Microeconomics - Chapter 16

Externalities

what is an external cost

its an uncompensated cost that an individual or firm imposes on others

3 examples of external costs

air and water pollution, texting while driving, chemical runoff that affects fish stocks

what are external benefits

benefits that individuals or firms confer on others without receiving compensation

3 examples of external benefits

beehives next to almond orchards, education, preserved farmland

what are external costs and benefits known as

externalities

external costs are

negative externalities

external benefits are

positive externalities

def of externalities

the impact on third parties of a transaction between others

The extra safety your neighbor might have because everyone else in the area has purchased burglar alarms is a(n):

external benefit

what is the marginal social cost (of pollution)

the additional cost imposed on society as a whole by an additional unit of pollution

what is the marginal social benefit (of pollution)

the additional gain to society as a whole from an additional unit of pollution

what is the socially optimal quantity (of pollution)

the quantity society would choose if all costs and benefits were fully accounted for

will a market economy, left to itself, arrive at the socially optimal quantity?

no, it won’t

recreate the graph of the socially optimal quantity of pollution

sad

recreate the graph of why a market economy produces too much pollution

sad

in a market economy without government intervention, polluters will

consider private benefits of pollution rather than social costs

What is the Coase theorem

the economy can reach an efficient solution, even in the presence of externalities, if the costs of making a deal are sufficiently low.

why don’t private parties always internalize externalities?

transaction costs are the problem.

what are transaction costs and what can they prevent

costs of making a deal and they often prevent a mutually beneficial trade from occuring

In reality, the Coase theorem is unlikely to work because:

transaction costs are often high, making negotiations difficult

3 types of government policies used to deal with pollution

environmental standards, emissions taxes, and tradable emissions permits

explain environmental standards

rules that protect the environment by specifying actions of producers and consumers

explain an emissions tax

cost depends on the amount of pollution a firm produces

what are Pigouvian taxes

taxes designed to reduce external costs

explain tradable emission permits

licenses to emit limited quantities of pollutants; the licenses can be bought and sold by polluters

will markets produce enough external benefits

no

what is a technology spillover

its a positive externality that results from knowledge spread among individuals and firms

what is a network externality

the value of the good to an individual is greater when a large number of other people also use the good

3 examples of network externalities

communication systems (telephones), railway systems, air travel

network externalities are subject to

positive feedback, where success breeds greater success and failure breeds failure

example of positive feedback to a network externality

The more popular Windows is, the more software is made for it and the more popular it becomes.