9. Externalities

Question 1

Positive Consumption Externality

Answer 1

A benefit accrued to someone who is not involved in the consumption of a given good.

Question 2

Positive Production Externality

Answer 2

A benefit accrued to someone who is not involved in the production of a given good.

Question 3

Coase Theorem

Answer 3

If trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

The market can be efficient with externalities when:

• no transaction costs
• property rights are clearly defined

The theorem suggests an alternative solution:

• the creation of new markets if government can
• define property rights
• reduce transaction costs
• therefore markets can be used to control externality problems

Question 4

Negative Production Externality

Answer 4

A cost incurred by someone who is not involved in the production of a given good.

Question 5

Negative Consumption Externality

Answer 5

A cost incurred by someone who is not involved in the consumption of a given good.

Question 6

Social Cost

Answer 6

A cost incurred by someone who is not involved in the consumption of a given good.