Externalities

Front 1

externalities

Back 1

(market failures), uncompensated impact of one person's actions on the well-being of a bystander

positive- when impact beneficial (vaccine)
negative- when impact adverse (pollution)

Front 2

private cost

Back 2

cost paid by consumer or producer

Front 3

external cost

Back 3

cost paid by ppl other than consumer or producer trading in market

Front 4

social cost

Back 4

cost to everyone (private and external)

Front 5

social surplus

Back 5

consumer + producer + everyone else's surplus

Front 6

efficient equilibrium

Back 6

price and quantity that maximize social surplus

Front 7

efficient quantity

Back 7

quantity that maximizes social surplus

Front 8

if external cost very high...

Back 8

output is too high

costs underestimated (Qe , Qm)

costs exceed private benefits to buyers

result= deadweight loss, decrease in total surplus

Front 9

solution to very high external cost

Back 9

output must be reduced via pigovian taxes

Front 10

private value

Back 10

direct value to buyers

Front 11

external benefit (value)

Back 11

value of positive impact on bystanders

Front 12

social value

Back 12

private value + external benefit

Front 13

consequences of positive externality

Back 13

Qm < Qe, total benefits > private benefits to buyers

deadweight loss incurred, decrease in social surplus

Front 14

solution to deadweight loss incurred by positive externality

Back 14

subsidize flushots increase output

Front 15

corrective tax

Back 15

tax designed to induce private decision makers to take account of social costs that would arise from negative externality

Front 16

pigovian tax

Back 16

tax on a good with external costs

Front 17

consequences of pigovian tax

Back 17

1. aligns private incentives with society's interest

2. make private decision makers take into account external costs and benefits of their actions

3. move economy toward a more efficient allocation of resources

Front 18

private solutions to externality problems

Back 18

-contracts between market participants, affected bystanders
-moral codes and social sanctions
-charities that respond to externalities (pollution, etc.)

Front 19

the coas theorem

Back 19

if transaction costs low and property rights clearly defined, private bargains will ensure that market equilibrium is efficient even with externalities

Front 20

Why don't private solutions always work?

Back 20

transaction costs too high
stubbornness (can't reach agreement)
communication/coordination problems