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Definition
the action of one party imposes costs on another party
When there are negative externalities, the marginal social cost MSC is higher than the marginal cost MC.
The difference is the marginal external cost MEC. |
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| When there are negative externalities, the marginal social cost is... |
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Definition
higher than the marginal cost MC.
The difference is the marginal external cost. |
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| (with negative externalities) a profit- maximizing firm produces where price is |
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| (with negative externalities) the efficient output is q*, at which price equals... |
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| when the action of one party benefits another party |
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| When there are positive externalities, marginal social benefits MSB are higher than... |
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...marginal benefits D.
The difference is the marginal external benefit MEB. |
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aka "spillover effects."
action by either a producer or consumer which affects other producers or consumers, but is not accounted for in the market price
- all about encouraging certain activities and preventing others |
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| sum of the marginal cost of production and the marginal external cost. |
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| increase in cost imposed externally as one or more firms increase output by one unit. |
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| legal limit on the amount of pollutants that a firm can emit. |
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Definition
charge levied on each unit of a firm's emissions
e.g. Facing a fee of $3 per unit of emissions, a firm reduces
emissions to the point at which the fee is equal to the marginal cost of abatement. |
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| The efficient level of factory emissions is the level that equates... |
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Definition
| ... the marginal external cost of emissions MEC to the benefit associated with lower abatement costs MCA. |
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Term
| transferable emissions permits |
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Definition
system of marketable permits allocated among firms, specifying the maximum level of emissions that can be generated.
Marketable emissions permits create a market for externalities. This market approach is appealing because it combines some of the advantageous features of a system of standards with the cost advantages of a fee system. |
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Definition
legal rules stating what people or firms may do with their property
- central to regulations |
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| principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified. |
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| resource to which anyone has access |
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| nonexclusive and nonrival good: the marginal cost of provision to an additional consumer is zero and people cannot be excluded from consuming it |
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| good for which the marginal cost of its provision to an additional consumer is zero |
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| goods that people cannot be excluded from consuming, so that it is difficult or impossible to charge for their use. |
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| consumer or producer who does not pay for a nonexclusive good in the expectation that others will. |
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| When to impose a standard |
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Definition
| The standard is preferable when the marginal external cost curve is steep and the marginal abatement cost curve is relatively flat. |
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| emissions permits are appealing because... |
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Definition
| Marketable emissions permits create a market for externalities. This market approach is appealing because it combines some of the advantageous features of a system of standards with the cost advantages of a fee system. |
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Definition
With the fee, the firm with a lower abatement cost curve (Firm 2) reduces emissions more than the firm with a higher cost curve (Firm 1).
With limited information, a policymaker may be faced with the choice of either a single emissions fee or a single emissions standard for all firms.
The fee of $3 achieves a total emissions level of 14 units more cheaply than a 7-unit-per- firm emissions standard. |
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| Opportunity cost to society as a whole of receiving an economic benefit in the future rather than the present. |
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Term
| The social rate of discount depends on three factors: |
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Definition
(1) the expected rate of real economic growth
(2) the extent of risk aversion for society as a whole
(3) the “rate of pure time preference” for society as a whole. |
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Term
| Economic efficiency can be achieved without government intervention when… |
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Definition
the externality affects relatively few parties and when property rights are well specified.
e.g. The efficient solution maximizes the joint profit of the factory and the fishermen. Maximization occurs when the factory installs a filter and the fishermen do not build a treatment plant.
If the factory and the fishermen agree to split this gain equally by having the fishermen pay the factory $250 to install the filter, this bargaining solution achieves the efficient outcome. |
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Term
| Common bargaining problems |
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Definition
Bargaining can be time-consuming and costly, especially when property rights are not clearly specified.
Bargaining can break down even when communication and monitoring are costless if both parties believe they can obtain larger gains.
Another problem arises when many parties are involved. |
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Term
| When a common property resource, such as a fishery, is accessible to all, the resource is used up to the point Fc at which… |
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Definition
...the private cost is equal to the additional revenue generated.
This usage exceeds the efficient level F* at which the marginal social cost of using the resource is equal to the marginal benefit (as given by the demand curve).
e.g. Because crawfish are bred in ponds to which fishermen
have unlimited access, they are a common property resource.
The efficient level of fishing occurs when the marginal benefit is equal to the marginal social cost.
However, the actual level of fishing occurs at the point at which the price for crawfish is equal to the private cost of fishing.
