Micro 11

2. Microeconomics

3. Opening
Prayer

4. Quiz
1. What is an externality?
2. What is a negative externality?
3. What is a positive externality?
4. What can governments do to encourage externalities?
5. What can governments do to discourage externalities?

5. Chapter 10
Externalities

6. Chapter 10
Private Cost
External Cost
Social Cost
Externalities
Social Surplus
ef
fi
cient Equilibrium
Ef
fi
cient quantity
Pigouvian tax
external bene
fi
t
Pigouvian subsidy
internalizing an externality
transaction costs
Coase Theorem

10. McDonalds

12. Common Property
If everyone owns it, nobody
owns it.

13. Tragedy of the Commons
Resource gets wasted

14. Privatize the Commons
Resource gets valued

15. Externalities
External costs or external
bene
fi
ts, that is, costs
or bene
fi
ts, respectively,
that fall on bystanders

16. Private Cost
A cost paid by the
consumer or producer

17. External Cost
A cost paid by people other
than the consumer or the
producer trading in the
market

18. Social Cost
The cost to everyone: the
private cost plus the
external cost.

19. Social Surplus
Consumer surplus plus
producer surplus plus
everyone else’s surplus

20. Ef
fi
cient Equilibrium
The price and quantity that
maximizes social surplus

21. Ef
fi
cient Quantity
The quantity that
maximizes social surplus

22. Pigouvian Tax
A tax on a good with
external costs

23. External Bene
fi
t
A bene
fi
t received by people
other than the consumers or
producers trading in the
market

24. Pigouvian Subsidy
A subsidy on a good with
external bene
fi
ts

25. Internalizing an Externality
Adjusting incentives so that
decision makers take into account
all the bene
fi
ts and costs of their
actions, private and social

26. Transaction Costs
All the costs necessary to reach
an agreement

27. Coase Theorem
If transaction costs are low and property
rights are clearly de
fi
ned, private
bargains will ensure that the market
equilibrium is ef
fi
cient even when there
are externalities