Unit 2 - Policy Evaluation Criteria: Objectives

Question 1

What are the three requirements for market efficiency according to property rights?

Answer 1

• Exclusivity (Benefits/costs accrue to owner)
• Transferability (Owned resources can be exchanged voluntarily)
• Enforceability (Secure ownership rights)

Question 2

Define a Pigouvian tax and explain its purpose.

Answer 2

Answer: A Pigouvian tax is a tax on market activities that generate negative externalities. Its purpose is to correct market inefficiencies by making actors internalize the external costs of their activities.

(MCs - MCp)

Question 3

What are the four main causes of market failures?

Answer 3

1. Externalities and public goods (no exclusivity)
2. Transaction costs (limited transferrability)
3. Imperfect market structures (e.g. monopolies)
4. Information asymmetries (e.g. experience goods, principal-agent problems

Question 4

Explain the difference between public goods and common pool resources.

Answer 4

Answer: Public goods are both non-excludable and non-rival (like clean air and biodiversity), while common pool resources are non-excludable but rival (like shared pastures and fish stocks).

Question 5

Explain the Coase Theorem

Answer 5

states that even with externalities, bargaining can lead to an efficient outcome if 1) property rights are well-defined, 2) transaction costs are sufficiently low, 3) wealth distribution is irrelevant for efficiency

Question 6

Explain the two policy evaluation methods

Answer 6

• Cost-benefit analysis & economic efficiency
  
  • if benefits > costs, you support the policy
• Efficiency in welfare analysis
  
  • consider the consumer and produce surplus
    
    • consumer surplus is the difference between what customers are willing to pay and what they actually pay
    • producer surplus is the different between what producers receive and their costs

Question 7

What is the external cost when it comes to environmental externalities?

Answer 7

external cost - negative effect of an economic activity that is involuntarily imposed on others’ production or consumption (CO2 emissions, water pollution)

Question 8

What are the implications for environmental externalities?

Answer 8

• economic activitiy is highly inefficient (Qm)
• Mitigation measures are inefficiently low
• no incentives for mitigating innovations

Question 9

Which goods have low market failure risk?

Answer 9

• Private goods (excludable & rival): groceries, clothes
• Club goods (excludable & non-rival until congestion): private parks

Question 10

Which goods have high market failure risk?

Answer 10

• Public goods (non-excludable & non-rival): clean air, biodiversity
• Common pool resources (non-excludable & rival): shared pastures, fish stocks