Externalities

These flashcards cover key vocabulary terms and concepts relevant to the topic of externalities from the lecture notes for ECON1101.

Externalities

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

Market failure

When the allocation of resources by a free market is not efficient.

Negative externality

An externality that imposes adverse effects on bystanders.

Positive externality

An externality that benefits bystanders.

Social cost

The total cost to society of producing a good, including private costs and external costs.

Command-and-control policies

Government regulations that directly regulate behavior.

Corrective taxes

Taxes designed to induce private decision makers to take account of social costs of negative externalities.

Social Marginal Cost (SMC)

The total cost of producing one more unit of a good, including both private costs and external costs.

Social Marginal Benefit (SMB)

The total benefit derived from consuming one more unit of a good, including both private benefits and external benefits.

The Coase theorem

The theory that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities themselves.

Tradable pollution permits

Permits that allow the holder to pollute a certain amount, which can be bought or sold by firms.

Technology spillover

Positive externalities that arise when one firm's research and production efforts benefit other firms.

Pigovian tax

A tax levied on any market activity that generates negative externalities.

External Benefits

Benefits that affect third parties who are not the direct parties to a transaction.