ECON 200: Externalities and Public Goods – Flashcards
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when markets fail to allocate resources efficiently
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market failure
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are a type of market failure. Externalities refer to the uncompensated impact of one person's actions on a the well-being of a bystander
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externalities (formal definition)
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refers to the benefits or costs of one person's actions on another person or society. EXAMPLE: Person A does not return a library book. Person B needs the library book for a school report. Person B fails. Person B's failure is an externality.
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externalities (lay person definition)
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is an externality where the impact on the bystander is negative or adverse (Person B failing)
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negative externalities
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is an externatlity where the impact on the bystander is positive (EXAMPLE: Person A spends a lot of money on landscaping. As a result, the value of Person B's house goes up)
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positive externalities
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NOT efficient. Supply and demand do NOT maximize total surplus.
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When externalities exist, markets are...
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Factories that create pollution do not bear the full cost of its production. Society bears some. So private cost does not equal social cost.
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Example of a negative externality: Pollution
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means altering incentives so that people take into account the external affects of their actions. (EXAMPLE: creating a pollution tax for factories)
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internalizing the externality
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a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality
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corrective tax
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another name for corrective taxes
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Pigouvian taxes
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equal to the producers exact external cost
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The ideal corrective tax is...
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is when the impact to the bystander is positive (EXAMPLE: If Person A is vaccinated for polio, Person B is automatically less likely to get polio because there is one less person he can catch it from)
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positive externality
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the direct value to buyers
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private value
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the value of the positive impact on buyers
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external benefit
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the benefits of research and production can be extensive. Firms that engage in the development of new technology can provide benefits to society as a whole.
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positive externality in production
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refers to the impact of one firms' research and development on other firms' access to technological advances
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technology spillover
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is when the government subsidizes certain industries that offer large technology spillovers
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industrial policy
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the market produces a larger quantity than is socially optimal (you get more crap than you want)
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effects of negative externalities
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market produce a smaller quantity than is socially optimal (you get less good stuff than you want)
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effects of positive externalities
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tax these goods to lower the quantity produced (ex: pollution)
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to fix the effects of a negative externality, you...
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subsidize these goods in order to produce a larger quantity (ex: subsidizing education means more folks go to school)
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to fix the effects of a positive externality, you...
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taxes, command and control policies (ex: SuperFund), cap and trade
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examples of solutions to negative externalities
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adjustments in social norms, the process of contracts and bargaining can produce closer to socially optimal solutions
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private solutions to externalities
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if private parties can bargain at no cost, then the private market will correct externality problems and allocate efficiently
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the coase theorem states
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the government needs to intervene to find the socially optimal solution.
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but the coase theorem implies that when their ARE costs to bargaining...
