Chapter 7

Question 1

What are externalities?

Answer 1

They are the costs or benefits of a market activity which affect a third party. These are a type of market failure

Question 2

What is a market failure?

Answer 2

Market failure occurs when there is an inefficient allocation of resources in a market

Question 3

What are internal costs?

Answer 3

They are the costs of a market activity paid only by an individual participant

Question 4

What are external costs?

Answer 4

They are costs of a market activity imposed on individuals who are not participants in that market

Question 5

What are social costs?

Answer 5

They are the sum of the internal costs and the external costs of a market activity

Question 6

What is a third party problem?

Answer 6

Occurs when those not directly involved in the market transaction experience negative or positive externalities

Question 7

What is the social optimum?

Answer 7

It is the price and quantity combination that would exist if there was no externalities

Question 8

What happens when firms internalise negative externalities?

Answer 8

As they are the suppliers, the supply curve shifts to the left and there is a loss of the deadweight loss that is otherwise created

Question 9

What are some of the corrective methods that can be used to force firms to internalise negative externalities?

Answer 9

Use better technology/equipment
Pay for damage caused
Levy a tax for causing the externality

Question 10

What are some of the corrective methods that can be used to force firms to internalise negative externalities?

Answer 10

Create laws that mandate certain behaviours

Offer subsidies or price breaks to encourage the positive externality

Question 11

What happens when positive externalities are corrected?

Answer 11

The demand curve shifts to the right, thus creating a loss of deadweight loss

Question 12

What are property rights?

Answer 12

They give the owner the ability to exercise control

over a resource. If someone has the property rights to something else, then they would be the owner of that thing

Question 13

What is Private property?

Answer 13

It provides an exclusive right of ownership that allows for the use, and especially the exchange, of property

Question 14

What are some of the incentives of property?

Answer 14

The incentive to maintain property
The incentive to protect property
The incentive to conserve property
The incentive to trade with others

Question 15

What is the Coase Theorem?

Answer 15

It states that if there are no barriers to negotiations, and if property rights are fully specified, interested parties will bargain to correct externalities

Question 16

What is an excludable good?

Answer 16

It occurs when it is possible to prevent consumers who have not paid for it from having access to it.

Question 17

What is a rival good?

Answer 17

It is a good that cannot be enjoyed by more than one person at a time

Question 18

What characteristics does a private good have?

Answer 18

It is excludable and rival

Question 19

What characteristics does a public good have? What is an issue with public goods?

Answer 19

It is non-excludable and non-rival. The free-rider problem can occur, whereby individuals receive a benefit without paying for it

Question 20

What is a club good?

Answer 20

A club good is nonrival in consumption and excludable. Satellite television is an example. It is excludable because you must pay to receive the signal, but it is nonrival in consumption because more than one customer can receive the signal at the same time

Question 21

What is a common-resource good?

Answer 21

A common- resource good is rival in consumption but
nonexcludable. King crab in the Bering Sea off Alaska is an example. Because any particular crab can be caught by only one boat crew, the crabs are a rival resource. At the same time, exclusion is not possible because any boat crew that wants to brave the elements can catch crab

Question 22

What is the Cost-benefit analysis?

Answer 22

It is a process that economists use to determine whether the benefits of providing a public good outweigh the costs

Question 23

What is the tragedy of the commons and what is an example?

Answer 23

It occurs when a good that is rival in consumption but

non-excludable becomes depleted. It primarily occurs when there are loosely defined property rights

Question 24

What are some potential solutions to the tragedy of the commons?

Answer 24

For activities such as fishing, regulations and caps could be imposed. For global warming and pollution, a cap and trade process could be implemented whereby firms could trade their caps for producing pollutants