Exam 3 - Extra Reading Notes

Question 1

monopoly can

Answer 1

have a strong influence over the market and to some

extent control the relationship between itself and its customers.

Question 2

Monopolies strong influence power

Answer 2

benefit to be gained from

transactions and may also involve a loss to society as a whole.

Question 3

markets may produce a misallocation of resources without the

Answer 3

imposition of monopoly power.

• this may result from the
  existence of an “external cost”, or from an information problem.

Question 4

An external cost is created whenever

Answer 4

someone is negatively
affected by a transaction with which they have no direct
involvement

• For example = when smog in Washington, D.C. is shown
  to be damaging the statue of Abraham Lincoln in his memorial, an
  external cost exists

Question 5

A market is

Answer 5

really a consideration of costs and benefits.

Question 6

The

demand curve represents

Answer 6

benefits

Question 7

The supply curve represents

Answer 7

costs

Question 8

If external costs exist,

Answer 8

then the true cost of a
transaction is not being considered, and the costs being used are
too low

Question 9

the existence of external costs will lead to

Answer 9

too much of a good being produced, compared to its true cost to
society.

Question 10

external benefit

Answer 10

Someone outside the
transaction benefits from an action of others.

• For example, the
  cleaning up of a polluted river will increase the property value of
  land located along the waterway. Because the true benefit of this
  type of good is not part of the

Question 11

An external cost or benefit is sometimes referred to as

Answer 11

an “externality”, indicating that a transaction affects those who are
neither buying nor selling.

• For example, Acid rain is an externality (and also
  an external cost) since the acid rain falls many miles from the
  place it is produced and not necessarily on the people who bought
  the products producing the acid.

Question 12

When the person creating an externality is figuring

the cost or benefit in his or her decisions, we say that

Answer 12

the
externality has been “internalized”.

• Once this has occurred the
  solution will be the one that is best for society, what economists
  refer to as “optimal.”

Question 13

The Coase Theorem

Answer 13

The Coase theorem essentially says that if the costs of
transactions to deal with an externality are zero, the participants
will be able to arrive at an agreement that will deal with the
externality without intervention by government or any outside
party.

Question 14

The point of the Coase theorem, then, is that

Answer 14

the market can
deal with at least some examples of market failure, if the impacted
persons can determine the correct outcome at zero or low cost.

Question 15

In reality, it is often the case that the

Answer 15

costs of dealing with an externality are not zero

Question 16

The Coase

theorem suggests that a possible “solution” is simply to

Answer 16

find a way
to significantly lower the costs of individuals to adapt. If that
can occur, the optimal solution will be created by the persons
involved.

Question 17

the cause of transaction costs will be

Answer 17

the lack

of information on the part of the participants.

Question 18

consumers change their consumption habits based on

Answer 18

the acquisition
of information.

• For example, We eat less fat, we drive less polluting cars, we
  buy recycled products and so on.

Question 19

Role of Information

Answer 19

When we learned the true consequences of our actions, our behavior
changed in response.

Question 20

Typically, economics revolves around .

Answer 20

perfect information assumptions

Question 21

Perfect competition requires that businesses know

Answer 21

their true costs of production and have perfect knowledge about the
demand conditions.

Question 22

All of supply and demand requires

Answer 22

perfect information to create the equilibrium solution.

Question 23

The stock market is a “free”

market only to the extent

Answer 23

that the traders are all on an even

basis.

Question 24

The securities laws of the United States prohibit

Answer 24

an individual with “inside knowledge, that is, information not
available to all investors, from using that knowledge to make
investment decisions.

Question 25

Advertising

Answer 25

is the transmission of information to consumers, though that information may not be factual

Question 26

What is the easiest examples of externalities?

Answer 26

occurs when we

consider the environmental impact of economic activities.

Question 27

The Optimal Level of Pollution

Answer 27

To some, it would seem that the optimal level of pollution is zero. It should be quickly obvious that this solution is unworkable

Question 28

The equilibrium point is

Answer 28

the optimal level of pollution. Finding it requires that the true costs of production are passed on to those who benefit from the production.

Question 29

Actions to Correct Environmental Externalities

Answer 29

Among these are simple market

economics, the legal system, and direct government action of various kinds.

Question 30

The effectiveness of

such a program depends on

Answer 30

the information of consumers and the

degree of market power possessed by the business involved.

Question 31

Individuals hurt by an external cost can often

Answer 31

file a law suit for damages.

Question 32

Government action can appear in many forms.

Answer 32

1. Regulations and laws that define “appropriate” behavior
   by persons and businesses.
2. Numerous other laws by the feds, states and local government
   affect virtually every aspect of our lives.
3. government could impose prices on pollution.
4. A different proposal is to simply decide how much of a
   particular pollutant is “optimal” and give each producer of this
   pollutant a certificate allowing them to create a certain quantity
   (say, a set number of tons of sulphur dioxide).

Question 33

If the total of the certificates is less than the total

pollution made prior to their issue,

Answer 33

the externality of the pollution will be internalized and the costs of production for polluting companies will rise relative to cleaner competitors.