Chapter 10- Economics
Six insights for dealing with externalities:
1. Don't intervene if you don't need to. 2. Complementing market forces is better than hindering them. 3. The right tool depends on what you're uncertain about. 4. Consider costs and benefits of regulations or public goods. 5. Target bad outcomes, not specific processes. 6. Ensure there's an incentive to innovate.
What are the three facts about public goods that you should know?
1. Fact one: Just because the government provides it, doesn't mean that it is a public good . 2. Fact two: Just because something is a public good doesn't mean that the government should fund it . 3. Fact three: Just because the government should fund a public good, doesn't mean that the government should provide it .
What can solve externalities?
1. Side payments 2. Strategic investments 3. Private bargaining can solve externality problems when bargaining costs are low. 4. Mergers
external benefit
A benefit accruing to bystanders.
external cost
A cost imposed on bystanders.
nonrival good
A good for which one person's use doesn't subtract from another's.
rival good
A good for which your use of it comes at someone else's expense.
club good
A good that is excludable, but nonrival in consumption.
common resource
A good that is rival and also nonexcludable.
public good
A nonrival good that is nonexcludable and hence subject to the free-rider problem.
cap and trade
A quantity regulation implemented by allocating a fixed number of permits, which can then be traded.
_______and ________ are like corrective subsidies.
A warm glow & social recognition
marginal social benefit
All marginal benefits, no matter who gets them = Marginal private benefit + marginal external benefit
marginal social cost definition
All marginal costs, no matter who pays them = Marginal private cost plus marginal external cost
positive externality
An activity whose side effects benefit bystanders.
negative externality
An activity whose side effects harm bystanders.
------ target externalities
Company rules also target externalities.
------ can fix positive externalities.
Corrective subsidies
------ can solve negative externalities.
Corrective taxes
What fixes distortions caused by market failures?
Corrective taxes and subsidies
Coase Theorem
If bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.
The supply curve is also the...
Marginal private cost curve
Rational Rule for Society
Produce more of an item if its marginal social benefit is greater than (or equal to) the marginal social cost.
What's the three-step recipe to analyze externalities?
Step one: Predict the equilibrium outcome to forecast what you think will happen. Step two: Assess what externalities are involved. Step three: Find the socially optimal outcome that is in society's best interest, and then compare this to the equilibrium forecast from the first step.
marginal private benefit
The extra benefit enjoyed by the buyer from one extra unit.
marginal private cost definition
The extra cost paid by the seller from one extra unit.
marginal external benefit
The extra external benefit accruing to bystanders from one extra unit.
marginal external cost definition
The extra external cost imposed on bystanders from one extra unit.
socially optimal
The outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders.
tragedy of the commons
The tendency to overconsume a common resource.
free-rider problem
When someone can enjoy the benefits of a good without bearing the costs.
nonexcludable
When someone cannot be easily excluded from using something.
_____ is not an externality.
a price change
Common resources can lead to....
a tragedy of the commons.
The marginal social benefit curve lies where?
above the demand curve
The marginal social cost curve lies where?
above the supply curve
Governments use what to limit pollution?
cap and trade to limit pollution.
Public goods can be provided by who?
communities
A cap-and-trade system is like a what?
corrective tax.
Positive externalities create...
external benefits.
Negative externalities create....
external costs.
Nonexcludable goods create what?
externality problems.
When goods or services are rival and it's easy to exclude those who don't pay, there's no what?
free-rider problem.
Positive externalities do what?
generate benefits for others.
The _______ is about externalities
golden rule
Negative externalities do what?
impose costs on others.
the demand curve is also the
marginal private benefit curve
marginal social cost=
marginal private cost + marginal external cost
marginal social benefit=
marginal social cost
Public goods are....
nonrival goods afflicted by the free-rider problem.
Negative externalities lead to....
overproduction
There is a socially optimal quantity of...
pollution.
What are the types of externalities?
positive and negative
Businesses try to turn....
public goods into club goods.
The tragedy of the commons occurs whenever....
rival goods are nonexcludable.
private interest is all about what?
the costs and benefits that you personally incur.
If people don't take account of the external costs of their actions, what happens?
they'll pursue those actions too often.
Markets yield....
too few positive externalities.
Positive externalities lead to....
underproduction
Your choice between quantity regulation and taxes depends on......
what you know.
Externalities create tension between....
your personal or private interest and society's interest.
what do you do to solve the tragedy of the commons?
assign ownership rights
Solutions to the externality problem rely on "internalizing the externality":
1. Private bargaining 2. Fix the price: Corrective taxes and subsidies 3. Fix the quantity: Cap and trade 4. Laws, rules, and regulations 5. Government provision of public goods 6. Assign ownership rights
What is an externality?
A side effect of an activity that affects bystanders whose interests aren't taken into account.
corrective subsidy
A subsidy designed to induce people to take account of the positive externalities they cause.
corrective tax
A tax designed to induce people to take account of the negative externalities they cause.
When ------is difficult, externalities remain a problem.
bargaining
rules are a....
blunt instrument
Increase efficiency by allowing.....
businesses to trade their permits.
