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
0 The cost borne by the producer of a good or service.
0 The total cost of producing a good, including both the
private cost and any external cost.
o The benefit received by the consumer of a good or l\
o The total benefit from consuming a good, including
both the private benefit and any external benefit.
o Situations in which the market fails to produce the
efficient levei of output.
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.
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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- Spring '08