Week 5 - Externalities

Question 1

Socially optimal quantity

Answer 1

outcome most efficient for society as a whole, including interests of buyers, sellers, and bystanders

Question 2

Consequences of negative + positive externalities

Answer 2

Negative: Overproduction
Positive: Underproduction

Question 3

Main solution for solving externality problems

Answer 3

Internalize externality

Question 4

Coase theorem

Answer 4

Private bargaining works for externalities if it’s easy to strike a deal and legal rights are understood

Question 5

Corrective tax + subsidy

Answer 5

Corrective tax — tax designed to induce ppl to take account of negative externalities
Corrective subsidies — subsidy designed to induce ppl to take account of positive externalities

Question 6

4 types of goods + classifications

Answer 6

1. Public good — non-excludable and non-rival
2. Club good — excludable and non-rival
3. Common resource — non-excludable and rival
4. Private good — excludable and rival

Question 7

Free-rider problem vs. Tragedy of the commons

Answer 7

Free-rider: When someone can enjoy benefits of public good w/out bearing costs
Tragedy: Tendency to over consume a common resource

Question 8

6 ways to deal w externalities

Answer 8

1. Private bargaining
2. Fix price (corrective taxes and subsidies)
3. Fix quantity (cap and trade)
4. Laws, rules, and regulations
5. Gov’t provision of public goods
6. Assign ownership rights to common resources