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econ chap 5-Externalities, Environmental Policy, and Public Goods

Terms in this set (26)

externality
benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service, interfere with the economic efficiency of a market equilibrium
negative externality
market may produce a quantity of the good that is greater than the efficient amount, too much of good/service produced at market equilibrium
positive externality
market may produce a quantity of the good that is less than the efficient amount, too little of good/service produced at market equilibrium
private cost
the cost borne by the producer of a good or service
social cost
the total cost of producing a good or service, including both the private cost and any external cost
private benefit
the benefit received by the consumer of a good or service
social benefit
the total benefit from consuming a good or service, including both the private benefit and any external benefit
market failure
situation in which the market fails to produce the efficient level of output
property rights
the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it, cause externalities and market failure
coarse theorem
there is an economically efficient level of pollution reduction, optimal decision: continue any activity up to the point where the marginal benefit=marginal cost,
net benefit to society from reducing pollution is equal to the difference between the benefit of reducing pollution and the cost
transaction costs
the cost in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services
pigovian taxes and subsidies
government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities, eliminates deadweight loss and improves economic efficiency, taxes work because negative externalities caused too much to be produced and taxes reduced the amount of output, positive externalities (too little being produced)=subsidies needed, shift the supply to the left
subsidy
an amount paid to producers or consumers to encourage the production or consumption of a good, shift demand to the right
command-and-control approach
a policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices
cap-and-trade
government establishes an allowable amount of emissions, emissions permits are distributed, firms can trade emission permits, market used to achieve efficient pollution reduction
rivalry
the situation that occurs when one person consuming a unit of good means no one else can consume it
excludability
the situation in which anyone who does not pay for a good cannot consume it
four categories of goods
private goods, quasi-public goods, common resources, public goods
private goods
excludable and rival, Big Macs, running shoes
common resources
non excludable and rival, tuna in the ocean, public pasture land
quasi-public goods
excludable and non rival, cable tv, toll roads
public goods
non excludable and non rival, national defense, court system
free-riding
benefitting from a good without paying for it
market demand curve for a private good
determined by adding (horizontally) the quantity of the good demanded at each price by each consumer
market demand curve for a public good
determined by adding the price each consumer is willing to pay for each quantity of the public good (Vertically), optimal quantity of a public good occurs where the demand curve intersects the curve representing the marginal cost of supplying the good
tragedy of the commons
the tendency for a common resource to be overused due to lack of clearly defined and enforced property rights, people cannot be excluded from the resource, their consumption is rival (deplete resource for other people) negative externality
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