ch 10
when technology spillover occurs...
a firms research yields technological knowledge that can then be used by society as a whole
externalities tend to cause markets to be...
inefficient
would pollution permits or Pigovian taxes be better at limiting the quantity of pollution?
Pigovian Tax would be more efficient as it give strong incentive for the firm to find alternative than paying the pollution tax.
Why might a Pigovian tax or tradable pollution permits be more effective than command and control policies?
With Pigovian taxes, polluting firms must pay a tax to the government. With pollution permits, polluting firms must pay to buy the permit. Both corrective taxes and pollution permits internalize the externality of pollution by making it costly for firms to pollute.
Two types of private solutions to the problem of externalities are...
charities and the golden rule
private markets fail to account for externalities because...
decision makers in the market fail to include the costs of their behavior to third parties
what are examples/types of market-based solutions
market-based solutions are organized so that companies, prices, and production are controlled naturally by the supply of and demand for goods and services, rather than by a government:
government should tax goods with...
negative externalities and subsidize goods with positive externalities
what does "command and control" mean?
rules, regulations, and laws
a paper plant produces water pollution during the production process. If the government forces the plant to internalize the negative externality, then the...
supply curve for paper would shift to the left
what is a Pigovian tax?
the most efficient and effective way to correct negative externalities. A type of a Pigovian tax is a "sin tax" which is a special tax on tobacco products and alcohol
what is 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.
suppose that cookie producers create a positive externality equal to $2 per-dozen. Further suppose that the government offers a $2 per-dozen subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?
they are equal
why do private solutions not always work?
two parties can't always come to an agreement
