Externalities in Microeconomics

Vocabulary flashcards focused on key terms and definitions related to externalities in microeconomics.

Externality

A situation in which a transaction between a buyer and seller directly affects a third party.

Negative Externality

An impact on a bystander that is adverse, such as pollution.

Positive Externality

An impact on a bystander that is beneficial, such as education.

Market Inefficiency

Occurs when buyers and sellers do not consider the external effects of their actions, leading to an inefficient market equilibrium.

Social Cost

The total cost to society, which includes both private costs and external costs imposed on bystanders.

Internalizing the Externality

Altering incentives so that people take the external effects of their actions into account.

Corrective Tax

A tax imposed on activities that generate negative externalities, meant to align private costs with social costs.

Coase Theorem

A principle stating that if parties can bargain without cost over resource allocation, they can solve the problem of externalities on their own.

Tradable Pollution Permits

A system where firms can buy and sell permits allowing them to pollute a certain amount, aiming to reduce overall pollution at a lower cost.

Public Policies Toward Externalities

Government interventions intended to correct externalities, including regulations, corrective taxes, and tradable permits.

Social Benefit

The total benefit to society from a good, which includes both private value and external benefits to bystanders.

Private Solutions to Externalities

Solutions to externalities that are negotiated directly between affected parties, without need for government intervention.