Ch. 10 - Externalities & Public Goods

Question 1

What is an Externality?

Answer 1

A side effect of an activity that affects bystanders whose interests aren’t taken into account

Question 2

What is a Negative Externality? A Positive Externality?

Answer 2

Negative Externality - A side effect that harms bystanders
ex. If I stand up at a concert, you won’t be able to see the stage

Positive Externality - A side effect that benefits bystanders
ex. When I buy a big TV, my roommates will also enjoy watching movies on it

Question 3

Why do Positive Externalities still lead to Market Failure?

Answer 3

Because individuals do not fully account for the benefits their actions provide to others, resulting in less socially useful activities than is in society’s best interest

Question 4

What are Marginal Private Costs?

Answer 4

The extra cost paid by the seller from producing one extra unit

Question 5

What is the External Cost?

Answer 5

The cost imposed on bystanders

Question 6

What are Marginal External Costs?

Answer 6

The extra cost imposed on bystanders from producing one extra unit

Question 7

What is the Marginal Social Cost?

Answer 7

All marginal costs (no matter who pays them) = Marginal Private cost + Marginal External Cost

Question 8

What are Marginal Private Benefits?

Answer 8

The extra benefit enjoyed by the buyer from one extra unit

Question 9

What is the External Benefit?

Answer 9

A benefit accruing by bystanders

Question 10

What is the Marginal External Benefit?

Answer 10

The extra external benefit accruing to bystanders from one extra unit

Question 11

What is the Marginal Social Benefit?

Answer 11

All marginal benefits (no matter who pays them) = Marginal Private Benefit + Marginal External Benefit

Question 12

What does Socially Optimal mean?

Answer 12

The outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

Question 13

What is the Rational Rule for Society?

Answer 13

Produce more of an item if its marginal social benefit >= marginal social cost

Question 14

What is Coase Theorem?

Answer 14

If bargaining is costless and legal right are clearly established & enforced, then externality problems can be solved by private bargains

Question 15

What is a Corrective Tax? Corrective Subsidy?

Answer 15

Corrective Tax - A tax designed to induce people to take account of the negative externalities they cause

Corrective Subsidy - A subsidy to induce people to take account of the positive externalities they cause

Question 16

What is Cap & Trade?

Answer 16

A quantity regulation system implemented by allocating a fixed number of permits, which can be traded

Question 17

What does Non-excludable mean?

Answer 17

When someone cannot be easily excluded from using something

Question 18

What does Non-rival mean?

Answer 18

A good for which one person’s use doesn’t subtract from another’s

Question 19

What is the Free-Rider Problem?

Answer 19

When someone can enjoy the benefits of a good without bearing the costs

Question 20

What is a Rival Good?

Answer 20

A good for which your use of it comes at someone else’e expense

Question 21

What is a Public Good?

Answer 21

A non-rival good that is non-excludable & hence subject to the free-rider problem

Question 22

What is a Club Good?

Answer 22

A good that is excludable, but non-rival in consumption

Question 23

What is a Common Resource? The Tragedy of Commons?

Answer 23

Common Resource - A good that is rival and also excludable

The Tragedy of Commons - The tendency to over-consume a common resource