Chapter 5&31: Public Spending and Public Choice & Environmental Economics Flashcards
a price system allows all resources to move from lower-valued uses to higher-valued uses via
voluntary exchange
Market Failures
when the market economy leads to few or too many resources going to a specific economic activity
whats a result of Market Failures
dead weight loss
What are some causes of market failures
positive or negative externalities, existence of public goods, imperfect competition, imperfection information
Private Costs
borne solely by individuals who incur them “internal costs”
External Costs
borne by third parties
Social Costs
the full cost borne by society whenever a resource use occurs (private costs + external costs)
Externalities
assume that people are rational, they should benefit from economic activities in which they are directly involved
Voluntary transactions benefit
both the buyer and seller
Economic activities can affect
people not directly involved (third parties)
Externalities are the consequence of
an economic activity spill over of third parties
Negative Externalities confer
external costs on third parties (pollution, littering, overfishing)
Positive externalities confer
external benefits to third parties (research, vaccinations, lawn mowing)
Social Cost (negative externalities & External costs)
internal cost + external cost
Internal Cost (negative externalities & External costs)
cost on parties directly involved
External Cost (negative externalities & External costs)
Cost on third parties
Social Benefits (positive externalities and external benefits)
internal benefits (private benefits) + external benefits
Internal Benefits (positive externalities and external benefits)
benefits on parties directly involved
External Benefits (positive externalities and external benefits)
benefits on third parties
External Costs are also know as
negative externalities
External Benefits are also known as
positive externalities
Common Property
owned by everyone (owned by nobody)
Private Property rights
exclusive rights of ownership that allow the use, transfer and exchange of property
Lack of clearly defined property rights can be
a precursor to externalities
After defining property rights, bargaining between parties could
correct for externalities
Government action
corrects negative externalities
Special Taxes
adds the external cost to the supplier, which makes the supplier weigh the private benefits against social cost
innovation
corrects negative externalities
Mutual agreement/ Private bargaining
corrects negative externalities
Positive externalities lead to
inefficient markets
correct positive externalities
private sector, profit motive (google search) government actions (gov. financing) Altruism and reciprocity (charities)
Optimal amount of pollution is where
Marginal Benefits= Marginal Cost
Non-Rival (Public Good)
one persons use does not diminish anyone else’s enjoyment
Non- Excludable (public goods)
hard to exclude free riders
Production of public goods result in
positive externalities
Private sector may lack enough incentive to provide enough amount of
public good
Not a public good because
the government provides it
Public Choice
study of politics using an economic way of thinking
Public Choice uses economics
to examine collective decision making
Which of the following is an example of a negative externality?
a) Smoking harms one’s own health.
b) The opening of a new football stadium increases the business of nearby restaurants.
c) Consumers pay a sales tax in addition to the price of a product.
d) There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.
There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers.
However, 10MPG increase 2% more miles driven
Are people elasticly or inelasticly responding to the change in MPG?
a) Elasticly
b) Inelasticity
c) Neither
d) Both
inelasticly
Will we burn more or less gas after the increase in MPG?
a) more
b) less
c) same
d) can’t tell
less
Why won’t the market provide the optimal resource allocation when externalities are present?
a) Not all costs & benefits are taken into account by decision makers
b) Activities that produce externalities are illegal
c) Markets work in the case of positive externalities, but not negative ones
d) Markets work in the case of negative externalities, but not positive ones
Not all costs & benefits are taken into account by decision makers
