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20 Cards in this Set
- Front
- Back
externalities
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(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) |
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private cost
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cost paid by consumer or producer
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external cost
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cost paid by ppl other than consumer or producer trading in market
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social cost
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cost to everyone (private and external)
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social surplus
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consumer + producer + everyone else's surplus
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efficient equilibrium
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price and quantity that maximize social surplus
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efficient quantity
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quantity that maximizes social surplus
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if external cost very high...
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output is too high
costs underestimated (Qe , Qm) costs exceed private benefits to buyers result= deadweight loss, decrease in total surplus |
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solution to very high external cost
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output must be reduced via pigovian taxes
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private value
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direct value to buyers
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external benefit (value)
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value of positive impact on bystanders
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social value
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private value + external benefit
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consequences of positive externality
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Qm < Qe, total benefits > private benefits to buyers
deadweight loss incurred, decrease in social surplus |
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solution to deadweight loss incurred by positive externality
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subsidize flushots increase output
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corrective tax
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tax designed to induce private decision makers to take account of social costs that would arise from negative externality
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pigovian tax
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tax on a good with external costs
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consequences of pigovian tax
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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 |
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private solutions to externality problems
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-contracts between market participants, affected bystanders
-moral codes and social sanctions -charities that respond to externalities (pollution, etc.) |
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the coas theorem
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if transaction costs low and property rights clearly defined, private bargains will ensure that market equilibrium is efficient even with externalities
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Why don't private solutions always work?
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transaction costs too high
stubbornness (can't reach agreement) communication/coordination problems |