Chapter 19: Externalities

external benefit

a benefit that an individual or firm confers on other without receiving compensation ex. clean air is available to everyone, but firms arent paid for providing it

Pigouvian subsidy

a payment designed to encourage activities that yield external benefits

industrial policy

a policy that supports industries believed to yield positive externalities

emissions tax

a tax that depends on the amount of pollution a firm produces ex. the more pollution a tax emits, the greater the emissions tax

technology spillover

an external benefit that results when knowledge spreads among individuals and firms ex. with more knowledge, firms can produce more and perhaps lower external costs

external cost

an uncompensated cost that an individual or firm imposes on others ex. pollution into the environment affects everyone and is imposed by firms

marginal social cost of a good/activity

equal to marginal cost of production plus its marginal external cost ex. the marginal social cost of pollution is the additional cost to society by one more unit of pollution

marginal social benefit of good/activity

equal to the marginal benefit that accrues to consumers plus its marginal external benefit

Coase theorem

even in the presence of externalities, an economy can always reach an efficient solution as long as transaction costs are sufficiently low

positive externalities

external benefits ex. shade from a tree in a neighbors lawn

negative externalities

external costs ex. pollution

externalities

external costs and benefits

tradable emissions permits

licenses to emit limited quantities of pollutants that can be bought and sold by producers ex. there is 50 permits to emit x amounts of pollution, these permits can be traded amongst firms, but cannot be reproduced or destroyed

environmental standards

rules that protect the environment by specifying actions by producers and consumers ex. the government can place an environmental standard on the amount of radiation that one can emit into the environment

pigouvian taxes

taxes designed to reduce external costs ex. a pigouvian tax can be placed on pollution to reduce overall pollution emitted by firms

marginal social cost of pollution

the additional cost imposed on society as a whole by an additional unit of pollution ex. the amount of waste that is emitted, or the additional number of animals that die due to the one more unit of pollution

marginal social benefit of pollution

the additional gain to society as a whole from an additional unit of pollution ex. the new product or output from the additional unit of pollution

transaction costs

the costs to individuals of making a deal ex. the cost if I want to internalize the externality

socially optimal quantity of pollution

the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for ex. the intersection of the marginal social benefit of an activity and the marginal social cost, therefore takes into account both costs and benefits

internalize the externality

when individuals take external costs or benefits into account