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external cost
an uncompensated cost that an individual or firm imposes on others
ex) environmental costs from pollution
external benefit
a benefit that an individual or firm confers on other without receiving compensation
externalities
external costs and benefits
external costs are negative externalities
external benefits are positive externalities
marginal social cost of pollution
the additional cost imposed on society as a whole by an additional unit of pollution
marginal social benefit of pollution
the additional gain to society as a whole from an additional unit of pollution
socially optimal quantity of pollution
the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.
coase theorem
the economy can always reach an efficient solution, even in the presence of externalities, provided that the costs to individuals making a deal are sufficiently low.
internalize the externality
when individuals take external costs or benefits into account.
transaction costs
the costs to individuals of making a deal — often prevent a mutually beneficial trade from occurring.
environmental standards
rules that protect the environment by specifying actions by producers and consumers.
emissions tax
tax that depends on the amount of pollution a firm produces.
pigouvian taxes
taxes designed to reduce the costs imposed on society from a negative externality
Tradable emissions permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters.
climate change
an accumulation of greenhouse gases caused by the use of fossil fuels has led to changes in Earth’s climate
greenhouse gases
are gas emissions that trap heat in the earths atmosphere.
fossil fuels
such as coal and oil derived from fossil sources
renewable energy sources
such as solar and wind power are inexhaustible sources of energy (unlike fossil-fuel sources, which are exhaustible)
clean energy sources
are those that do not emit greenhouse gases. Renewable energy sources are also clean energy sources.
Policies to address climate change
Government subsidies to R&D
Multilateral agreements
Incentives for individual choices
paris agreement
international agreement by 196 countries to reduce their greenhouse emissions.
pigouvian subsidy
a payment designed to encourage activities that yield external benefits
technology spillover
a positive externality that results when knowledge spreads among individuals and firms..
when is a good excludable
if the supplier of that good can prevent people who do not pay from consuming it
when is a good in rival consumption
if the same unit of the good cannot be consumer by more than one person at a time.
private good
a good that is both excludable and in rival consumption
ie wheat
when is a good nonexcludable
when the supplier cannot prevent consumption of a good by people who do not pay for it.
nonrival consumption
if more than one person can consume the same unit of the good at the same time
free-rider problem
goods that are nonexludable suffer from this — many individuals are unwilling to pay for their own consumption and instead will take a ‘free ride’ on anyone who does pay.
public good
both nonexcludable and in nonrival consumption
cost benefit analysis
is the estimation and comparison of the social costs and social benefits of providing a public good.
