Exam 2 Cheat Sheet - Chapter 10 Externalities Private cost=...

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Chapter 10 – Externalities Private cost= price paid by consumer External cost=cost to 3 rd party Social Cost= Private Cost + External Cost Social Surplus= consumer surplus + producer surplus + everyone else’s surplus Positive Externalities are social benefits (environmentally friendly cars) Negative Externalities are social costs (pollution, etc.) Coase Theorem: if transaction costs are low and property rights are well defined then producers and consumers will negotiate to find the efficient price that can be agreed upon by both parties Pigouvian Taxes: a tax on a good with external cost Pigouvian Subsidies: subsidy on a good with external benefits Tradable Permits: setting a maximum quantity A company can trade an allowable pollution amount for $ if they reduce their own pollution at a lower price than the first company. This is accepted because it does not affect the environment and still makes a profit. Command and Control: Raising prices and lowering consumption, this is hard to regulate because the way in which people reduce their consumption is varied (ex. electricity) better solved with a tax Chapter 12 – Invisible Hand Properties: 1. By maximizing profits and producing where P=MC firms minimize total costs 2. By maximizing profits and responding to profits in market or industry, firms are assuring that resources are moving to their most productive use and the balance of industries is efficient Cost Minimization: Overall costs will be lowered when MC A = MC B if MC at all firms is equal
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