Externalities (Chapter 7)

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

arises when a person engages in an activity that influences the well-being of a bystander but neither pays or receive compensation for that effect

if the impact on bystander is adverse

if the impact on bystander is beneficial

what happened if a product or service’s price equilibrium does not accurately reflect the true costs and benefits of that product or service

the imposition of a cost on a party as an indirect effect of the actions of another party

arises when one party, such as business, makes another party worse off, yet does not bear the costs from doing so

lead market to produce a larger quantity than is socially desirable

what determines the optimal output level.

occurs when the consumption or production of a good causes a benefit to a third party

lead markets to produce a smaller quantity than is socially desirable

what type of externalities is technology spillover?

Government can respond to externalities in one of two ways:

are taxes enacted to deal with the effects of negative externalities

an ideal corrective tax would equal the external cost from an activity with negative externalities, and an ideal corrective subsidy would equal the external benefit from an activity with positive externalities

• Also known as cap-and-trade

• The government can use market-based policies to align private incentives with social efficiency

• Is an environmental policy approach designed to address pollution and emissions

coase theorem is named after?