chapter 10 (externalities and public goods)

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

1. Government subsidies to R&D

2. Multilateral agreements

3. 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.