Externalities in Microeconomics

These flashcards cover the key concepts related to externalities in microeconomics, including definitions and implications of negative and positive externalities as discussed in the provided lecture notes.

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander.

Negative Externality

An externality that imposes costs on third parties not involved in the market transaction.

Positive Externality

An externality that confers benefits on third parties not involved in the market transaction.

Internalizing the Externality

Altering incentives in a way that accounts for the external effects of one's actions.

Corrective Tax

A tax enacted to correct the effects of negative externalities.

Deadweight Loss (DWL)

The decrease in total surplus resulting from a market distortion, such as a negative externality.

Social Cost

The total cost to society of producing a good, including both private costs and external costs.

Market Failure

A situation in which the free market fails to allocate resources efficiently.

Coase Theorem

Proposition stating that if private parties can bargain without cost, they can solve externalities among themselves.

Tradeable Permits

Permits allowing firms to trade rights to pollute, creating a market for pollution emissions.