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Clean Air Act

1970 reaction to Rachel Carson in her 1962 in Silent Spring, It describes one of a number of pieces of legislation relating to the reduction of smog and air pollution in general. The legislation forced the country to enforce clean air standards to improve health and showed that American was moving towards certain environmentalist measures.

Silent Spring

A book written to voice the concerns of environmentalists. Launched the environmentalist movement . Had suspicion that the pesticide DDT (Negative externality), by entering the food chain and eventually concentrating in higher animals, caused reproductive dysfunctions. In 1973, DDT was banned in the U.S. except for use in extreme health emergencies.


The uncompensated impact of one person's actions on the well-being of a bystander, can be positive(restoring old buildings) or negative(take pollution for example)

Positive externality

A beneficial side effect that affects an uninvolved third party. (Research,restoration) for example. Leads to smaller quantities than are socially desirable.

Negative externality

A situation where a third party, outside the transaction, suffers from a market transaction by others (pollution, traffic congestion, dogs barking at you when you're walking ,etc,.) Leads to larger quantities than socially desirable.


A document granting an inventor sole rights to an invention for a given time, a way that the government creates positive externalities.

Private cost

The cost borne by the producer of a good or service

Coase Theorem

The proposition that if private parties can bargain WITHOUT cost (or very little cost) over the allocation of resources, they can solve the problem of externalities on their own, proposed by Ronald Coase, other words this sould work if there are no transaction costs.

Social cost

The total cost of a good to society (social cost) includes the costs of production incurred by the industry as well as the external costs (externalities)

Internalizing the externality

Altering incentives so that people take account of the external effects of their actions, can be done by imposing taxes(negative externality) or subsidies(positive externality)


A prominent example of a positive externality, the consumer of it becomes a more productive worker and reaps the benefit of higher wage. Also leads to more informed voters, which leads to a more efficient government, lower crime rates, and higher levels of technological innovation. Internalizing this externality requires the use of a government subsidy.

Technological progress

___________ __________ is a key to why living standards rise over time.

Technology spillover

The impact of ones firms research &production efforts on other firms access to tech. advance. positive externality.

Industrial Policy

Government intervention in the economy that aims to promote technology enhancing industries.


A rule or order issued by an executive authority or regulatory agency of a government and having the force of law

Command and Control Policy

Forms of regulation that depend on government laws and agencies to enforce rules, including such things as regulated limits on pollution or fuel efficiency standards; contrasts with market-based or incentive-based approaches.

Market Based Policy

A way to counter externalities by providing incentives so that private decision-makers will choose to solve the problem on their own(maybe).

Corrective tax

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality, also called Pigovian tax


An independent federal agency established to coordinate programs aimed at reducing pollution and protecting the environment

Pigovian tax

A tax designed to induce private decisions makers to take account of the social costs that arise from a negative externality, same as corrective tax.

Gas Tax

What is the name of the tax imposed upon vehicles which do not meet specified fuel economy targets? Actually makes the economy work better and does not cause a deadweight loss.

Rachel Carson

United States biologist remembered for her opposition to the use of pesticides that were hazardous to wildlife (1907-1964)


Not-for-profit organizations that are established to support good causes, from society's point of view. A private response to negative externalities.


Legal agreements for the exchange of resources and services, another private response to externalities.

Ronald Coase

Economist who won a Nobel prize in economics for arguing that assigning property rights to either party would result in the internalization of externalities, Coase Theorem.

Transaction costs

The costs that parties incur in the process of agreeing to and following through on a bargain, will be the reason that private parties do not internalize externalities according to the Coase Theorem.

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