Theory of Environmental Externalities

Front

What is the ultimate goal of public policy?

Back

Best/optimal social welfare.

Front

What is Pareto efficiency?

Back

A situation is Pareto-efficient only if no individual can be made better off without making someone else worse off.

Front

What does the Pareto frontier consist of?

Back

All allocations that cannot be improved in the Pareto sense.

Front

What does the First Theorem of Welfare Economics state?

Back

In a competitive economy, a market equilibrium is Pareto optimal.

Front

What are the two approaches to Environmental Policy?

Back

1. Command-and-control approach (conventional approach) 2. Market-based instruments (market approach) such as green taxes and emissions trading.

Front

What are externalities?

Back

Impacts that affect the well-being of those outside of a market transaction.

Front

What are negative externalities?

Back

Negative impacts of a market transaction affecting those not involved in the transaction.

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What are positive externalities?

Back

Positive impacts of a market transaction that affect those not involved in the transaction.

Front

What is the social marginal cost curve?

Back

The cost of providing one more unit of a good or service, considering both private production costs and externalities.

Front

What is a Pigovian tax?

Back

A per-unit tax set equal to the external damage caused by an activity, such as a tax per ton of pollution emitted.