chapter 10: externalities

Question 1

what is an externality?

Answer 1

a side effect of an activity that affects bystanders whose interests are not taken into account

they lead to market failure

Question 2

what is a negative externality?

Answer 2

a side effect that harms bystanders

choice that impose costs on others

too much is created

Question 3

what is a positive externality?

Answer 3

a side effect that benefits bystanders

choice that generates benefits for others

too little is created

Question 4

what is private interest?

Answer 4

costs and benefits that you personally incur

Question 5

what is society’s interest?

Answer 5

includes all costs and benefits (whether they accrue to you or to others)

Question 6

what is a marginal private cost?

Answer 6

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

firm’s supply curve

Question 7

what is the marginal external cost?

Answer 7

the extra cost imposed on bystanders from producing one extra unit

Question 8

what is the marginal social cost?

Answer 8

all marginal costs, no matter who pays them

Question 9

what is the formula for marginal social cost?

Answer 9

marginal social cost = marginal private costs + marginal external costs

Question 10

what is marginal private benefit?

Answer 10

the extra enjoyment by the buyers form purchasing one extra unit

buyers demand curve

Question 11

what is the marginal external benefit?

Answer 11

the extra benefit accruing to bystanders from one extra unit

Question 12

what is the marginal social benefit?

Answer 12

all marginal benefits, no matter who gets them

Question 13

what is the formula for marginal social benefit?

Answer 13

marginal social benefit = marginal private benefit + marginal external benefit

Question 14

what is the socially optimal quantity?

Answer 14

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

accounts for all costs and all benefits, regardless of who they fall one

where marginal social benefit = marginal social cost

Question 15

what is the rational rule for society?

Answer 15

produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost

Question 16

what happens to the market when there is a negative externality?

Answer 16

there is overproduction

Question 17

what happens to the market when there is a positive externality?

Answer 17

underproduction

Question 18

what is the coase theorem?

Answer 18

is bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains

Question 19

what is a side payment?

Answer 19

when private bargaining

if someone else’s actions harm you, you can pay them to do something else instead

or if someone else’s actions benefit you, you can pay them to do more of that action

Question 20

what is a corrective tax?

Answer 20

when there is a negative externality, set the corrective tax equal to the external cost

this tax incentivizes people to do less of the activity

also called pigouvian tax

Question 21

what is a corrective subsidy?

Answer 21

when there is a positive externality, set the corrective subsidy equal to the external benefit

this tax incentivizes people to do more of the activity

Question 22

what is excludable?

Answer 22

when someone can be easily excluded from using something (ex. I can exclude you from using my car by not giving you the keys)

Question 23

what is nonexcludable?

Answer 23

when someone cannot easily be excluded from using something (ex. you can’t stop your neighbour from also enjoying the fireworks you set in your backyard)

Question 24

what is rivalrous?

Answer 24

when your use of something comes at someone else’s expense (ex. if I buy a cupcake, then there is one less cupcake available for you to buy and enjoy)

Question 25

what is nonrivalrous?

Answer 25

when one person’s use doesn’t subtract from another’s (just because I am watching something on TV doesn’t mean you can’t also watch that same show on TV)

Question 26

what is a private good?

Answer 26

excludable and rival

Question 27

what is a common resource?

Answer 27

nonexcludable and rival

Question 28

what is a public good?

Answer 28

nonexcludable and nonrival

Question 29

what is a club good?

Answer 29

nonrival and excludable

Question 30

what is the problem with public goods?

Answer 30

there are free riders which means that someone can enjoy the benefits without bearing the costs, as a result there is underproduction

Question 31

what is the solution to free-riders?

Answer 31

the government can provide the public goods using tax money

Question 32

what is the tragedy of the commons?

Answer 32

the tendency to over-consume a common resource

Question 33

what is the solution to the tragedy of the commons?

Answer 33

assign ownership rights so that someone now owns the common resource