Tutorial 6

Question 1

Externality

Answer 1

The direct effect of the actions of a person or firm on another person’s wellbeing or a firm’s production capability rather than an indirect effect through changes in prices.

Question 2

Private cost

Answer 2

The cost of production only, not including externalities.

Question 3

Social cost

Answer 3

The private cost plus the cost of the harms from externalities.

Question 4

Rival good

Answer 4

Good that is used up as it is consumed; consumption by one consumers prevents or reduces the ability of simultaneous consumption by other consumers.

Question 5

Exclusion

Answer 5

Others can be prevented from consuming a good.

Question 6

Open-access common property

Answer 6

A resource that is nonexclusive and rival.

Question 7

Club good

Answer 7

A good that is nonrival but is subject to exclusion.

Question 8

Public good

Answer 8

A good that is nontrivial and nonexclusive.

Question 9

Fee riding

Answer 9

Benefiting from the actions of others without paying.

Question 10

Private good

Answer 10

A good that is rival and exclusive.

Question 11

Coase Theorem

Answer 11

Regardless of which party gets clearly defined property rights, a polluter and its victim may achieve optimal levels of pollution (maximum joint profit) if they can bargain freely. However, who gets the property rights affects how they split the joint profit.

Question 12

Efficient market

Answer 12

For a market to be efficient it is necessary to take into account the social cost and not only the private marginal cost.