Chapter 2 Public goods and externalities

Question 1

What are private goods ?

Answer 1

Goods that are excludable and rival in consumption (for example: private gyms, concert tickets )

Question 2

What are public goods ?

Answer 2

Goods that are non excludable and non rivalry (for example: national defence)

Question 3

What is excludability?

Answer 3

it is possible to prevent other individuals from consuming that good or service

Question 4

What is rivalry/ diminishable ?

Answer 4

an individual’s consumption of that good reduces the quality & quantity available for consumption by others

Question 5

Marginal cost of public goods is

Answer 5

0

Question 6

What is free rider problem ?

Answer 6

ppl having an incentive to use a good without paying for it

Question 7

Why non provision of public goods considered as market failure?

Answer 7

private sectors choose not to supply as they cannot be sure of making an economic profit
free rider problem

Question 8

What is social efficiency ?

Answer 8

An optimal distribution of resources in the society

Question 9

Social efficiency is achieved when

Answer 9

MSC = MSB

Question 10

MSB =

Answer 10

marginal private benefit plus external benefit

Question 11

MSB definition

Answer 11

amt ppl are willing to pay for the additional unit of good/ service

Question 12

MPB definition

Answer 12

increase in private benefit resulting from consuming an extra unit of good

Question 13

XMB definition

Answer 13

additional benefit imposed on third party due to consuming an extra unit of that good

Question 14

MSC =

Answer 14

marginal private cost + external cost

Question 15

MSC definition

Answer 15

change in society’s total cost of production of additional unit of good/ service

Question 16

MPC definition

Answer 16

change in producer’s total COP due to production of additional unit of good/ service

Question 17

XMC definition

Answer 17

change in the cost to third parties due to production of additional unit of good/ service

Question 18

What is externality ?

Answer 18

impact of one person’s action on the well being of a bystander

Question 19

What is neg externality ?

Answer 19

social cost > private cost
occurs when production/ consumption impose external costs to third parties

Question 20

What is social cost ?

Answer 20

Total cost to the entire society (private cost + external cost)

Question 21

What is social benefit ?

Answer 21

Total benefits to the whole society (private benefit + external benefit)

Question 22

Neg externalities in production means there is an

Answer 22

overproduction

Question 23

Neg externalities in consumption means there is an

Answer 23

overconsumption

Question 24

What is pos externality ?

Answer 24

social benefit > private benefit
occurs when production/ consumption has positive impacts on third parties

Question 25

Pos externalities in consumption means that there is an

Answer 25

underconsumption

Question 26

Pos externalities in production means that there is an

Answer 26

underproduction

Question 27

What are demerit goods ?

Answer 27

goods that impose external costs when consumed (tobacco, drugs)

Question 28

Why overprovision of demerit goods are considered as market failure?

Answer 28

there is overproduction by the market (resources overallocated), overconsumption, they generate neg ext

Question 29

What are merit goods?

Answer 29

goods that are underprovided and underconsumed in the economy ( education, vaccinations )

Question 30

Why under provision of merit goods are considered as market failure ?

Answer 30

they generate pos externalities, there is underproduction by the market, underconsumption

Question 31

Why market tends to underprovide merit goods?

Answer 31

i) they generate pos ext
ii) unequal distribution of income
iii) consumers lack perfect info
iv) consumers uncertain abt their future needs
v) monopoly power may arise