Chapter 10

Chapter 10 - production efforts on other firms access to...

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I. Chapter 10 A. Externality- an action that influences the well-being of the environment or a bystander 1. Negative Externality- a. A bad effect on the bystander b. For each unit of aluminum produced, a certain amount of smoke enters the atmosphere. This smoke creates a health risk. c. Social Cost- private cost of aluminum (plus) the cost of those bystanders affected adversely by the pollution d. Stop negative externalities i. Apply a tax to the aluminum, this would cause aluminum producers to produce less ii. Internalizing the externality- altering incentives so that people take account of the external effects of their actions. 2. Positive Externality- a. A beneficial effect on the bystander b. Social cost value is greater than private value c. Government subsidies goods that are positive externalities d. Technological spillover- the impact of one’s firm research and
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Unformatted text preview: production efforts on other firms access to technological advance. e. Supply curve shifts downward 3. Coase Theorem- The private parties can bargain without cost over the allocation of resources, then the private market will always solve the problem of externalities and allocate resources efficiently. 4. Transaction costs- a. The costs that parties incur in the process of agreeing to and following through on a bargain b. Ex. Hiring a translator because the two private parties speak different languages 5. Corrective Tax- (pigovian tax) a. Tax designed to induce private decision makers to take account of social costs that arise from a negative externality. b. Higher the tax, larger the reduction in pollution. c. Taxes give companies incentives to develop cleaner technology d. Enhance economic efficiency...
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This note was uploaded on 09/18/2011 for the course SAS 101 taught by Professor Unsure during the Spring '11 term at Rutgers.

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Chapter 10 - production efforts on other firms access to...

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