econ ch 18 externalities and public goods

• What is an externality?

  An effect of a production or consumption activity on others that is not reflected in market prices
• What's the differences between a positive and negative externality?

  -Positive externalities create benefits for others

  -Negative externality imposes costs
• What is marginal social cost (MSC)?

  The sum of the marginal private costs (MC) and the marginal external cost (MEC)
• What is marginal social benefit (MSB)?

  The sum of marginal private benefit and marginal external benefit (MEB)
• Why do negative externalities leas to market inefficiency?

  Because private producers ignore external costs, leading to overproduction and DWL
• Name three ways to correct negative externalities

  1. Emission standards
  2. Emission fees
  3. Tradable permits
• What is an emission fee?

  A tax charged per unit of pollution emitted
• What are tradable emissions permits?

  Government-issued rights to pollute, which can be bought or sold in a market
• When is an emission fee preferred over a standard?

  When abatement costs differ across firms- fees allow cost-effective emissions reductions
• What is a stock externality

  An externality that builds up over time, like greenhouse gas accumulation
• What is the dissipation rate?

  The fraction of a pollutant stock that naturally breaks down each year
• What is the Coase Theorem?

  If bargaining is costless and property rights are well defined, parties will reach an efficient outcome regardless of who holds the rights
• What makes bargaining fail in real life?

  High transactional costs, unclear rights, many affected parties, and strategic behavior
• What is a common property resource?

  A resource accessible to all without restriction, often overused due to lack of ownership
• Why are common property resources inefficiently used?

  Users don't account for the negative effect of their use on others, leading to overuse
• What is a public good?

  A good that is nonrival and nonexclusive- like clean air or national defense
• What is the free rider problem?

  People benefit from a public good without paying, reducing the incentive for private provision
• How is the efficient level of a public good determined?

  By vertically summing individual demand curves and setting that equal to marginal cost