Principles of Microeconomics - Externalities

These flashcards cover key concepts related to externalities in microeconomics, including definitions and implications of both negative and positive externalities, policy responses, and theoretical frameworks.

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander.

Negative Externality

An externality where the impact is adverse.

Positive Externality

An externality where the impact is beneficial.

Internalizing the Externality

Altering incentives so that individuals take account of the external effects of their actions.

Social Cost

The private costs of production plus the costs to those harmed by the negative externality.

Corrective Taxes

Taxes imposed to correct for the negative externality by aligning private incentives with social interests.

Tradable Pollution Permits

Permits that allow the holder to pollute a specified amount that can be traded between firms.

Coase Theorem

Private economic actors can potentially solve the problem of externalities among themselves regardless of the initial allocation of rights.

Transaction Costs

Costs incurred in the process of agreeing to and following through on a bargain.

Subsidy

Financial support given by the government to encourage the production or consumption of a good with positive externalities.

Market Efficiency

A state in which the allocation of resources results in the maximum possible total surplus.

Command-and-Control Policies

Regulations that require or forbid certain behaviors to remedy an externality.

Pigovian Taxes

Taxes designed to correct negative externalities by equating private cost with social cost.

Socially Optimal Quantity

The quantity of a good that maximizes total welfare in the presence of externalities.

Market Equilibrium

The point at which the quantity demanded equals the quantity supplied, maximizing the total surplus.