Lesson 13-Externalities

Question 1

Define market failure

Answer 1

This occurs when the price mechanism cannot bring about an efficient allocation of resources leading to net welfare loss to the society.

Question 2

State the two types of market failure

Answer 2

1.Externalities
2.Non provision of public and merit goods (missing markets)

Question 3

Define externalities

Answer 3

Effects on a third party who is neither the producer nor the consumer

Question 4

Define external cost

Answer 4

Costs to third parties resulting from the production or consumption of a good or service.

Question 5

State two other names for external costs

Answer 5

1.Negative externalities
2. Negative spillover effects

Question 6

State an example of external cost

Answer 6

Pollution by firms
Playing loud music at night

Question 7

Define external benefit

Answer 7

Benefits to third parties resulting from the production or consumption of a good or service.

Question 8

State two other names for external benifit

Answer 8

1.Positie externalities
2. Positive spillover effects

Question 9

State an example for external benefit

Answer 9

Vaccination by a worker that results in high labor productivity at work and reduced absenteeism

Question 10

Define private costs

Answer 10

Costs incurred by a firm or individual in order to produce or consume a good or service.

Question 11

State 3 private costs to a firm

Answer 11

wages
rent
payment for raw materials
electricity
cost of production

Question 12

State a private cost to a consumer

Answer 12

The market price that a consumer pays for a good or service

Question 13

Define private benifits

Answer 13

The private benefits on production can be the revenue obtained by a firm and the private benefit of consumption can be the satisfaction of listening to loud music.

Question 14

Define social costs

Answer 14

By adding private cost to external cost we obtain social cost.

Question 15

Define external cost

Answer 15

The difference between private costs and social costs

Question 16

Define social benefits

Answer 16

By adding private benefit to external benefit we obtain social benefit.

Question 17

Define external benifit

Answer 17

The difference between private benefit and social benefit

Question 18

Define regulation

Answer 18

This is where the government regulates private sector firms whereby they are requested to cut down levels of pollution and if not in extreme cases may be shut down by the government.

Question 19

Advantage of taxation

Answer 19

The government will be able to earn from taxes.

Question 19

Define Taxation

Answer 19

This is where the government imposes high taxes on firms that damage the environment A higher level of damage will mean that a higher rate of tax will be paid.

Question 20

Disadvantage of taxation

Answer 20

It give an opportunity to firms to continue damaging the environment by paying taxes

Question 21

Define subsidies

Answer 21

This is where the government offers grants, tax reliefs and subsidies to those firms whose pollution levels are generally low or to those firms that invested in environmentally friendly production methods.

Question 22

Benefits of subsidies

Answer 22

It will act as an incentive for those firms that pollute to cut down their levels of pollution or to invest in environmentally friendly methods of production.

Question 23

Define pollution permits

Answer 23

This is where firms are required to buy permits in order to pollute.

Question 24

What is a benefit of pollution permits to a firm

Answer 24

Firms that reduce their pollution below the level mentioned on the permit will be able to sell these permits at a higher price to to other polluting permits

Question 25

Define Fines

Answer 25

Can be imposed by the government on firms found guilty of polluting or damaging the environment.

Question 26

Define public goods

Answer 26

These are goods provided by the government free of charge

Question 27

What are two important characteristics of public goods

Answer 27

1.Non-excludability- This means that once a good has been produced for the benefit of one person it is impossible to stop others from using it.
2. Non-rivalry- This means that as more people consume a good and enjoys it benefits it does not reduce the amount available for others.

Question 28

What is the free rider prolem

Answer 28

When one person is given something, others can use it as well for free.

Question 29

State two reasons why the private sector does not provide public goods

Answer 29

1. Non excludability
2. Non rivalry

Question 30

Define Merit goods

Answer 30

These are services provided by the government but would be under provided by the private sector. They create positive externalities.

Question 31

Why are Merit goods underconsumed?

Answer 31

As a result of imperfect information about the benefits that can be derived.