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22 Cards in this Set
- Front
- Back
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Externalities |
Costs not considered in the equilibrium price |
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Market Failure |
Occurs when market prices fail to reflect the full value (benefit or cost) of a commodity to society |
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Externality (third party effects) |
An action that affects someone else without consent or compensation - costs/benefits of a transaction not borne by a buyer or seller |
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Role of Government Policy |
- Corrects prices to account for the "external" costs or benefits associated with market failure - Internalizes externalities |
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Arthur Pigou |
Proposed the Pigouvian tax to internalize externalities (Polluter Pays principle) |
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Pigouvian tax characteristics |
- Incentive-based policy instrument - set a tax for every unit emitted based upon the estimated marginal costs associated with the externality ("price instrument") - Behavior changing and revenue generating |
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Issues with taxation to internalize externalities |
Difficult assigning monetary value to environmental damages/benefits |
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Per-unit tax |
Setting it to equal to the per-unit cost of the externality |
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Socially Efficient |
A market situation in which net social benefits are maximized |
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Is efficiency always the answer? |
- Safe Drinking Water Act (technology standard to keep safety up) - Clean Air Act (National Ambient Air Quality Standard) - not good by ethical standards |
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Subsidy |
Provision of money to increase the quantity supplied of a particular good or service to improve social welfare by reducing the costs of production |
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Positive Externality Benefits |
More people consume this resource, the less they consume another resource - ex: solar energy vs fossil fuels |
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Should the government intervene? |
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Property Rights and Externalities |
Private property: your goods are exclusively for your use |
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The Coase Theorem |
Efficient outcomes can be achieved regardless of initial allocation of property rights if: - Property right are clearly define - transaction costs are negligible |
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The Coase Theorem diagram |
the costs to community of fisherman and the benefits to farmers on a lake. If farmer owns the right to pollute, try to maximize marginal benefit (go straight to A) |
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Optimal Pollution |
the pollution level that maximizes net social benefits |
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What if a company "owns" the right to pollute? |
The company will pollute until the marginal costs are 0, no matter the amount the pollution they produce. |
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How do negotiations work in the Coase Theorem |
If MC>MB, then the community could strike a bargain with the company to reduce pollution at a lower cost than the community is willing to pay for the pollution until MC=MB. |
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What if the community "owns" the rights on polluting? |
MB>MC can be negotiated until MB=MC |
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Gains and Losses from Negotiations with Different Property Rights |
If community holds rights, community benefits (+) but company benefits (+) less than if the company held the rights. If company holds rights, company benefits (++) with the community trying to minimize damages (-). Net social gain is the same in either case |
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Does it matter who has the "property rights" and who pays who? |
Yes |
