Micro-economics Midterm 2

Ch 10,8,6

Externalities

external costs or benefits that fall on bystanders

External Costs

negative externalities

External benefits

positive externalities

Private costs

a cost paid by the consumer or producer

Social cost

cost to everyone; private + external

Negative externalities

Q is too high; cost associated with the use of resources that’s not reflected in prices

Pigouvian tax

solution to negative externalities

Positive externalities

Q is too low

Subsidy

solution to positive externalities

Internalizing externalities

considering all costs/benefits

Private solutions

requires low transaction and clear property rights

Efficient equilibrium

price and quantity that maximize social surplus

Social surplus

CS + PS + everyone else’s surplus

Marginal social cost

marginal cost and marginal external cost