ch. 10

externality

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

negative externality

impact on the bystander is adverse

positive externality

impact on the bystander is beneficial

demand curve

value to consumers (price they’re willing to pay)

supply curve

cost to suppliers

equilibrium quantity and price

maximizes the sum of producer and consumer surplus

command and control policies

regulate behavior directly

market-based policies

provide incentive so that private decision makers will choose to solve the problem on their own

regulation

regulate behavior directly; making certain behaviors either required or forbidden

EPA

environmental protection agency, develop and enforce regulation

corrective taxes and subsidies

induce private decision makers to take account of social costs that arise from a negative externality

tradable pollution permits

voluntary transfer of the right to pollute from one firm to another

coarse theorem

if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

transaction cost

costs incurred during the bargaining process