5. Assignment 1 Flashcards
Why is the supply curve upward sloping?
Because of increasing marginal costs.
Why is the demand curve downward sloping?
Because of falling marginal benefits.
Why can a SMC sometimes not be parallel to the PMC?
This happens when marginal external costs increase with production.
What is a negative externality? Provide one example.
Effects of a market transaction that changes the utility, negatively, of those outside the transaction.
- Production which causes pollution and then generates clean-up costs.
- Dam building may prevent fish from swimming upstream, therefore generating negative impacts for local fishermen
- Excessive development creates less aesthetically appealing landscapes.
True or false: producer surplus is in the top left corner of a demand-supply graph and consumer surplus in the bottom left corner.
False. Consumer surplus is top left, producer surplus bottom left.
True or false: if price elasticity of demand is >1 then the good/service is sensitive to price changes.
True.
How much pollution will a factory emit if there are no laws?
The factory will increase emissions as long as it receives a positive marginal benefit.
What is the social optimal level of emissions?
When marginal benefits equal marginal costs.
True or false: in Coase theorem, a factory will be willing to accept payment as long as the payment is greater than the marginal benefit associated with the emissions.
True.
