Lecture 2: Externalities

Question 1

Taxes vs subsidies

Answer 1

Positive Externality: subsidize
Negative Externality: tax OR subsidize alternative technologies

Question 2

Assumptions of the perfect market model

Answer 2

• all goods have a price
• price = marginal cost
• perfect information
• perfect decision-making

Question 3

Non-rivalry in consumption

Answer 3

Marginal cost of providing the good to an additional consumer is equal to zero

Question 4

Emission trading

Answer 4

Firms with high costs of reducing emissions buy permits while firms with low costs sell them

Question 5

Private marginal cost

Answer 5

Direct cost of producing an additional unit of a good

Question 6

Public sector remedies to externalities

Answer 6

• quantity regulation
• corrective taxation

Question 7

Social marginal cost (formula)

Answer 7

SMC = PMC + MD
Private marginal cost to producers + marginal damage

Question 8

Social Marginal Benefit

Answer 8

PMB - any costs
Associated with the consumptions of the goods that are imposed on others

Question 9

Private sector solution to externalities

Answer 9

Internalizing the externality

Question 10

Negative consumption externality

Answer 10

When an individual’s consumption reduces the well-being of others who are not compensated by the individual

Question 11

Positive externalities

Answer 11

When a firm’s production increases others well-being, but the firm is not compensated by others

Question 12

Coase Theorem II

Answer 12

Achieving an efficient solution to an externality does not depend on which party is assigned the property rights, as long as the rights are assigned

Question 13

Coase Theorem I

Answer 13

Well-defined property rights and collective bargaining, negotiations can bring amount the socially optimal market quantity

Question 14

Deadweight loss (DWL)

Answer 14

Difference between societal costs and benefits compared to the fully efficient solution

Question 15

Externality

Answer 15

Action of 1 economic agent affects another economic agent outside the market mechanism that does not have any price

Question 16

Private Marginal Benefit

Answer 16

Direct benefit to consumers of consuming an additional unit of a good by the consumer

Question 17

Marginal Damage

Answer 17

Additional costs associated with producing the good that are imposed on others but that producer does not pay

Question 18

Climate Change (4 factors)

Answer 18

1. global
2. irreversible
3. long-term
4. uncertain

Question 19

A lump-sum payment

Answer 19

monetary sum paid in one single payment instead of allocated into installments