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VOCAB Chapter 10
Externalities
Term | Definition |
---|---|
Externality | The uncpmpensated impact of one person's actions on the well-being of a bystander. |
Positive externality | A situation when a person's actions have a beneficial impact on a bystander. |
Negative externality | A situation when a person's actions have an adverse impact on a bystander. |
Social cost | The sum of private costs and external costs. |
Internalizing an externality | Altering incentives so that people take into account the external effects of their actions. |
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 cost | The costs that parties incur in the process of agreeing and following through on a bargain. |
Corrective tax | A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality. |