Chapter 3 - Wheelan

Question 1

externality

Answer 1

private costs of a consumer/individual’s behavior that is different from a social cost

Question 2

when an externality is high/large then individuals have…

Answer 2

an incentive to do things that make them better off

Question 3

markets fail bc

Answer 3

they encourage individuals to cut corners and makes society worst off as a result

Question 4

when cost benefits don’t work

Answer 4

rules are made

Question 5

government deals with externalities

Answer 5

policy issues

Question 6

all market transactions are voluntary exchanges that

Answer 6

make the involved parties better off

Question 7

involved

Answer 7

all individuals affected may not be at the table when the deal is made

Question 8

positive externalities

Answer 8

someone’s behavior can have positive impact for which he/she is not fully compensated

Question 9

externalities can be

Answer 9

positive and negative at the same time

Question 10

ex. of a neg externality

Answer 10

second hand smoking

Question 11

ex. of a positive externality

Answer 11

smokers die young and leave benefits available for the rest of us

Question 12

solutions

Answer 12

government regulations

Question 13

economist solution

Answer 13

taxing an offense rather than banning it

Question 14

economists also suggest

Answer 14

raising private costs to enable them into making better decisions

Question 15

government can tax negative behaviors

Answer 15

creating good incentives

Question 16

taxes as invectives

Answer 16

• limit bad behavior
• imposes taxes which raises revenues
• encourages alternative solutions

Question 17

why is taxing not a good solution

Answer 17

can be unfair for the poor - no equity

Question 18

every activity generates an externality on some level and…

Answer 18

taxing is not always the solution

Question 19

markets fail to make us better off when…

Answer 19

there is a larger gap between private costs and social costs

Question 20

Ronal Cose

Answer 20

parties involved in an externality have an incentive to come to a private agreement of their own.

• if circumstances are right, one party of an externality can pay the other to change their behavior
• private parties will always come to the same efficient solution regardless of which parties starts out with property rights
• the transition costs related to striking this kind of deal must be reasonably low for the private parties to work out the externality on their own

Question 21

private parties can only sole an externality

Answer 21

on their own if relevant property rights are clearly defined

ex: viagra and hiv drugs

Question 22

governments make markets possible by

Answer 22

fixing the rough edges of capitalism

Question 23

countries without governments

Answer 23

• do not have free market

- expensive and difficult

Question 24

government as a functional market

Answer 24

• defines property rights
• make investments on your property
• copyright laws
• lower costs of doing business in the private sector: rules, managing fraud, sound currency, finance infrastructure, private commerce less costly
• effective regulation and oversights make markets more credible

Question 25

price discrimination varies per country

Answer 25

AIDS medicine in USA vs Africa