Chapter 16 Externalities

Marginal Social Benefit of Pollution

*Downward sloping line*, producers benefit from this because they won't have to spend money to clean up pollution.

Coase theorem

*Private sector* can *correct externalities and produce efficient level of good*, provided that transaction *costs are sufficiently low.*

Pigouvian taxes

*Reduce problem of negative externalities or external costs.* *Difficult to implement*, government doesn't know what level of tax is efficient.

External Benefit

Benefit received by someone other than the people directly involved in the transaction, market does not produce enough of this good. Ex. of positive ecternalities.

Pollution

Inflicts cost on entire society, this cost isn't borne by the companies or individuals who generate it. Pollution however generates costs and benefits to society. *In absence of government intervention, polluters pollute until benefit of pollution = 0.* *Reduction in pollution emissions result in an Increase in total surplus of market.*

Socially optimal quantity of pollution

Level in which *marginal social cost of pollution equal the marginal social benefit of pollution.* *Unlikely* because people who produce pollution do not have to compensate those who bear the cost of pollution.

Emission/Environmental Standard

Marginal Benefit of Pollution = Marginal Cost of pollution. or *MSB=MSC* *Effective but not Efficient.*

Tradable Pollution Permits

Permits allowing firms right to pollute. Allow them to trade if its easy to reduce pollution. Create incentives for firm to find less polluting technology.

Negative Externalities

Side effect that imposes costs on others. Ex. *create too much of a good.*

Positive Externalities

Side effect that provides benefits to others. Ex. *create too little of the good.* *Hard to measure* When market generates positive external benefits, they produce too little.

technology spillover

Spread of knowledge among individuals and firms.

Subsidy

Subsidy helps government achieve socially optimal amount of consumption. *Generates more consumption of a good til optimal amount.* (MSB=MSC)

emission tax

Taxes that depend on the amount of pollution a firm produces. More efficient than environmental standard It ensures *Marginal benefit of pollution = all sources of pollution.* Create incentives for firm to find less polluting technology.

Marginal Social Cost of Pollution

The additional cost imposed on society of an additional unit of pollution. *Upward sloping line*, since additional unit present greater cost to society as environment deteriorates.

Network Externalities

Value/Marginal benefit of good is dependent on how many other people consumed that good. In Markets of transportation and communication.

Externalities

When externalities are present, *market fails to produce optimal amount of the good.* When observed can be regulated through *direct controls, taxations, or subsidization.* When not observed government implement *policies to prevent actions that produce externalities.*

internalize the externality

When individuals *take into account externalities* when making decisions. *Does not occur if cost of communication is too high, cost of making legally binding agreements, or costly delays in bargaining.* When people fail to internalize, government intervenes.

positive feedback

as more people use the good, even more are inclined to use the good. Also known as Network Externalities.