Externalities

A set of flashcards based on key concepts from a lecture on externalities, useful for studying and preparing for exams.

Externality

A situation where the actions of one economic agent directly affect another economic agent outside the market mechanism.

Market Failure

A problem that violates one of the assumptions of the 1st welfare theorem and causes the market economy to deliver an outcome that does not maximize efficiency.

Negative Production Externality

When a firm’s production reduces the well-being of others who are not compensated by the firm.

Private Marginal Cost (PMC)

The direct cost to producers of producing an additional unit of a good, which corresponds to the supply curve.

Social Marginal Cost (SMC)

The private marginal cost to producers plus the marginal damage imposed on others.

Marginal Damage (MD)

Any additional costs associated with the production of the good that are imposed on others but that producers do not pay.

Private Marginal Benefit (PMB)

The direct benefit to consumers of consuming an additional unit of a good, which corresponds to the demand curve.

Social Marginal Benefit (SMB)

The private marginal benefit to consumers minus any costs associated with the consumption of the good that are imposed on others.

Coase Theorem

The theory that suggests when there are well-defined property rights and costless bargaining, negotiations between the party creating the externality and the party affected can result in the socially optimal market quantity.

Corrective Tax

A tax imposed equal to the marginal damage per unit in order to reduce negative externalities.

Positive Production Externality

When a firm’s production increases the well-being of others but the firm is not compensated by those others.

Subsidy

A financial incentive provided by the government to encourage the reduction of negative externalities or to promote positive externalities.

Deadweight Loss

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Cap-and-Trade System

A market-based approach used to control pollution by providing economic incentives for reducing emissions.

Decarbonization

The process of reducing carbon dioxide emissions through various strategies, particularly in energy production.

Pigouvian Taxes

Taxes levied on activities that generate negative externalities, equal to the external cost to society.

Congestion Pricing

A system of surcharging users of a public good during peak times to reduce demand.

Global Warming

The long-term rise in the average temperature of the Earth’s climate system primarily due to human activities.