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Externalities
The economics of the public sector (externalities)
| Term | Definition |
|---|---|
| Externality | The uncompensated impact of one person's actions on the well-being of a bystander |
| negative externality | the impact of the bystander is adverse |
| positive externality | the impact of the bystander is beneficial |
| Internalizing an externality | altering incentives so that people take account of the external effects of their actions |
| technology spillover | it will benefit not only the firm but society as a whole; type of positive externality |
| Coase theorem | the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own |
| Ronald Coase | economist; produce the coase theorem |
| Transaction costs | the costs that parties incur in the process of agreeing and following through a bargain |
| government | an institution design for collective action |
| command-and-control policies | regulate behavior directly |
| Market-based policies | provide incentives so that private decision makers will choose to solve the problem on their own |
| Pigovian tax | a tax enacted to correct the effects of a negative externality |
| Arthur Pigou | 1877-1959; economist; produce Pigovian tax |
| invisible hand | powerful but not imnipotent |
| pollution | most common example of negative externality |
| Pigovian tax | corrective taxation |
| marginal benefit/cost | inversely related to price; benefit you for getting extra unit of good. |
Created by:
Siomaisui
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