Module 11 Flashcards
What kind of good is both excludable and rival?
Private good
what kind of good is non-excludable but rival?
Common good
What kind of good is non-rival, but excludable?
Quasi-public good
What kind of good is non-excludable and non-rival?
Public good
What does it mean when we say a good is rival?
One person’s consumption of that good excludes someone else from consuming it.
What does it mean when we say a good is excludable?
It’s possible to make people pay for it, with no free-rider problem.
What kind of good is national defence?
Public
What kind of good is a lighthouse?
Public
What kind of good is a cinema?
Quasi-public
What kind of good is a haircut?
Private
What kind of good is cable-TV?
Quasi-public
What kind of good is public education?
Common good
How do we calculate the demand curve for a public good?
Q: the individual units
P: added across consumers
So if 2 people would each pay $1 for 1 unit, Q=1, P=$2
Why is it hard to figure out the true demand for a public good?
Because no one has incentive to reveal their preferences.
What kind of good is a toll road?
Quasi-public (unless massive congestion occurs)
What is the “tragedy of the commons”?
The “tragedy of the commons”:
- stems from lack of enforceable property rights
- the tendency for a common resource to become overused to the point where it’s no longer useful.
How do we correct for the tragedy of the commons?
Taxes, quotas.
What is an externality?
A cost or benefit that is not borne solely by the buyer or seller.
What is a private cost?
A cost borne solely by the producer.
What is a social cost?
The sum of private cost plus any externality.
What is a private benefit?
The benefit received by the consumer.
What is a social benefit?
= private benefit plus any externalities
Where do we find the DWL for a negative externality?
On the right side of the demand curve, between the old and new supply curves.
Where do we find the DWL for a positive externality?
Between the old and new demand curves on the left hand side of the intersection between them and supply.
When showing the correction for a positive externality, does the supply or the demand curve change?
Demand curve changes with a correction for a positive externality.
When showing the correction for a negative externality, does the supply or demand curve change?
The supply curve changes when we correct for a negative externality.
With a negative externality, is there a shortage or a surplus of the good?
Surplus
With a positive externality, is there a shortage or a surplus of the good?
Shortage
What is a market failure?
When the market fails to produce the efficient level of output.
What do externalities and market failures arise from?
The inability to enforce property rights, or the incompleteness of property rights.
Is there an efficient level of an externality? Why or why not?
Yes - rule of decreasing marginal benefit applies to fighting the externality as well.
What is area B?
Area B is the total cost of increasing the reduction of pollution from 7.0 to 8.5.
What is area A?
Area A is the net benefit to society for increasing the pollution reduction from 7.0 to 8.5.
What is the total benefit from increasing the reduction in pollution levels from 7.0 to 8.5?
The total benefit from increasing pollution reduction levels from 7.0 to 8.5 is the sum of areas A + B.
How does the cost of fighting an externality change based on who’s paying?
The cost does not change at all. It still costs the same amount to fight externalities no matter who’s paying.
What is a transaction cost?
Transaction costs are the costs in time and resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
What must be true about transaction costs in order for there to be a private solution to externalities?
They must be low.
What is the Coase Theorem?
If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
What are the caveats to the Coase Theorem?
All parties to the agreement must have full information about all costs and benefits.
All parties must be willing to accept a reasonable agreement.
How do we find the value of the tax when correcting for a negative externality?
The value of the tax is from Pefficient to Preceived by producers, found from the natural Q when S has been corrected.
How do we find the value of a subsidy when looking at a correction for a positive externality?
The value of the subsidy is from Ppaid by consumers to Pefficient
How do we find the price paid by consumers on a graph showing a subsidy that corrects for a positive externality?
Where the original D is intersected by Qefficient.
Who was Pigou?
A British economist who argued that taxes and subsidies could be used to correct for externalities.
What is a Pigouvian tax or subsidy?
A tax or subsidy used to correct for externalities, and in the same amount as the externality.
What is “command and control”?
“Command and control” refers to using rules to combat externalities, such as quantitative limits on pollution, rules about processes, etc.
