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01:220:102 (14)
Chapter 17

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Department
Economics
Course
01:220:102
Professor
Thomas Prusa
Semester
Fall

Description
Chapter 17 – Externalities The Economics of Pollution Costs and Benefits of Pollution  Marginal social cost of pollution- additional cost imposed on society as a whole by an additional unit of pollution  Marginal social benefit of pollution- additional gain to society as a whole from an additional unit of pollution  Socially optimal quantity of pollution- quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for Pollution: An External Cost  External cost- uncompensated cost that an individual or firm imposes on others  External benefit- benefit that an individual or firm confers on others without receiving compensation  Externalities- external costs and benefits  Negative externalities- external costs  Positive externalities- external benefits The Inefficiency of Excess Pollution  In the absence of government action, quantity of pollution will be inefficient- polluters will pollute up to the point at which the marginal social benefit of pollution is zero  Left to itself, a market economy will typically generate too much pollution because polluters have no incentive to take into account the costs they impose on others Private Solutions to Externalities  According to the Coase theorem, even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low  Transaction costs- the costs to individuals of making a deal  When individuals take external costs or benefits into account, they internalize the externality  Examples of transaction costs o Cost of communication among the interested parties o Costs of making legally binding agreements o Costly delays involved in bargaining  When transaction costs are too high, government intervention may be warranted Policies Toward Pollution Environmental Standards  Environmental standards- rules that protect the environment by specifying actions by producers and consumers  Generally, such standards are an inefficient way to reduce pollution because they are inflexible Emissions Taxes  Emissions tax- tax that depends on the amount of pollution a firm produces  Pigouvian taxes- taxes designed to reduce external costs o Optimal Pigouvian tax is equal to the marginal social cost of pollution at the socially optimal quantity of pollution Tradable Emissions Permits  Tradable emissions permits- licenses to emit limited quantit
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