Key Terms

additional external cost: additional costs incurred by third parties outside the production process when a unit of output is produced

biodiversity: the full spectrum of animal and plant genetic material

command-and-control regulation: laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies one must use

externality: a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover”

international externalities: externalities that cross national borders and that a single nation acting alone cannot resolve

market failure: When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure

marketable permit program: a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms

negative externality: a situation where a third party, outside the transaction, suffers from a market transaction by others

pollution charge: a tax imposed on the quantity of pollution that a firm emits; also called a pollution tax

positive externality: a situation where a third party, outside the transaction, benefits from a market transaction by others

property rights: the legal rights of ownership on which others are not allowed to infringe without paying compensation

social costs: costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process, like costs of pollution

spillover: see externality

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