Ch.5- Externalities, Environmental Policies, and Public Goods

Question 1

Negative externality example

Answer 1

Pollution

Question 2

Externality

Answer 2

a benefit or cost that affects people who aren’t directly involved in the production/consumption of a good/service

Question 3

Positive externality example

Answer 3

Education, medical research, etc.

Question 4

Private cost/benefit

Answer 4

Borne by the producer of a good/service

Question 5

Social cost/benefit

Answer 5

borne by the consumer of a good/service

Question 6

Social=

Answer 6

Private + any externality

Question 7

Market equilibrium is NOT efficient

Answer 7

P efficient and Q efficient is efficient (after you move to the social cost/benefit)

Question 8

Marginal Social Benefit>Marginal Private Benefit

Answer 8

Positive externality

Question 9

Marginal private benefit>Marginal social benefit

Answer 9

Negative Externality

Question 10

Externalities and market failure result from…

Answer 10

Incomplete property rights or from difficulty of enforcing said rights

Question 11

Externalities in a private market

Answer 11

If too much is produced=negative externality
If too little is produced=positive externality

Question 12

Market Failure

Answer 12

When a private market fails to produce the efficient level of output

Question 13

Private solutions to externalities

Answer 13

Bargaining when property rights are well defined

Question 14

Public solutions (government policies) to externalities

Answer 14

-Taxes
-Subsidies
-Quotas
-Command/Control policies
-Cap and Trade
-Behavioral “Nudges”

Question 15

The Coarse Theorem

Answer 15

“Can achieve efficient outcome through bargaining (when transaction costs are low)”
*all parties must have full info about costs/benefits
*all parties willing to accept reasonable agreement

Question 16

Transaction costs

Answer 16

costs in time and other resources that parties incur in trying to agree and carry out an exchange of goods/services

Question 17

Government policies to deal with externalities

Answer 17

-Taxes can eliminate deadweight loss in negative externalities (can cancel out based on an external)
-Subsidies for positive externalities

Question 18

Command-and-control approach

Answer 18

When the government imposes quantitative limits on the amount of pollution firms are allowed to emit, or making them install pollution control devices

Question 19

Rivalry

Answer 19

when one person’s consumption of a unit of a good means no one else can consume it

Question 20

Excludability

Answer 20

Anyone who doesn’t pay for a good cannot consume it

Question 21

Private good

Answer 21

Rival AND excludable
example: houses, cars, etc.

Question 22

Public goods

Answer 22

Non-rival AND non-excludable
example: education, law enforcement

Question 23

Quasi-Public Goods

Answer 23

Excludable, but non-rival
example: cable tv and tolls

Question 24

Common goods/resources

Answer 24

Rival, but non-excludable
example: forest land, clean water

Question 25

Tragedy of the commons

Answer 25

tendency for a common resource to be overused (like land)

Question 26

Free-riding

Answer 26

When someone enjoys benefits of a good/service without contributing to it

Question 27

Pigovian taxes/subsidies

Answer 27

Government taxes/subsidies intended to bring out an efficient level of output in the presence of externalities