Unit 5 and 6

Question 1

Define common pool resource.

Answer 1

A resource that is not owned by anyone that can be used by anyone without payment or other restriction.

Question 2

What are the characteristics of common pool resources?

Answer 2

1. Rivalrous.
2. Non-excludable.

Question 3

What is the story and topic concerning common pool resources?

Answer 3

1. Tragedy of the commons.
2. Unsustainable production creating resource depletion and negative externalities.

Question 4

Define market failure.

Answer 4

The failure of markets to achieve allocative efficiency. Markets fail to producethe output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.

Question 5

Define externality

Answer 5

External costs or benefits to third parties when a good or service is produced or consumed

Question 6

What is socially optimum output?

Answer 6

1. When allocative efficiency is achieved from society’s POV.
2. MPB = MSB = MPC = MSC

Question 7

Define non-rivalrous

Answer 7

The consumption by one person does not reduce consumption by someone else.

Question 8

Define non-excludable.

Answer 8

It is not possible to prevent someone from consuming.

Question 9

Explain the matrix of goods

Answer 9

1. Private goods (R, E) e.g. bike.
2. Common pool resources (R, NE) e.g. ocean fish stock.
3. Quasi-public good (NR, E) e.g. toll road.
4. Public goods (NR, NE) e.g. national defense.

Question 10

Why are quasi public goods government-produced?

Answer 10

They have very large positive externalities.

Question 11

Private good

Answer 11

A good which is provided by firms and is rival and excludable and provides both external benefits and costs

Question 12

Free goods

Answer 12

A good with no opportunity cost when consumed (e.g. Air)

Question 13

Public good

Answer 13

A good which is provided by the government and is non-rival and non excludable and provides external benefits

Question 14

Merit goods

Answer 14

Goods or services considered to be beneficial for people that are underprovided by the market and so under-consumed, mainly due to positive consumption externalities

Question 15

Demerit goods

Answer 15

Goods or services that not only harm the individuals who consume these but
also society at large, and that tend to be overconsumed. Usually they are due to
negative consumption externalities.

Question 16

What are the policies to correct negative production externalities?

Answer 16

1. Indirect (Pigouvian) taxes.
2. Carbon taxes.
3. Legislation/regulation.
4. Education/awareness creation.
5. Collective self-governance.
6. Tradable permits.
7. International agreements.

Question 17

What are the policies to correct negative consumption externalities?

Answer 17

1. Indirect (Pigouvian) taxes.
2. Legislation/regulation.
3. Education/awareness creation.
4. Nudges.

Question 18

What are the policies to correct positive production externalities?

Answer 18

1. Government provision.
2. Subsidies.

Question 19

What are the policies to correct positive consumption externalities?

Answer 19

1. Legislation/regulation.
2. Education/awareness creation.
3. Nudges.
4. Government provision.
5. Subsidies.

Question 20

Tradable permits

Answer 20

Permits to pollute, issued by a governing body, that sets a maximum amount of
pollution allowable. These permits may be traded (bought or sold) in a market
for such permits.

Question 21

Marginal social cost

Answer 21

The extra or additional cost to society of producing an additional unit of output,
including both the private cost and the external costs.

Question 22

Marginal social benefit

Answer 22

The extra or additional benefit/utility to society of consuming an additional unit
of output, including both the private benefit and the external benefit.

Question 23

Marginal private cost

Answer 23

the extra or additional costs for producers of producing one more unit of a good, excludes the external costs

Question 24

Marginal private benefits

Answer 24

The extra or additional benefit/utility to the entity of consuming an additional unit of output, including only the private benefit

Question 25

How does tradable permit work and benefits

Answer 25

1- Government set cap of CO2 emission that economy is allowed to emmit in a year

2-Gov issues permit to firms across economy (market for permit created, perfectly inelastic market)

3)Firms make decision based on least cost (invest in green tech or buy trade permits) This internalises the externality as producer is paying the for the externality in the most efficient way

4)with strict enforcement pollution goes down to socially optinum levels where allocative efficiency will be reached (max welfare in market)

5) Promotes long run incentives (Investment in green tech)
-Can profit from selling trade permits
-Not burdened when permit prices rise

Question 26

Negatives of trade permits

Answer 26

1)Enforcement
-Can it be afforded (e.g developing countries)
-Tech to acrruretly measure emission (firms wont follow the policy)

2) Imperfect information for gov
Might not know optimum quantity (might cap to tight or not enough) can lead to market failure

3) unintended consequences
Firms can shut down, leave country and pollute elsewhere
Pass on the higher cost due to trade permits onto consumers, leading to inflation

4)Need for international cooperation
-climate change is global market failure
-getting cooperation is really hard, e.g. developing countries.

Question 27

Direct provision

Answer 27

Direct provision of goods and services by the government free at the point of consumption

Question 28

Why is state provision used

Answer 28

Solves merit good market failure
Increases the problem of underconsumption/production of goods/services.
There is inequity when it comes to merit goods (sense that for some things no prices should be charged to exclude producers from consuming those) e.g. basic things such as healthcare and education

Question 29

How does curve of direct provision look like

Answer 29

Completely vertical as fixed budget for state provision

Question 30

Issue with state provision

Answer 30

Excess demand at P=0, difference between Q* and Q1

Government cant ration easily due to price changes can’t change

Low quality provided they pay in other ways (e.g. poor quality healthcare and education being crowded)

Expensive, worry about long run funding, opportunity cost, higher taxes, cut in government expenditure in other parts of economy.

Imperfect gov info

Inefficiency of state organization

Question 30

Issue with state provision

Answer 30

Excess demand at P=0, difference between Q* and Q1

Government cant ration easily due to price changes can’t change

Low quality provided they pay in other ways (e.g. poor quality healthcare and education being crowded)

Expensive, worry about long run funding, opportunity cost, higher taxes, cut in government expenditure in other parts of economy.

Imperfect gov info

Inefficiency of state organization
Lack of profit motive, costs are much higher causing opportunity cost