Ch. 10 (Externalities) Key Terms
Negative Consumption Externality
Ex: Alcohol demand = private value demand' = social value (left side of demand curve) social value = private value + external COST
Positive Production Externality
Ex: Basic Research supply = private cost supply' = social cost (right side of supply curve) social cost = private cost + external BENEFIT
Positive Consumption Externality
Ex: Flu Shots demand = private value demand' = social value (right side of demand curve) social value = private value + external BENEFITS
Negative Production Externality
Ex: Pollution supply = private cost supply' = social cost (left side of supply curve) social cost = private cost + external COST
corrective tax
a tax designed to induce private decision makers to take account of the social costs that arise from a negative eternality *economists prefer corrective taxes (economic incentive) to regulations b/c they can reduce pollution at a lower cost to society
internalizing the externality
altering incentives so that people take account of the external effects of their actions (ex: pollution tax)
transaction costs
costs that parties incur in the process of agreeing to and following through on a bargain to solve an externality problem
social/private value
relates to DEMAND curve; consumption externality
social/private cost
relates to SUPPLY curve; production externality
externality
the uncompensated impact of one person's actions on the well-being of a bystander *Ex: Positive Externality = flu shots, public education, technology *Ex: Negative Externality = pollution, gas, alcohol
Coase Theorem
with low transaction costs (or without cost), it's possible that private bargaining can lead to an efficient outcome when dealing with an externality (work it out on their own)
Methods to Solve Externalities (3)
1) government involvement: positive externality (subsidize); negative externality (impose tax) 2) private bargaining: only with smaller groups of people 3) Legal Remedy *Coase Theorem - private bargaining can solve problems of externalities among themselves