Card Set Information
When does economic efficiency exist?
•When marginal benefit equals marginal cost
Who is a third party?
•People outside the market transaction who are affected by the product
What are private benefits and costs?
•Benefits and costs to the decision maker, ignoring benefits and costs to third parties
What are externalities?
•Benefits or costs that are not considered by market buyers and sellers
What is an example of a negativeexternality?
•Pollution from cars
What is an example of a positiveexternality?
•The enjoyment you derive from your neighbor’s well-kept yard
What happens when externalities arepresent?
•Competitive markets are not likely to achieve economic efficiency
What are social benefits?
•The sum of benefits to everyone, including both private benefits and external benefits
What are private costs?
•Production costs of capital, labor, land, and entrepreneurship
What are social costs?
•The sum of costs to everyone, including both private costs and external costs
When is social welfare maximized?
•When marginal social benefit equals marginal social cost
Why can’t businesses solve pollution?
•The added costs of cleaning up the environment will make them less competitive in the market place
Why should a firm minimize costs?
•Only firms that choose the lowest cost method of production will survive the market
What happens when external costs areignored?
•Competitive firms produce “too much,” and the market equilibrium price is “too low,” compared to a socially efficient industry
What happens when there is nogovernment intervention?
•If left to the competitive market, profit-maximizing firms would have no reason to reduce emissions
Who is a free rider?
•A person who gets the same benefit from purchasing a good whether she or he pays for anti-pollution devices or not
Do markets fail when externalities are present?
•Externalities illustrate that private markets fail to produce society’s preferred outcome
How can society achieve efficiencywhen markets fail?
•Government has a potential role when there is market failure
What is an exampleofgovernment failure?
•Government can fail to correct market failure by doing too little or too much about pollution
What are government approaches toachieving environment efficiency?
•Command-and-control regulations•Incentive-based regulations
What is a command-and-controlregulation?
•Government regulations that set an environmental goal and dictate how the goal will be achieved
What is an example of acommand-and-control regulation?
•Mandatory installation of catalytic converters on automobiles
What is an incentive-basedregulation?
•Government regulations that set an environmental goal, but are flexible in how buyers and sellers achieve the goal
What is an effluent tax?
•A tax on the pollutant
Effluent tax-->Increase price--> Decrease quantity--> leads to
What isemissions trading?
•Trading that allows firms to buy and sell the right to pollute
What is new-source bias?
•Bias that occurs when there is an incentive to keep assets past the efficient point as a result of regulation
Is the efficient amount of pollution typically zero?
•No, the marginal social cost of achieving one more unit of clean air may be greater than the marginal social benefit
What conclusion can be made?
•Economists generally believe that incentive based regulations are more efficient than command-and-control regulations
What is the Coase Theorem?
•The proposition that private market negotiations can achieve social efficiency, regardless of the initial definition of property rights
How comprehensive is the Coase Theorem?
•Only a small number of environmental problems qualify for Coase Theorem solutions
Whichcases qualify for the Coase Theorem?
•no transactions costs•no income effects•only two parties in the negotiation
What is a transaction cost?
•The costs of negotiating and enforcing a contract
What is the free-rider problem?
•If some people benefit while others pay, few will be willing to pay for improvement of the environment or other public goods
What is the result of the free-riderproblem?
•Goods affected are underproduced
What is Tragedy of the Commons?
Individuals will use an open access resource to the point of exhaustion, basing their use on private benefits while disregarding external costs to others.