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The economics of the public sector (externalities)

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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