Econ 20A - Chapter 10: Externalities

Property Right

Firm has to obtain permission from the inventing firm and pay it a royalty if they want to use their technology.

Regulation (Command-and-Control)

The government can remedy an externality by either requiring or forbidding certain behaviors.

Technology Spillover

The impact of one firm's research and production efforts on other firms' access to technological advance.

Corrective Taxes (also known as Pigovian Taxes) (Market-Based)

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

Internalizing the Externality

Altering incentives so that people take account of the external effects of their actions.

Industrial Policy

Government intervention that aims to promote technology-enhancing industries.

Command-and-Control Policies

Government regulates behavior of firms directly, solving their externalities

Positive Externality

Has a beneficial impact on the bystander. (Ex: Historical buildings are favored by the public, causing the government to lower taxes for them.)

Negative Externality

Has an adverse impact on the bystander. (Ex: Exhaust from automobiles creates smog, causing the government to raise taxes on gas.)

Market-Based Policies

Incentives are provided so that private decision makers will choose to solve externalities on their own.

Summary of Negative/Positive Externalities

Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem, the government can internalize the externality by: Taxing goods that have negative externalities Subsidizing goods that have positive externalities

Tradable Pollution Permits (Market-Based)

Sets a quantity of allowable pollution via permits. The more costly it is for a firm to cut back on pollution, the more it will be willing to pay for a permit.

Transaction Costs

The costs that parties incur in the process of agreeing to and following through on a bargain.

Private Solutions towards Externalities (TOPIC START)

The private market can often solve the problem of externalities by relying on the self-interest of the relevant parties.

Coase Theorem (Private Solution)

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. Argues that private economic actors can potentially solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient.

Externality (TOPIC START)

The uncompensated impact of one person's actions on the well-being of a bystander.