Modern Principles of Economics - Chapter 10: Externalities

These flashcards cover the key concepts about externalities and their impact on economics, efficiency, and government solutions.

What are externalities in economics?

Externalities are external costs or benefits that fall on bystanders, impacting individuals not involved in a given economic transaction.

What is a negative externality?

Negative externality refers to external costs that affect third parties not involved in a transaction, such as pollution.

Define positive externality.

Positive externality is a benefit received by people other than the consumers or producers trading in the market.

What is meant by 'social cost'?

Social cost is the total cost to society, which includes both private costs and external costs.

What maximizes social surplus in a market?

A market equilibrium maximizes social surplus, which is the sum of consumer surplus, producer surplus, and everyone else's surplus.

What is a Pigouvian tax?

A Pigouvian tax is a tax imposed on a good that generates external costs, aimed at correcting market inefficiency.

What are transaction costs?

Transaction costs are the costs necessary to reach an agreement, including costs for identifying and bringing together buyers and sellers.

What is the Coase theorem?

The Coase theorem states that if transaction costs are low and property rights are clearly defined, private bargaining will lead to an efficient market.

What are tradable allowances in environmental policy?

Tradable allowances are permits issued by the government allowing firms to pollute a certain amount, which can be traded among firms.

What are the three main government solutions to externality problems?

Government solutions include command and control regulations, Pigouvian taxes and subsidies, and tradable allowances.

What is meant by 'internalizing an externality'?

Internalizing an externality involves adjusting incentives so decision-makers consider all costs and benefits, both private and social.

How do subsidies impact external benefits?

Subsidies can increase market output for goods with external benefits by incentivizing production closer to the efficient equilibrium.

What is the role of a carbon tax according to economists?

A carbon tax aims to provide a cost-effective means to reduce carbon emissions and should gradually increase each year until targets are met.

What does efficient equilibrium mean?

Efficient equilibrium is the price and quantity that maximize social surplus in a market.

What happens to market output when there are positive externalities?

When there are positive externalities, market output is typically too low, resulting in fewer goods being produced than is socially optimal.