Negative externalities – Flashcards
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Occurs before the transaction takes place
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Adverse selection
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Occurs after the transaction takes place
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Moral Hazard
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When there is an inefficient allocation of resources. Due to: monopoly, negative externalities, & public goods.
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Market failure
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A consequence of an economic activity that is experienced by an unrelated 3rd party
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Externality
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A situation/feelings that starts in one place but then begins to happen/have an effect somewhere else
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Spillover
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A cost that is suffered by a 3rd party. (Referred to as an external cost)
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Negative externality
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Private cost plus externalities.
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Social cost**
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The total cost to society as a whole for producing one further unit.
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Marginal social cost
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MPC + MEC (marginal private costs + marginal external cost)
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MSC=
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A benefit that is enjoyed by a 3rd party -The 3rd party who does not pay anything but still receives benefits is often called a free-rider
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Positive externality
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An externality that extends across national borders. (Negative example= global warming Positive example= technology)
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International externality
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Imposition of rules set by the Government, back by penalties that are intended specifically to modify the economics behavior of firms.
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Regulation
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Environmental policy that relies on regulation (as opposed to financial incentives) "Direct" control
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Command & Control Regulation
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Gives a firm the right to emit a given quantity of waste/pollution in a given time period. Determined by government/regulations and the permit can be bought/sold.
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Marketable pollution permit
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An instrument for controlling pollution. The polluter pays a principle. Fee based on the Q of pollutant discharged into the environment
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Pollution charge
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Determines how a resource is used/owned. Resources can be owned by individuals, associations or governments.
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Property rights
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1. The right to use the good 2. The right to earn income from the good 3. The right to transfer the good to others 4. The right to enforcement of property rights
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4 components of property rights
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-Optimal allocation of scare resources -Maximize the net benefits for everyone in society -Achieved if society's scare resources are allocated to their highest valued use, ceteris paribus
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Efficiency
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-A change that increases value improves efficiency -A change that decreases value deteriorates efficiency
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Value
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Produce quantity for which MB=MC Or MSB=MSC
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How is efficiency achieved?
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1. Market power (ability to influence market price) 2. Externalities (positive and negative) 3. Public Goods 4. Imperfect information
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4 ways markets can fail
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When someone bears a cost for which they are not compensated for (external costs) Markets over produce goods with negative externalities Ex: cigarettes
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Negative externalities
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When someone obtains a benefit for which they do not pay (benefits are external benefits)
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Positive externalities
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The costs are typically external so they do not bear the full cost of their actions & do not put it into consideration.
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Problem with negative externalities
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In the absence of externalities
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Internal costs & benefits
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In the presence of externalities (external costs- negative externalities, benefits- positive externalities)
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External costs & benefits
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Sum of internal and external costs and benefits with externalities
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Social costs & benfits
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Marginal private cost Marginal external cost Marginal social cost MSC= MPC = MEC
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Negative externalities equation
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Marginal private benefit Marginal external benefit Marginal social benefit MSB= MPB + MEB
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Positive externalities equation
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Those borne by a person as a consequence of his/her decisions
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Private/internal costs
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Those borne by others, or society in general, as a consequence of a person's decisions -A person does not bear all the costs of his or her actions -External costs are not considered in a person's decision making
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External costs
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Misallocation of resources because some costs are ignored in decision making
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Efficiency issue
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Someone unwillingly pays for the actions of others
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Equity issue
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"indirect" regulation based on: -Taxes/subsidies -Property rights
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Market based regulation
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Fee levied on product with adverse environment effect
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Product charge
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Fee paid in exchange for the use of natural resources or for the collection or disposal of pollutants
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User charge
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By bearing the cost os a negative externality, its producer will take it into account during decision making
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Economics rationale
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Supply shifts left (decrease) Increase P* market (to reflect both MPC & MEC) and decrease in Q* market Social welfare increases
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Tax increases cost
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Government imposes tax, but market behavior leads to desired outcome
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Indirect regulation
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Provides incentive to reduce the negative externalities Social efficiency MSC=MSB Taxes raise revenue for the government
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Advantages of taxes
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Difficult to measure level of negative externalities Difficult to measure harm of externalities IF demand is inelastic then higher taxes will have little effect on Q*
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Disadvantage of taxes
