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?
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
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
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