Ch. 16 [Externalities]

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Examples of transaction cost:

Costs of communication; Cost of making legally binding agreements; Costs of coordinating relevant parties

Is it possible to have zero pollution?

False, optimal quantity of pollution isn't zero

An emissions tax is a form of:

Pigouvian tax

Goods with network externalities exhibit positive feedback:

The good with the largest network eventually dominates the market, and rival goods disappear. As a result, in early stages of the market, firms have an incentive to take aggressive actions, such as lowering price below production cost, to enlarge the size of their good's network.

The socially optimal quantity of the good or activity can be achieved by:

an optimal Pigouvian subsidy

Positive externalities

are external benefits

Negative externalities

are external cost

Tradable emissions permits

are licenses to emit limited quantities of pollutants that can be bought and sold by polluters

Network externalities

arise when the value of a good increases when a large number of other people also use the good.

When the quantity of pollution emitted can be directly observed and controlled, environmental goals can be achieved efficiently in what two ways:

emissions taxes and tradable emissions permits

Governments often limit pollution with:

environmental standards

Standards that are an inefficient way to reduce pollution because they are inflexible:

environmental standards

The optimal Pigouvian tax is:

equal to the marginal social cost of pollution at the socially optimal quantity of pollution

Coase theorem

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

Externalities

external costs and benefits

According to Coase theorem, the private sector can sometimes resolve externaliies on its own:

if transaction cost AREN'T too high , individuals can reach a deal to internalize the externality. When transaction costs ARE too high, government intervention may be warrented.

Left to itself, a market economy will typically generate an:

inefficiently high level of pollution because polluters have no incentive to take into account the costs they impose on others.

External benefit

is a benefit that an individual or firm confers on others without receiving compensation

Pigoucian subsidy

is a payment designed to encourage activities that yield external benefits

Emissions tax

is a tax that depends on the amount of pollution a firm produces

Technology spillover

is an external benefit that results when knowledge spreads among individuals and firms

External cost

is an uncompensated cost that an individual or firm imposes on others.

Marginal social cost of pollution

is the additional cost imposed on society as a whole by an additional unit of pollution

Marginal social benefit of pollution

is the additional gain to society as a whole from an additional unit of pollution

Environmental standards

rules that protect the environment by specifying actions by producers and consumers

Pigouvian taxes

taxes designed to reduce external costs

Transaction costs

the costs to individuals of making a deal

The most important example of external benefits in the economy is:

the creation of knowledge through technology spillover

Socially optimal quantity of pollution is:

the quantity at which the marginal social cost of pollution is equal to the marginal social benefit of pollution.

The marginal social cost of a unit of pollution is equal to:

the sum of the willingness to pay among all members of society to avoid that unit of pollution.

Benefits of emission taxes and tradable emissions permits

these methods are efficient because they are flexible, they allocate more pollution reduction to those who can do it more cheaply, and they also motivate polluters to adopt new pollution-reducing technology.

Goods with externalities pose special problems for antitrust regulators because:

they tend toward monopoly; it can be difficult to distinguish what is a normal growth of the network and what is an illegal monopolization effort by producers.

When there are positive externalities, or external benefits, a market economy left to itself will typically produce:

too little of the goods or activity

Internalize the externality

when individuals take external cost or benefits into account

Positive feedback

when success breeds greater success and failure breeds further failure.


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