The shaded area represents the social cost of the common property resource. |
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Term
| When a good is nonrival, the social marginal benefit of consumption, given by the demand curve D, is determined by… |
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Definition
vertically summing the individual demand curves for the good, D1 and D2.
- At the efficient level of output, the demand and the marginal cost curves intersect. |
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Term
| The efficient level of educational spending is determined by… |
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Definition
| summing the willingness to pay for education (net of tax payments) of each of three citizens. |
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Term
| "true cost" of production includes |
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| examples of positive externalities |
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Definition
| - beekeepers and apple orchards |
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| examples of negative externalities |
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Definition
- apple farms and pig farms
- dirty chimneys |
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Definition
| do total benefits exceed total costs? |
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| how government is needed to deal with externalities |
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Definition
- transparent regulatory system
- enforcement of property rights
- independent judiciary
- rule of law |
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Term
| negative consumption (demand) externalities |
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Definition
ex: cigarette smoking (2nd hand smoke)
MB>MSB
q* where MC=MSB
= MB-MEC |
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Term
| positive consumption externalities |
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Definition
ex: education, public health (stuff we want people to consume more of)
MSB>MB
Q* where MC=MSB |
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| positive production (supply) externalities |
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Definition
ex: compost (prevents waste), planting trees (improves values of neighbors' houses), honey production (bees are cool), yerba mate (?)
MC>MSC
Q* where MB=MSC
= MC-MEB |
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Term
| negative production externalities |
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Definition
ex: steel production creates pollution
MSC>MC
Q* where MB=MSC
= MC + MEC |
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Term
| taxes easier to implement and enforce than bans, why? |
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Definition
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Definition
less pollution or cleaning up pollution
*lots of incentives to free-ride on abatement costs
* some countries have much higher MCA than others |
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| efficient level of pollution |
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| where MSC of pollution = MC of abatement |
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| an argument for fees is essentially and argument against... |
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| argument in favor of fees |
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Definition
- takes advantage of firms with low abatement costs
- creates incentive to adopt abatement technology
- standards have a risk becoming inefficient by being too high or too low, hard to get right |
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Term
| argument in favor of standards |
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Definition
- more leeway with standards than with fees (why?)
- social cost of setting fee too low is much higher
- thus... standards are less efficient, but less risky |
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Term
| how to allocate pollution permits: |
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Definition
1. select total q* of allowable pollution
2. allocate q* across firms
3. let firms buy and sell allocations |
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Term
| tax is more effective in addressing market failure when demand is... |
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Definition
elastic.
but when demand is inelastic, you get more tax revenues. |
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Term
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Definition
excludable and rivaled
mc = mb = p* |
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Definition
non-excludable, but rivaled
MC = 0 up to congestion, after with MC>MB
ex: roads, public transportation, education |
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| common pool resources/depletable resources |
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Definition
excludable, but non-rivaled (i think?)
MSC > MB individual
- free-riding leads to inefficient overuse
examples? |
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Definition
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| strength of preferences = MB |
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Definition
| if i value defense at $100, and you at $1, then total MB = $101 |
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Definition
e.g. too many sheep, so all the grass dies.
- people need to stay home voluntarily, but they wont out of fear that someone else's sheep will eat their share of grass. |
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Term
| how deal with tragedy of commons? |
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Definition
- sometimes people will share, especially in homogeneous communities with history of trusting relationships and transparency about rules
- otherwise a gov enforcement mechanism needed (a posse, or the EPA) |
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Term
| efficient public good provision |
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Definition
MSB = MB1+MB2
at Q* MSB = MC
total WTP = total MB |
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Term
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Definition
the medium voter selects the level of public good provided
* distribution based on democratic principles, not efficiency
* dont know where the efficiency point is
total WTP = total MB |
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Definition
| wealth that gives utility = exp. utility |
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Term
| wealth-certainty equivalent = |
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Definition
| insurance premium = exp. loss + risk premium |
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Term
| risk-averse people will pay... |
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Definition
a positive risk premium
(and so forth for risk-neutral and risk-loving people) |
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Term
| in real world, assumption that consumers have perfect information about risk is not true. so? |
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Definition
companies have incentive to convince them that risk is higher than actual, thus getting consumer to pay higher risk premium.
- insurers also dont have perfect info about risk |
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Definition
one buglary doesnt increase the likelihood of other houses being burglarized.
- necessary for pooling |
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| risk pools with large numbers and independent risk |
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Definition
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Term
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Definition
expected loss + risk premium
- not necessarily equitable
- more risk-averse person would pay more for same insurance plan |
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