Ch. 10 (Externalities) Key Terms

Negative Consumption Externality

Ex: Alcohol demand = private value demand' = social value (left side of demand curve) social value = private value + external COST

Positive Production Externality

Ex: Basic Research supply = private cost supply' = social cost (right side of supply curve) social cost = private cost + external BENEFIT

Positive Consumption Externality

Ex: Flu Shots demand = private value demand' = social value (right side of demand curve) social value = private value + external BENEFITS

Negative Production Externality

Ex: Pollution supply = private cost supply' = social cost (left side of supply curve) social cost = private cost + external COST

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative eternality *economists prefer corrective taxes (economic incentive) to regulations b/c they can reduce pollution at a lower cost to society

internalizing the externality

altering incentives so that people take account of the external effects of their actions (ex: pollution tax)

transaction costs

costs that parties incur in the process of agreeing to and following through on a bargain to solve an externality problem

social/private value

relates to DEMAND curve; consumption externality

social/private cost

relates to SUPPLY curve; production externality

externality

the uncompensated impact of one person's actions on the well-being of a bystander *Ex: Positive Externality = flu shots, public education, technology *Ex: Negative Externality = pollution, gas, alcohol

Coase Theorem

with low transaction costs (or without cost), it's possible that private bargaining can lead to an efficient outcome when dealing with an externality (work it out on their own)

Methods to Solve Externalities (3)

1) government involvement: positive externality (subsidize); negative externality (impose tax) 2) private bargaining: only with smaller groups of people 3) Legal Remedy *Coase Theorem - private bargaining can solve problems of externalities among themselves