Chapter 10 - Externalities

ECON 1101 Midterm II

negative externality

impact on bystander is adverse

• social cost = private cost + external cost

positive externality

impact on bystander is beneficial

• social cost = private cost + external benefit

social marginal cost

private marginal cost + external marginal cost

private marginal cost

cost of the last unit into the decision maker

external marginal cost

cost of the last unit to bystanders

social marginal benefit

private marginal benefit + external marginal benefit

private marginal benefit

value of the last unit into the decision maker

external marginal benefit

benefit of the last unit to bystanders

patent law

protect the rights of inventors by giving them exclusive use of their inventions for a period of time

command-and-control policies

remedies an externality by legally limiting a specific behavior by a specific entity

corrective taxes (pigovian taxes)

induce private decision makers to take account of the social costs that arise from a negative externality

• ex: sets the price of pollution

corrective subsidy

encourages behavior that has positive external effects

tradeable pollution permits

incentive-based strategy for managing pollution by allowing companies to buy and sell rights to emit specific amounts of pollutants

• ex: sets the quantity of pollution