Ch. 8 Flashcards
Sometimes the market system fails to produce efficient outcomes because of side effects
externalities
Benefit or cost from consumption or production that spills over onto those who are not consuming or producing the good.
Externality
Occurs when benefits spill over to an outside party who is not involved in producing or consuming the good.
Positive externality
Occurs when costs spill over to an outside party who is not involved in producing or consuming the good.
Negative externality
What graph is this?
Negative Externalities in Production
•The government cant intervene in market decisions in an attempt to take account of negative externalities.
False
If the government could impose a pollution tax equal to the exact size of the external cost then what?
•the firm would produce at the socially desired level of output.
How could regulation be used?
•simply forcing firms to reduce their emissions or prohibit certain pollution causing activities.
Most economists agree that a pollution tax is more…..
efficient than regulation?
The pollution tax is good because of what two things?
- it gets rid of the externality
- moves society closer to the efficient level of output.
The tax also gives firms an incentive to what?
•to find and apply new technology to further reduce pollution levels in their plant.
Under regulation, a firm has little incentive to further reduce emissions once it reaches what?
•the predetermined level set by the regulated standard.
•For some goods, the individual consumer does not receive all of the benefits.
True
The benefits not received by the consumer are called…….
•positive externalities.
At the market equilibrium for goods providing external benefits, output is less than the efficient level why?
•because many people that benefit do not have to pay for those benefits.
If we could add the benefits that are derived by nonpaying consumers
•the demand curve would shift to the right, increasing output.
What does the graph represent?
Positive Externalities in Consumption
Because producers are unable to collect payments from all of those that are benefiting from the good or service, the market has a tendency to
•under-produce goods with external benefits, causing an efficiency loss.
What Can the Government Do to
Correct for Positive Externalities?
2 things
•A subsidy benefit would shift the demand curve to the right, and result in an efficient level of output.
- Government Regulation
•Sometimes externality problems can be handled by individuals without the intervention of government.
True
