chapter xv ~ externalities

external costs

an uncompensated cost that one actor imposes on another actor; smoking

external benefits

a benefit that an actor receives without compensating the provider of that benefit; christmas lights

externalities

general term referring to both the external costs and benefits associated with the use of a good/service

positive externalities

externalities that create benefits in society

negative externalities

externalities that create costs to society

environmental economics

economics of natural resources in terms of how we optimally extract and use the resources and byproducts (waste/pollution) stemming from their use

marginal social cost of pollution

additional cost on society associated with an additional unit of pollution; upward sloping curve

marginal social benefit of pollution

additional benefit to society associated with an additional unit of pollution; downward sloping curve

socially optimal quantity of pollution

quantity of pollution that society would find optimal if all the costs and benefits of pollution were considered

coase theorem

argued that the socially optimal quantity of pollution can be reached if transaction costs are reasonably low

internalization of an externality

actors take into account positive and negative attributes of an action

transaction costs

costs individuals face when making a deal

high costs of communication

the more people involved in a decision, the more costly it is to get everyone to communicate

high costs of legally binding/timely agreements

lawyers and other experts have high costs and no guarantee of a timely agreement

environmental standards

rules and regulations set forth to protect the environment by clarifying actions actors are legally allowed to take

1970 clean air act

rules requiring power plants to reduce emissions

pigouvian tax

taxes designed to reduce an external cost

emission tax

tax on emission is a type of pigouvian tax

tradable emission permits (cap & trade)

a license that can be bought and sold in a market, that allows an actor to emit a certain quantity of pollution

pigouvian subsidy

payment mechanism to encourage actions that bring about positive externalities to society

technology spillover

external benefits that occur when knowledge is shared among individuals or firms