ECO 211 Chapter : Econ study guide #2.docx

• School: University of Miami
• Department: Economics
• Course: ECO 211
• Professor: Spiegelman

Document Summary

Externality- the uncompensated impact of one person"s actions on the well- being of a bystander (negative and positive) Internalizing the externality- altering incentives so that people take account of the external effects of their actions. Corrective taxes- a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality. Coase theorem- the proposition that if private parties can bargain without cost over the 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. Some decision maker fails to take account of the external effects of his or her behavior. The government responds by trying to influence this behavior to protect the interests of bystanders. Negative externalities the cost to society of producing aluminum is larger than the cost to the aluminum producers.