module 6

Question 1

externality

Answer 1

cost or benefit that impacts a bystander who did not choose to receive that

Question 2

positive externality

Answer 2

when individuals/businesses confer benefits upon others without receiving any compensation

Question 3

negative externality

Answer 3

when individuals/businesses impose costs on third-parties without fully bearing the consequences of their actions –market eq is larger than socially desirable

Question 4

societal costs

Answer 4

expenses incurred by society as a whole resulting from production/sale of goods

Question 5

private cost

Answer 5

expenses directly borne by individuals/businesses responsible for creating the negative externality

Question 6

external cost

Answer 6

costs imposed on bystanders and third-parties as a result of negative externalities

Question 7

internalize the externality

Answer 7

corrective measure of overproduction of goods caused when market overlooks external costs and prioritizes private costs – market eq to socially optimal eq

Question 8

social value

Answer 8

benefit directly received by the individual creating positive externality and the external benefits by others

Question 9

private value

Answer 9

direct value/benefit to individuals/businesses creating the positive externality

Question 10

external benefits

Answer 10

benefits third-parties enjoy due to the positive externality

Question 11

command-and-control

Answer 11

direct government control over specific actions

Question 12

market based

Answer 12

aim to incentivize individuals to voluntarily choose socially optimal quantity

Question 13

corrective taxes/Pigouvian tax

Answer 13

designed to induce private decision-makers to take into account the social costs that arise from negative externalities

Question 14

corrective taxes with negative externalities

Answer 14

ideal corrective tax aligns private incentives with social efficiency

Question 15

corrective taxes with positive externalities

Answer 15

ideal corrective tax aligns private incentives with societies interests – subsides

Question 16

tradeable permits

Answer 16

mechanisms used to address negative externalities – can sell a permit to increase their limit on producing that negative externality

Question 17

private solutions to negative externalities

Answer 17

• moral codes
• charities
• contracts
• coase theorem

Question 18

Coase theorem

Answer 18

if transaction costs are low, private parties can bargain over the allocation of resources and solve externalities on their own

Question 19

problems with Coase theorem

Answer 19

1. transaction costs
2. coordination problems
3. stubbornness

Question 20

excludable goods

Answer 20

you can prevent people from consuming it

Question 21

non-excludable goods

Answer 21

goods you cannot prevent people from consuming it

Question 22

goods rival in consumption

Answer 22

if one persons consumption lowers another persons use of the good

Question 23

goods not rival in consumption

Answer 23

use by others does not impact its value to another

Question 24

club goods

Answer 24

excludable and rival in consumption - netflix

Question 25

private goods

Answer 25

excludable and rival in consumption - cannot use once taken

Question 26

common resources

Answer 26

non-excludable and rival in consumption - fish in the sea (over-consumed)

Question 27

public goods

Answer 27

non-excludable and not rival in consumption - public fireworks (under-supply)

Question 28

free-rider problem

Answer 28

receives full benefit but avoids having to pay for it -reason why public goods are difficult for private markets to provide

Question 29

cost-benefit analysis

Answer 29

comparing costs and benefit when providing public good

Question 30

why is cost-benefit analysis hard to assess?

Answer 30

1. no price assigned by market
2. difficult for individuals to attach money figure
3. no incentives