Externality: a cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or benefit that arises from consumption and that falls on someone other than the consumer.
Negative externality: a production or consumption activity that creates and external cost.
Positive externality: a production or consumption activity that creates an external benefit.
Four types of externalities:
Negative production externalities Positive production externalities Negative consumption externalities Positive consumption externalities
Marginal private cost: the cost of producing an additional unit of a good or service that is borne by the producer of that good or service.
Marginal external cost: the cost of producing an additional unit of a good or service that falls on people other than the producer.
Marginal social cost: the marginal cost incurred by the entire society --- by the producer and by everyone else on whom the cost falls. It is the sum of marginal private cost and marginal external cost.
Property rights: legally established titles to the ownership, use and disposal of factors or production and goods and services that are enforceable in the courts.
Coase theorem: the proposition that if property rights exist, only a small number of parties are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affect by who is assigned the property right.
Transactions costs: the opportunity costs of conducting a transaction.
Government actions in the face of external costs: Pollution limits
Pollution charges or taxes
Marketable pollution permits (cap-and trade)
Marginal private benefit: the benefit from an additional unit of a good or service that the consumer of that good or service receives.
Marginal external benefit: the benefit from an additional unit of a good or service that people other than the consumer of that good or service enjoy.
Marginal social benefit: the marginal benefit enjoyed by society --- by the consumer of a good or service and by everyone else who benefits from it. It is the sum of marginal private benefit and marginal external benefit. MSB = MB + Marginal external benefit
Government actions in the face of external benefits: Public provision Private subsidies Vouchers
Public provision: the production of a good or service by a public authority that receives most of its revenue from the government.
Subsidy: a payment by the government to a producer to cover part of the costs of production.
Voucher: a token that the government provides to households, which they can use to buy specified goods or services.
Graphs:
Price of product (Aluminum) Supply (private cost)
Demand (private value)
Quantity of product
The market for product
Price of product (Aluminum)
Social cost Cost of pollution
Supply (private cost)
Optimum
Demand (private value) Quantity of product
Pollution and the social optimum
Price of product (robot)
Supply Value of technology spillover Social cost
Optimum Demand
Quantity
Positive Externalities in production
Pigovian tax Pollution permits
Price of pollution Price of pollution
Supply pollution rights
Pigovian tax
Demand pollution rights Demand pollution rights
Quantity of pollution
The equivalence of Pigovian taxes and pollution permits
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