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Externalities
| Question | Answer |
|---|---|
| Externality | A side effect of a transaction that effects a bystander |
| Negative externality | An externality that harms the bystander |
| Positive externality | An externality that benefits a bystander |
| What is the market trend of negative externalities? | Overconsumption/production |
| What is the market trend of positive externalities? | Underconsumption/production |
| What is the difference between a price change and an externality? | Externalities only effect people outside the market, price changes effect people inside the market |
| What does a market outcome have to do with externalities? | It is only efficient if there are no externalities |
| Demand in relation to externalites | Private marginal benefit |
| Supply in relation to externalities | Private marginal cost |
| External cost | The cost associated with the effect the externality has on society, very hard to calculate |
| Which way do external costs push supply curves? | Left/decrease |
| Where is the market level of supply after externalities are taken into account? | Too high/overproduction |
| What is a new curve created by an external price called? | Marginal social curve |
| What is a new equilibrium point created by an externality called? | Socially optimal cost |
| What is a common misconception about externalities? | To eliminate them rather than reduce/internalize them |
| Which way do external costs push demand curves? | Right/increase |
| Where is the market level of demand after externalities are taken into account? | Too low/underproduction |
| What is the principle of solving externalities? | Force the market to internalize the externality |
| 6 ways to internalize an externality | Private bargaining, corrective taxes and subsidies, cap and trade, laws, rules, and regulations, government provision of public goods, assign ownership rights |
| Private bargaining to internalize and externality | Get the person who is causing the externality to stop doing it by offering them something or vice versa |
| Coase Theorem | If bargaining is costless and property rights are clearly established and enforced, the externality problem can be solved with private bargains |
| Pigouvian/sin tax | A tax designed to correct and externality |
| Pigouvian subsidies | When a government pays for a good or service with a positive externality |
| Cap and trade program | Putting a quota on a damaging activity |
| How do cap and trade programs work? | Each company gets a set number of permits, which it can trade to other companies, where under-polluters can give them to over-polluters |
| Laws, rules, and regulations | Laws can be used to restrict or ban externalities |
| Rivalrous good | A good where one person's use comes at someone else's expense |
| Excludable good | A good for which non-payers can be excluded from consumption |
| Private good | A good that is both rivalrous and exclusive |
| Public good | A good that is neither rivalrous or exclusive |
| Free-rider problem | A problem incurred with public goods where people are less likely to pay for a good where they don't get all the benefit but incur the cost |
| Club good | A good which is excludable but not rival |
| Common good | A good that is rival but not excludable |
| Tragedy of the commons | People over-use common good to benefit themselves |
| How is tragedy of the commons solved? | Assigning ownership rights/permits |
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