Externalities, Public Goods, & Common Resources

Question 1

What is an externality?

Answer 1

A side affect the production (seller) or consumption (buyer) of a good/service has on a third party member.

Question 2

What is a negative externality?

Answer 2

When an activity (production or consumption) generates an external COST that effects third party members. EX: Pollution

Question 3

What is a positive externality?

Answer 3

When an activity (production or consumption) generates an external BENEFIT that effects third party members. EX: education, vaccination

Question 4

What is private value?

Answer 4

Consumers’ willingness to pay (demand)
Customer: What kind of benefit can I get out of this product? Is the benefit worth the price?

Question 5

We can call the Demand Curve the _____.

Answer 5

Marginal Benefit Curve

Question 6

What is private cost?

Answer 6

Producers’ willingness to sell (Supply)
Producer: How much profit can I get from selling this product? Is the profit worth the cost of making said product?

Question 7

We can call the Supply curve the ____

Answer 7

Marginal Cost Curve

Question 8

In the presence of a negative externality, the _____ is _____ than _______

Answer 8

Marginal Social Cost is greater than producers’ Marginal Cost

Question 9

The Market Equilibrium is LESS than the social equilibrium when there is a _____.

Answer 9

Negative Externality

Question 10

In the presence of a positive externality, ______ is _____ than _____

Answer 10

Marginal Social Benefit is greater than consumers’ Marginal Benefit.

Question 11

The Market Equilibrium is GREATER than the Social Equilibrium when there is a ____.

Answer 11

Positive Externality

Question 12

How much should you tax a good/product for a negative externality to be internalized?

Answer 12

The tax should be set equal to the marginal external cost

Question 13

How does the government solve negative externalities?

Answer 13

Taxes

Question 14

How does the government solve positive externalities?

Answer 14

Subsidzing goods

Question 15

What is the Coase Theorem?

Answer 15

When affected parties can negotiate with one another without cost, externality problems can be solved efficiently

Question 16

What does it mean for a good to be rival in consumption?

Answer 16

Where one’s use diminishes other people’s usage. So many people want it
EX: Prime

Question 17

What does it mean for a good to be excludable?

Answer 17

When a good/service is limited to ONLY paying customers or those who pay for it.
EX: golf club memberships

Question 18

What is a private good?

Answer 18

A good that’s BOTH rival and excludable.
EX: Expensive shoes- it is rival yet only people can have it if they pay a large sum of money for it

Question 19

What is a common resource?

Answer 19

A good that is rival but NOT excludable
EX: Hunting for animals- it is rival (there’s competition) but you don’t have to pay a fee or a permit in order to hunt for animals.

Question 20

What is a Public Good?

Answer 20

A good that is BOTH NOT rival and excludable
EX: Public Parks- there’s no rivalry in order to use a public park (it’s public) and you don’t have to pay in order to go into a park or use it (it’s free for anyone to go to)

Question 21

What is a Club Good?

Answer 21

A good that is NOT rival but it is excludable
EX: Wi-Fi- there’s no rival in using wifi (anyone can use it) except you have to pay money in order to have wi-fi.

Question 22

What kind of good is involved in the Free Rider problem?

Answer 22

A Public Good
This is because public goods are nonexcludable, meaning they don’t have to pay for the good which causes an overproduction of said good.

Question 23

What kind of good is involved in the Tragedy of the Commons?

Answer 23

Common Resources
This is because common goods are rival but they don’t have to pay anything which leads to overconsumption of the good.

Question 24

What is the Free Rider Problem?

Answer 24

Someone who enjoys the benefits of a good/service without paying for it.

Question 24

What is the Tragedy of the Commons?

Answer 24

When a good is overconsumed to the point where it creates negative affects.
EX: Too much hunting leads to the extinction of fish