Test 2 Review - ECON 2100 Test 2 Review Key Terms &...

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ECON 2100 Ch. 10 – Externalities Externality – the uncompensated impact of one’s actions on the well-being of a bystander; adverse impact on a bystander is a negative externality, beneficial impact is positive Social Optimum – when negative externalities exist, social costs exceed private costs; therefore the optimal quantity is less than the market equilibrium quantity. When positive externalities exist, the social value exceeds the private value; therefore the optimum quantity is larger than the equilibrium quantity. Internalizing the externality – altering incentives so that people take account of the external effects of their actions; i.e. using a tax equal to the external cost in order to shift supply to the optimum quantity( negative ext. ) –or– using a subsidy on goods to equalize the social value and private value to shift demand to optimum ( positive ext. ) Corrective Tax – a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality; a tax on gasoline is an example of a corrective tax Coase Theorem – the proposition that if private parties can bargain without cost over that allocation of resources, they can solve the problem of externalities on their own Transaction costs – the costs that parties incur in the process of agreeing to and following through on a bargain; these costs can prevent private solutions ( Coase Theorem ) from every being realized. When bargaining breaks down, the government often steps in and uses taxes, subsidies, or regulations in order to internalize the externality Ch. 11 – Public Goods and Common Resources Excludability – the property of a good whereby a person can be prevented from using it Rivalry in Consumption – the property of a good whereby one person’s use diminishes other people’s use Private Goods – good that are both excludable and rival in consumption; i.e. ice cream cones, clothing, congested toll roads
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Public Goods – goods that are neither excludable nor rival in consumption; i.e. tornado siren, national defense, uncongested non-toll roads Common Resources – goods that are rival in consumption but not excludable; i.e. fish in the ocean, the environment, congested non-toll roads Natural Monopoly – goods that are excludable but are not rivalries in consumption;
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Test 2 Review - ECON 2100 Test 2 Review Key Terms &...

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