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18 Cards in this Set
- Front
- Back
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externality
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the uncompensated impact of one person's actions on the well being of a bystander
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market equilibrium is _____ when there are externalities
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not efficient -- it fails to maximize the total benefit to society as a whole
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externalities cause markets to...
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...allocate resources inefficiently
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the demand curve reflects...
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...the value of the good to consumers
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How is the value of a good to consumers measured?
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By the prices consumers are willing to pay.
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the height of the demand curve at any given point...
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...shows the willingness to pay of the marginal buyer
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the supply curve reflects...
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...the costs of producing a good
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the height of the supply curve at any given quantity shows...
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...the cost to the producer of the last unit of the good sold
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Give an example of a negative externality and say how it affects the efficiency of the market outcome.
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...
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internalizing the externality
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altering incentives so that people take account of the external effects of their actions -- i.e. taxes/subsidies
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technology spillover
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impact of one firm's research and production efforts on other firms' access to technological advance -- new ideas may have externalities for other producers in the economy
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industrial policy
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government intervention in the economy that aims to promote technology-enhancing industries
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patent protection
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protects rights of inventors by giving them exclusive use of their inventions for a period of time (property right) -- allows them to capture economic benefits
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corrective/Pigovian taxes
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tax designed to induce private decision makers to take account of the social costs that arise from a negative externality, ideally is equal to the cost/benefit that arises from the externality
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Why is gas taxed so heavily?
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- congestion
- accidents - pollution |
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private solutions to externalities
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-moral codes
-social sanctions -charities/non profits -integration of businesses -contracts -Coase Theorem |
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Coase Theorem
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the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities all on their own and reach an efficient outcome
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Why might private solutions not work?
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-transaction costs
-breakdown in bargaining -large number of parties involved |
