Lecture 12 - Externalities, .Environmental Policy, and Public Goods

Question 1

Externality

Answer 1

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

Question 2

Negative Externality

Answer 2

arise because of a divergence between private costs and social costs

Question 3

Social Costs

Answer 3

the total cost to society of producing a good or service, which includes private cost and any external costs

Question 4

Positive Externality

Answer 4

Arise because of a divergence between private benefits and social benefits

Question 5

Social benefit

Answer 5

the total benefit to society of producing a good or service, which includes both private benefit and any external benefit

Question 6

Supply curve is also known as the

Answer 6

marginal cost curve

Question 7

Demand curve is also known as the

Answer 7

marginal benefit curve

Question 8

Example of a negative externality

Answer 8

pollution

Question 9

Example of a positive externality

Answer 9

education

Question 10

True or False: provided the existence of an externality, competitive equilibrium will not result in an efficient level of output

Answer 10

True

Question 11

Negative externalities imply there is

Answer 11

overproduction

Question 12

Positive externalities imply there is

Answer 12

underproduction

Question 13

Market Failure

Answer 13

a situation in which the competitive market fails to produce the efficient level of output

Question 14

Property Rights

Answer 14

a bundle of rights that give economic agents the exclusive right to use, exclude, and dispose of something

Question 15

Transaction costs

Answer 15

the costs of using the market mechanism, which relate to search, negotiation, and enforcement of contracts

Question 16

Externalities arise because of (1)

Answer 16

incomplete property rights, or difficulty of enforcing property rights in certain situations, like high transaction-cost settings

Question 17

Who wrote “The Economics of Welfare”?

Answer 17

Arthur Pigou

Question 18

Why does Pigou say externalities arise?

Answer 18

in an unregulated market because the economic agents who cause external harms or benefits do not pay for them. Thus, external harms or benefits are not accounted for in the market price

Question 19

How does Pigou suggest we solve the problem of externalities?

Answer 19

taxation or subsidy induces economic agents to “internalize the externality”

Question 20

What is appropriate for solving negative externalities? (Pigou)

Answer 20

Taxation

Question 21

What is appropriate for solving positive externalities? (Pigou)

Answer 21

Subsidies

Question 22

Who wrote The Problem of Social Cost?

Answer 22

Ronald Coase

Question 23

Coase’s Theorem`

Answer 23

When transaction costs are low and property rights are well defined, the allocation of resources will be efficient regardless of the initial assignment of property rights

Question 24

Reciprocal Causation

Answer 24

An agent’s externality causes harm, but another agent must be present in order to be harmed

Question 25

When is Coase’s theorem preferred?

Answer 25

when transaction costs are low, because the administrative costs of government intervention are not justified

Question 26

Command-and-control

Answer 26

a policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution control devices

Question 27

Tradable Emissions Permit

Answer 27

Government decides what a tolerable level of emissions is, then permits are distributed where each firm is given a property right to a certain level of pollution

Question 28

True or False: high polluting firms can purchase tradable emissions permits from low polluting firms

Answer 28

True

Question 29

Two areas of concerns with tradable emissions permits

Answer 29

1. government must set the right level of pollution

2. pollution may occur in “hot spots”

Question 30

Common property resource

Answer 30

a resource to which anyone has free access

Question 31

Tragedy of the Commons

Answer 31

When economic agents act in their own self interest, they will not work in the group’s best interest when choosing their level of consumption levels, depleting common property resources
Translation: when lots of firms depend on a common resource for production, individual firms will not make sure there is enough for other firms, they will act in their own self interest

Question 32

Tragedy of the Anti-Commons

Answer 32

when numerous economic agents have non-excludable property rights in a particular resource, they will not act in accordance with the group’s best interest

Question 33

Assembly Problem

Answer 33

some projects require several contiguous parcels of land whose ownership is disbursed, which creates incentive for owners of the land to hold out in an effort to extract rent at monopoly-prices

Question 34

How are goods defined? (2)

Answer 34

Rivalry and Excludability

Question 35

Rivalry

Answer 35

The situation in which one person’s consumption of a good or service precludes another from consuming the same good or service

Question 36

Excludability

Answer 36

The situation in which anyone who does not pay for a good can not consume it

Question 37

Common resources are

Answer 37

Rivalrous; Nonexcludable

Question 38

Quasi-public goods are

Answer 38

Nonrivalrous; Excludable

Question 39

Public Goods are

Answer 39

Nonrivalrous; Nonexcludable

Question 40

Private Goods are

Answer 40

Rivalrous; Excludable

Question 41

Example of common resource

Answer 41

fish in the sea

Question 42

Example of quasi-public good

Answer 42

Cable TV; Toll Roads

Question 43

Nonexclusive

Answer 43

an individual cannot be excluded from consumption, so it is difficult or impossible to charge for its use

Question 44

Nonrival

Answer 44

the marginal cost of the good’s being provided to an additional customer is zero; simultaneous consumption is possible

Question 45

Without government intervention, the consumption of public goods will be too _ due to _

Answer 45

low; free-rider problem