Externalities and Public Goods

Question 1

What are externalities?

Answer 1

An activity’s affect on a third party

Question 2

What are the two types of externalities?

Answer 2

Negative, costs, (eg pollution or corruption)
Positive, benefits (eg education or government funded health care)

Question 3

What happens to p and q for positive externalities? DWL?

Answer 3

P and Q go up, deadweight loss is to the left
More total benefits - private costs stay constant

Question 4

What happens to p and q for negative externalities + DWL?

Answer 4

Price goes up and Q goes down
DWL is to the right
Private benefits are constant, private costs increase to total costs (total costs being the societal perspective)

Question 5

At m or 0 are we societally optimal?

Answer 5

At p0 and q0 we are societally optimal

Question 6

What are the two private solutions?

Answer 6

1) Bargaining - (frat house and professor example), Coase Thm
2) doing the right thing

Question 7

What three conditions does the Coase Thm require?

Answer 7

1) low bargaining costs
2) clear property rights
3) small number of parties

Question 8

What are public solutions?

Answer 8

1) command and control (intervention basically, to create +E graph)
2) market based (incentives)

Question 9

The two conditions of public goods?

Answer 9

Non-excludable
Non-rivalry - free rider problem (if privately provisioned benefits)
EG public education

Question 10

Conditions of common pool resources?

Answer 10

1) Non-excludable
2) Rival, scarcity and allocation problem
EG soup kitchen or fishing