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scan0001 - #5 Externalitiesl Efficiency EXTERNALITY o A...

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Unformatted text preview: #5 Externalitiesl Efficiency EXTERNALITY o A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. A negative externality in the market may produce a quantity of the good that is greater than the efficient amount. A positive externaiity in the market may produce a quantity of the good that is less than the efficient amount. Externalities interfere with the economic efficiency of a market equilibrium. PRIVATE COST 0 The cost borne by the producer of a good or service. SOCIAL COST 0 The total cost of producing a good, including both the private cost and any external cost. PRIVATE BENEFIT o The benefit received by the consumer of a good or l\ service. SOCIAL BENEFIT o The total benefit from consuming a good, including both the private benefit and any external benefit. MARKET FAILURE o Situations in which the market fails to produce the efficient levei of output. PROPERTY RIGHTS o The rights individuals or businesses have to the exciusive use of their property, including the right to buy or sen it. Externalities and market failure result from incomplete property rights or fromthe difficulty of enforcing property rights in certain situations. §olutions to Externalities TRANSACTION COSTS o The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. COASE THEOREM 0 The argument of economist Ronald Coase that if the transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. PIGOVIAN TAXES AND SUBSIDIES ...
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