Chapter 10: Externalities

Which of the following is true regarding tradable pollution permits and corrective taxes?

Corrective taxes and tradable pollution permits create and efficient market for pollution

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

Social cost

The sum of private costs and external costs

Externality

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

A negative externality generates

a social cost curve that is above the supply curve (private cost curve) for a good

A positive externality generates

a social value curve that is above the demand curve (private value curve) for a good

A negative externality (that has not been internalized) causes the

equilibrium quantity to exceed the optimal quantity

A positive externality (that has not been internalized) causes the

optimal quantity to exceed the equilibrium quantity

To internalize a negative externality, an appropriate public policy response would be to

tax the good

An externality is

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

Positive externality

A situation when a person's actions have a beneficial impact on a bystander

Negative externality

A situation when a person's actions have an adverse impact on a bystander

Corrective tax

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

Internalizing an externality

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