Ch 10 Micro Externalities

Industrial Policy

Government intervention that aims to promote technology-enhancing industries. Other economists are skeptical about IP. Even in technology spillovers are common, the success of an industrial policy requires that the government be able to measure the size of the spillovers from different markets.

Give an example of a negative externality and a positive externality.

If an activity yields a negative externality, such as pollution, the socially optimal quantity in a market is less than equalibrium quantity. If an activity yields a positive externality, such as technology spillovers, the socially optimal quantity is greater than the equilibrium quantity.

In what way could a patent system help society solve an externality problem?

The patent laws protect the rights of inventors by giving them exclusive use of their inventions for a period of time. When a firm makes a technological breakthrough, it can patent the idea and capture much of the economic benefit for itself. The patent internalizes the externality by giving the firm a property right over its invention.

externality

The uncompensated impact of one person's actions on the well-being of a bystander. If the impact is adverse then it is called a negatively. If it beneficial, it is called positive externality.

Corrective Tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality. This tax gives the factories an incentive to develop cleaner technologies because a cleaner technology would reduce the amount of tax a factory has to pay.

List some of the ways that the problems caused by externalities can be solved without government intervention.

moral codes and social sanctions: "do unto others as you would have them do unto you" Charities: tax deductions. Relying on the self-interest of the relevant parties: integrating businesses. Entering into a contract: think about the bees and the trees.

Transaction Costs

the costs that parties incur in the process of agreeing to and following through on a bargain.

Technology Spillover

the impact of one firm's research and production efforts on other firms' access to technological advance. The patent laws protect the rights of inventors by giving them exclusive use of their inventions for a period of time. The patent internalizes the externality by giving the firm property right over its invention.

Coase Theorem

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

internalizing the externality

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

Why do economists prefer Corrective Taxes to regulations as a way to protect the environment from pollution?

Because they can reduce pollution at a lower cost to society. When you charge (ex) 50,000 dollars for each ton of pollution the factories find more efficient ways to rid of their waste.