26 terms


the impact of one person's actions on the wellbeing of a bystander
internalizing the externality
altering incentives so that peopel take acouunt of the external effects of their actions
coase theorem
if private parties can bargain without cost over the allocation of resources, they can solve the problems of externalities on their own
transaction costs
the costs that parties incur in the process of agreeing to &following thru on a bargain
corrective tax
a tax designed to induce private decisions makers to take account of the social costs that arise from a negative externality
social costs
private cost + costs to those bystanders
negative externality
lead markets to produce a larger quantity than is socially desirable.
postive externality
lead markets to produce a smaller quantity than is sociallly desirable
how does government try to fix the externality
govt. can internalize the externality by taxing goods that have negative externalities &subsidizing goods that have positive externality
technology spillover
impact of ones firms research &production efforts on other firms access to tech. advance.
industrial policy
govt. intervention in the economy that aims to promote tech. enhancing industries
property right
ownership of a good or resource
pigovian taxes
also called corrective tax
primary tools used to internalize negative externality
primary tools used to internalize positive externality
why private solutions dont always work
sometimes the private solution approach fails because transaction costs can be so high that private agreement is not possible
command and control policy
regulation: making certain behavior forbidden, or making certain behavior req.
market based policy
taxes: imposing a tax on goods w/ negative externality, or implementing a subsidy on goods w/ a positive externality
examples of negative externality
loud barking dogs, air pollution, loud music in apartment building, and littering
what principle from chapter 1
govt. can sometimes improve market outcomes
tradable pollution permits
voluntary transfer of the right to pollute from one firm to another. pollution permits which results in a new market for these permits. firms that can reduce pollution most easily will be willing to sell their permits for whatever they can get
individuals who dont take into account externalities
as a result goods tend to be under supplied or over supplied to the market. govt.policy may be able to improve the outcome
demand curve
shows willingness to pay of marginal buyer
supply curve
shows cost of the margnial seller
market allocation
maxamizes the sum of the consumer and producer surplus
social cost curve
lies above the supply curve