MAE101 Economics
Economics
Economics
Set of flashcards Details
| Flashcards | 92 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 24.09.2018 / 01.10.2018 |
| Weblink |
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Options to face negative externalities
Internalising an externality involves altering incentives so that people take account of the external effects of their actions.
Achieving the socially optimal output
The government can internalise an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.
Options to face positive externalities
Internalising externalities with subsidies
Government solution on externalities
Command-and-control policies (regulations, forbid or require certain activities)
Market-based policies (taxation and subsidies to align private incentives)
Pigovian tax vs permits
Pigoian tax
- tax sets the price of (i.e.) pollution which together with the demand curve determines the quantity of pollution
Permit
- Pollution permits set the quantity of pollution which together wich the demand curve determines the price of pollution
Definition of excludability and rivalry
Excludability
-property of a good whereby a person can be prevented from using it (i.e. if others haven't paid for it)
Rivalry
-property of a good whereby one person’s use diminishes other people’s use (i.e. if I eat an apple, others can't eat the same apple)
Definition of non-excludability and non-rivalry
Non-excludability
not possible to prevent people from consuming the public good
Non-Rivalry
not desirable to prevent people from consuming the good as long as the consumer receives some benefit from consuming the good. People can consume the same good (or bad) at the same time
Characteristics of private goods
- property right after purchase
- consumption reduces amout available for others --> rivalry
- can exclude others from consuming it --> excludability
- transferable, low information cost and many producers and consumers
Characteristics of public goods
- cannot exclude others --> non-excludability
- consumption by one person does not deplete consumption by others --> non-rivalry
i.e. national defence, lighthouses, police
Quasi public goods (exception) as non-rival up to a point, until congestion occurs (roads i.e. if traffic jam) --> therefore introduction of toll or congestion tax
The free-rider problem
A free-rider is a person who receives the benefit of a good but avoids paying for it.
i.e. Once a public good is produced, it does not cost anything for others to enjoy it; others can’t be excluded from the benefits of the public good. Thats why the free-rider problem prevents private markets from supplying public goods.
Four kinds of goods
Private goods i.e. clothing
are both excludable and rival
Public goods i.e. national defence
are neither excludable nor rival
Common resources i.e. fish in the ocean
are rival but not excludable
Natural monopolies (club goods) i.e. Deakin webpage
are excludable but not rival
The tragedy of the Commons
Common resources get used more than is desirable from the standpoint of society as a whole
Common resources tend to be used excessively when individuals are not charged for their usage.
i.e. fish, whales, other wildlife, clean air and water
The coase theorem
The Coase theorem is a proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
