Chapter 7 Flashcards
What are externalities?
They are the costs or benefits of a market activity which affect a third party. These are a type of market failure
What is a market failure?
Market failure occurs when there is an inefficient allocation of resources in a market
What are internal costs?
They are the costs of a market activity paid only by an individual participant
What are external costs?
They are costs of a market activity imposed on individuals who are not participants in that market
What are social costs?
They are the sum of the internal costs and the external costs of a market activity
What is a third party problem?
Occurs when those not directly involved in the market transaction experience negative or positive externalities
What is the social optimum?
It is the price and quantity combination that would exist if there was no externalities
What happens when firms internalise negative externalities?
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
What are some of the corrective methods that can be used to force firms to internalise negative externalities?
Use better technology/equipment
Pay for damage caused
Levy a tax for causing the externality
What are some of the corrective methods that can be used to force firms to internalise negative externalities?
Create laws that mandate certain behaviours
Offer subsidies or price breaks to encourage the positive externality
What happens when positive externalities are corrected?
The demand curve shifts to the right, thus creating a loss of deadweight loss
What are property rights?
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
What is Private property?
It provides an exclusive right of ownership that allows for the use, and especially the exchange, of property
What are some of the incentives of property?
The incentive to maintain property
The incentive to protect property
The incentive to conserve property
The incentive to trade with others
What is the Coase Theorem?
It states that if there are no barriers to negotiations, and if property rights are fully specified, interested parties will bargain to correct externalities
What is an excludable good?
It occurs when it is possible to prevent consumers who have not paid for it from having access to it.
What is a rival good?
It is a good that cannot be enjoyed by more than one person at a time
What characteristics does a private good have?
It is excludable and rival
What characteristics does a public good have? What is an issue with public goods?
It is non-excludable and non-rival. The free-rider problem can occur, whereby individuals receive a benefit without paying for it
What is a club good?
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
What is a common-resource good?
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
What is the Cost-benefit analysis?
It is a process that economists use to determine whether the benefits of providing a public good outweigh the costs
What is the tragedy of the commons and what is an example?
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
What are some potential solutions to the tragedy of the commons?
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
