Chapter 10: Externalities
Which of the following is true regarding tradable pollution permits and corrective taxes?
Corrective taxes and tradable pollution permits create and efficient market for pollution
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
Social cost
The sum of private costs and external costs
Externality
The uncompensated impact of one person's actions on the well-being of a bystander
A negative externality generates
a social cost curve that is above the supply curve (private cost curve) for a good
A positive externality generates
a social value curve that is above the demand curve (private value curve) for a good
A negative externality (that has not been internalized) causes the
equilibrium quantity to exceed the optimal quantity
A positive externality (that has not been internalized) causes the
optimal quantity to exceed the equilibrium quantity
To internalize a negative externality, an appropriate public policy response would be to
tax the good
An externality is
the uncompensated impact of one person's actions on the well-being of a bystander
Positive externality
A situation when a person's actions have a beneficial impact on a bystander
Negative externality
A situation when a person's actions have an adverse impact on a bystander
Corrective tax
A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality
Internalizing an externality
Altering incentives so that people take into account the external effects of their actions