Section 6

Question 1

Why do we sometimes have market failure

Answer 1

Sometimes it happens because producers are not held responsible for all the marginal or extra cost of production

Question 2

What are the different types of solutions for correcting externalities

Answer 2

1. Private solutions (do not include government)

2. Public solutions (main Bob government depends on the type of public policy solution being considered)

Question 3

What are the two types of public solutions

Answer 3

1. Command and control policies

2. Market based policies

Question 4

What are the command and control policies

Answer 4

• complete Government control

- Government sets regulations

Question 5

What are the market-based policies

Answer 5

• governments role is limited

- The aim is to provide incentives so that private decision-makers may solve the externality problem on their own

Question 6

What are the two types of market-based policies

Answer 6

1. Tradable permits

2. Corrective (pigovian) taxes and subsidies

Question 7

With command and control policy policies are set by who

Answer 7

1. Federal government
2. Provincial government. – command and control polices (ie environmental polices)
3. Municipal government

Question 8

What are tradable permits

Answer 8

Means that a negative externality can be corrected by allowing permits for pollution

Companies can trade them

Total pollution cannot go over a fixed amount

Question 9

Who is pigovian taxes named after

Answer 9

British economist named Arthur pigou

Question 10

What are pigovian taxes used for

Answer 10

For eliminating negative externalities caused by pollution

• discourages overproduction
• The tax revenue is used to counteract the effects of the pollution

Question 11

What are pigovian subsidies used for

Answer 11

For eliminating positive externalities caused by education

Question 12

What are the private solutions to externalities

Answer 12

1. Moral codes and social sanctions
2. Self interest of concerned parties and private contract between interested parties
3. Charities

Question 13

Who provides public goods and why

Answer 13

Public goods are provided by the government due to market failure (other suppliers have no incentive to produce it)

Question 14

Provide three different examples of public goods

Answer 14

1. National defense
2. Basic scientific research & government programs aimed at fighting party
3. Lighthouses

Question 15

What are the two different types of goods

Answer 15

1. Excludable

2. Rival in consumption

Question 16

What does excludable mean

Answer 16

Can be prevented from using the good

Question 17

What does rival in consumption mean

Answer 17

Does one person’s use of the good diminish another person’s ability to use it

Question 18

What are the four categories of goods

Answer 18

1. Private goods
2. Common resources
3. Club goods
4. Public goods

Question 19

What is market failure

Answer 19

Failure to provide the correct amount if products

Question 20

What do economist prefer Government regulations or corrective taxes

Answer 20

Corrective taxes

Corrected taxes reduce pollution more efficiently because it might actually be cheaper for companies to reduce the position themselves then to pay the tax

Therefore if the tax is later revoked, companies have already change their methods to pollute less it will continue to

Question 21

Why selling tradable pollution permits may sometimes be better than levying a corrective tax.

Answer 21

The reason is that sometimes it is very difficult for the government to correctly estimate the exact amount of corrective tax to levy, so issuing and then auctioning off the permits by the government becomes preferable.

Question 22

Private solutions are based on the premise of what

Answer 22

that government action is not always needed to solve the problem of externalities because people themselves can develop private solutions.

Question 23

Wha t are the different types of public solutions to externalities

Answer 23

Moral codes and social sanctions often offer private solutions to externalities.

Charities are also designed to offer private solutions to externalities

Self-interest of concerned parties and private contracts between interested parties also offer private solutions to an externality.