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transaction costs
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the costs that parties incur in the process of agreeing to and following through on a bargain
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corrective taxes
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a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
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Coase theorem
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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
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internalizing the externality
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altering incentives so that people take account of the external effects of their actions
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externality
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the uncompensated impact of one person's actions on the well-being of a bystander
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corrective tax
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a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
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Give an example of a negative externality and an example of a positive externality.
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Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm's production process.
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In what way does the patent system help society solve an externality problem?
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What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?
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List some of the ways that the problems caused by externalities can be solved without government intervention.
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Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?
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