chapter 10 (externalities and public goods)

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30 Terms

1

external cost

an uncompensated cost that an individual or firm imposes on others

ex) environmental costs from pollution

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2

external benefit

a benefit that an individual or firm confers on other without receiving compensation

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3

externalities

external costs and benefits

external costs are negative externalities

external benefits are positive externalities

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4

marginal social cost of pollution

the additional cost imposed on society as a whole by an additional unit of pollution

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5

marginal social benefit of pollution

the additional gain to society as a whole from an additional unit of pollution

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6

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.

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7

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.

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8

internalize the externality

when individuals take external costs or benefits into account.

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9

transaction costs

the costs to individuals of making a deal — often prevent a mutually beneficial trade from occurring.

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10

environmental standards

rules that protect the environment by specifying actions by producers and consumers.

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11

emissions tax

tax that depends on the amount of pollution a firm produces.

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12

pigouvian taxes

taxes designed to reduce the costs imposed on society from a negative externality

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13

Tradable emissions permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters.

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14

climate change

an accumulation of greenhouse gases caused by the use of fossil fuels has led to changes in Earth’s climate

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15

greenhouse gases

are gas emissions that trap heat in the earths atmosphere.

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16

fossil fuels

such as coal and oil derived from fossil sources

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17

renewable energy sources

such as solar and wind power are inexhaustible sources of energy (unlike fossil-fuel sources, which are exhaustible)

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18

clean energy sources

are those that do not emit greenhouse gases. Renewable energy sources are also clean energy sources.

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19

Policies to address climate change

  1. Government subsidies to R&D

  2. Multilateral agreements

  3. Incentives for individual choices

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20

paris agreement

international agreement by 196 countries to reduce their greenhouse emissions.

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21

pigouvian subsidy

a payment designed to encourage activities that yield external benefits

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22

technology spillover

a positive externality that results when knowledge spreads among individuals and firms..

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23

when is a good excludable

if the supplier of that good can prevent people who do not pay from consuming it

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24

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.

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25

private good

a good that is both excludable and in rival consumption

ie wheat

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26

when is a good nonexcludable

when the supplier cannot prevent consumption of a good by people who do not pay for it.

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27

nonrival consumption

if more than one person can consume the same unit of the good at the same time

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28

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.

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29

public good

both nonexcludable and in nonrival consumption

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30

cost benefit analysis

is the estimation and comparison of the social costs and social benefits of providing a public good.

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