Terms in this set (17)
marginal social cost (of pollution)
is the additional cost imposed on society as a whole by an addition unit of pollution.
example: acid rain harms fisheries crops and forests and each additional ton of sulfur dioxide released into the atmosphere increases the harm. (upward sloping)
marginal social benefit (of pollution)
additional benefit to society from an additional unit of pollution. (downward sloping)
socially optimal quantity of pollution
the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.
uncompensated cost that an individual or firm imposes on others. (ex: environmental cost on pollution)
a benefit that an individual or firm confers on others without receiving compensation
external costs and benefits
external costs: negative externalities
external benefits: positive externalities
Explain why externalities often require government intervention
-in the absence of government action; the quantity of pollution will be inefficient, polluters will pollute up to the point at which the MSB of pollution is zero.
Outcome in inefficient: if some people could be made better off without making others worse off. (372)
according to this theorem even in the presence of externalities, an economy can always reach an efficient solution as long as transaction costs (the costs to individuals of making a deal) are sufficiently low. When individuals take external costs or benefits into account, they internalize the externalities. (ex: 372)
implication of coase's analysis: externalities need not lead to inefficiency because individuals have an incentive to make mutually beneficial deals- deals that lead them to take externalities into account when making decisions.
in many cases transactions costs are too high to make it possible to deal with externalities through private action
are rules that protect the environment by specifying limits or actions for producers and consumers.
two pollution companies (A and B) might be ordered to reduce pollution by the same percentage, even if their costs of achieving that objective are very different.
taxes that depend on the amount of pollution a firm produces. (example: power plants might be charged $200 for every ton of sulfur dioxide they emit)
an emissions tax equal to marginal social cost at the socially optimal quantity of pollution induces polluters to internalize the externality- to take into account the true cost to society of their actions.
Why emissions tax more efficient (more cost minimizing) than environmental standards
bc an emissions tax ensures that the marginal benefit of pollution is equal for all sources of pollution, but an environmental standard does not.
taxes designed to reduce external costs
problems with emissions taxes: gov. officials usually aren't sure what level the tax should be set.
too low: little improvement
too high: emissions will be reduced by more than is efficient.
Tradable Emission Permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters.
(a market inside a market)
important part: they are tradable; those that find it easier to reduce pollution will sell some of their permits to those that find it more difficult.
problem: officials issuing to much or too little.
both emissions tax and permit ensure that those who can reduce pollution most cheaply are the ones who do so.
Marginal Private Benefit
of a good is the marginal benefit that accrues to consumers of a good, not including any external benefits
Marginal social benefit
of a good is the marginal private benefit plus the marginal external benefit
Marginal external benefit
of a good is the addition to external benefits created by one more unit of the good
is a payment designed to encourage purchases and activities that yield external benefits
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