markets
usually a good way to organize economic society
market failures
in absence of _______ ______ the competitive market outcome is efficient, maximizes total surplus.
externality
a type of market failure; the uncompensated impact of one person's actions on the well-being of a bystander
positive, negative
externalities can be _______ or _______, depending on whether impact on bystander is adverse or beneficial.
not efficient
self-interested buyers and sellers neglect the external costs or benefits of their actions, so the market outcome is ___ ________
governments
________ can sometimes improve market outcomes
public policy
in presence of externalities, ____ _____ can improve efficiency
examples of negative externalities
�Air pollution from a factory
�The neighbor's barking dog
�Late-night stereo blasting from the dorm room next to yours
�Noise pollution from construction projects
�Health risk to others from second-hand smoke
�Talking on cell phone while driving makes the
private costs
supply curve shows _____ ____, the costs directly incurred by sellers.
private value
demand curve shows _______ ____, the value to buyers (the prices they are willing to pay)
social cost
______ ____= private + external cost
external cost
value of the negative impact
on bystanders
private cost
social costs will always be greater than ______ ____ in a negative externality
balancing
by raising the price of the negative externality, it encourage less production/of the action, thus ______ the social cost
internalizing the externality
altering incentives so that people take account of the external effects of their actions
market equilibrium
when market participants must pay social costs, _____ ________ = social optimum
examples of positive externalities
�Being vaccinated against
contagious diseases protects
not only you, but people who
visit the salad bar or produce
section after you.
�R&D creates knowledge
others can use.
�People going to college raise the population's education level, which reduces cri
social value
in the presence of a positive externality, the ____ ____ of a good includes private value and external benefit
private value
the direct value to buyers
external benefit
the value of the positive impact on bystanders
socially optimal
�The ______ _______ Q maximizes welfare:
�At any lower Q, the social value of
additional units exceeds their cost
�At any higher Q, the cost of the last unit exceeds its social value.
negative externality
if _____ _______, market quantity larger than socially desirable
positive externality
it _____ _______, market quantity smaller than socially desirable
tax goods
___ ____ with negative externalities
subsidize goods
_______ _____ with positive externalities
public policies toward externalities
command and control policies and market-based policies
command-and-control
_____-___-_______ policies regulate behavior directly
examples of command-and-control policies
�limits on quantity of pollution emitted
�requirements that firms adopt a particular technology to reduce emissions
market-based
_____-_____ policies provide incentives so that private decision makers will choose to solve the problem on their own
examples of market-based policies
�corrective taxes and subsidies
�tradable pollution permits
corrective tax
a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality
Pigouvian taxes
another name for corrective tax
ideal corrective tax
_____ __________ ___ = external cost
ideal corrective subsidy
_____ __________ _______ = external benefit
efficient outcome
firms with the lowest abatement costs reduce negative externalities the most
regulations
corrective taxes are better than _______