Econ 101: Chapter 10

Question 1

Externality

Answer 1

a side effect of an activity that affects bystanders whose interests aren’t taken into account.

Question 2

Externalities lead to…

Answer 2

market failure, producing inefficient outcomes that aren’t in society’s best interest.

Question 3

negative externality

Answer 3

an activity that imposes costs onto bystanders

Question 4

positive externality

Answer 4

activities that generates benefits for bystanders

Question 5

price changes are not…

Answer 5

an externality

Question 6

private interest

Answer 6

the costs and benefits you personally incur.

Question 7

society’s interest

Answer 7

includes all costs and benefits, whether they accrue to you or to others.

Question 8

marginal private costs

Answer 8

the extra cost paid by the seller from producing one extra unit.

Question 9

external cost

Answer 9

a cost imposed on bystanders

Question 10

marginal external cost

Answer 10

the extra external cost imposed on bystanders from producing one extra unit.

Question 11

marginal social cost

Answer 11

all marginal costs, no matter who pays them (marginal external cost + marginal private cost).

Question 12

marginal private benefit

Answer 12

the extra benefit enjoyed by the buyer from one extra unit

Question 13

external benefit

Answer 13

the benefit enjoyed by bystanders, created by positive externalities

Question 14

marginal external benefit

Answer 14

the extra external benefit enjoyed by bystanders from the extra unit.

Question 15

marginal social benefit

Answer 15

all marginal benefits, no matter who gets them (marginal private benefit + marginal external benefit).

Question 16

A seller’s supply curve is described by their…

Answer 16

marginal private costs.

Question 17

a buyer’s demand curve is described by their…

Answer 17

marginal private benefits.

Question 18

Socially optimal outcome

Answer 18

the outcome that is most efficient for society as a whole, including the interest of buyers, sellers, and bystanders.

Question 19

Rational Rule for Society

Answer 19

produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost.

Question 20

negative externalities lead to…

Answer 20

overproduction

Question 21

positive externalities lead to…

Answer 21

underproduction

Question 22

6 solutions to externality problems:

Answer 22

private bargaining / coase theorem, corrective taxes & subsidies, cap & trade, laws/rules/regulations, government support for public goods, and assignment of ownership rights.

Question 23

Private bargaining

Answer 23

get all interested parties together, and give them a chance to negotiate.

Question 24

side payment

Answer 24

if someone else’s actions harm you, you can pay them to do something else instead (negative externalities).

Also works with positive externalities.

Question 25

Coase Theorem

Answer 25

if bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.

Question 26

Private bargaining solves externality problems…

Answer 26

when the bargaining costs are low.

Question 27

Corrective taxes

Answer 27

aka Pigouvian tax

a tax designed to induce people to take account of the negative externalities they cause.

Question 28

Impose a corrective tax…

Answer 28

the size of the marginal external cost

Question 29

corrective subsidies

Answer 29

incentivizes people to do more of the things that ocnfer marginal external benefits onto others.

Question 30

create a corrective subsidy…

Answer 30

the size of the marginal external benefit.

Question 31

Cap and trade

Answer 31

Involves changing the quantity of the harmful directly, through a quantity regulation.

Question 32

set the quota at…

Answer 32

the socially optimal outcome

Question 33

in a cap and trade…

Answer 33

a fixed number of permits are allocated, which can then be traded.

Question 34

the cap and trade system is like…

Answer 34

a corrective tax – raises opportunity costs.

Question 35

laws/rules/regulations

Answer 35

exist to solve problems caused by negative externalities.

Question 36

Rules and regulations can be…

Answer 36

a blunt instrument

Question 37

Rules that specify how to achieve a given objective…

Answer 37

are inefficient.

This reduces the incentive to innovate and find a better more efficient method.

Question 38

non-excludable

Answer 38

when someone cannot be easily excluded from using something.

Question 39

nonrival

Answer 39

a good for which one person’s enjoyment or use of it doesn’t subtract from another person’s enjoyment or use.

Question 40

rival

Answer 40

a good for which your use of it comes at someone else’s expense.

Question 41

public good

Answer 41

a nonrival good that is nonexcludable and hence subject to the free-rider problem.

Question 42

free rider problem

Answer 42

when someone can enjoy the benefits of a good without bearing the costs.

Question 43

club good

Answer 43

good that is excludable, but non-rival in consumption

underprovided by businesses.

Question 44

public goods create…

Answer 44

positive externalities, as people can’t be forced to contribute as they can’t be excluded from enjoying the good.

Question 45

government support for public goods

Answer 45

Governments can solve the underprovision of public goods by purchasing them for everyone to use with tax revenue.

Question 46

fact 1 about public goods.

Answer 46

1. not all gov’t provided goods/services are public

Question 47

fact 2 about public goods.

Answer 47

2. not all public goods should be/are funded by gov’t.

Question 48

fact 3 about public goods.

Answer 48

3. just because a government funds a public goods doesn’t mean they should provide it – they can hire a private firm.

Question 49

common resources

Answer 49

a good that is rival and also nonexcludable.

-private gains but shared costs.

Question 50

tragedy of the commons

Answer 50

a tendency to over consume a common resource.

Question 51

Assigning ownership rights…

Answer 51

can solve common resource problems (tragedy of the commons).

the owner will facilitate successful private bargaining.