wk 10 - Externalities

Question 1

What is an externality

Answer 1

A cost or benefit caused by one party but incurred or received by another

Question 2

What is cost-benefit analysis

Answer 2

If B(x) > C(x) do activity x
B(x) and C(x) measure private benefit and cost

Question 3

What is Market efficiency

Answer 3

Efficiency requires to do activity x if SB(x) > SC(x)
^ measure social benefit and cost

Question 4

What benefits and costs occur in the absence of externalities

Answer 4

Private and social benefit and cost are identical

Question 5

Define positive externality

Answer 5

An activity that creates external benefits for others

Question 6

Define Negative externality

Answer 6

an activity that imposes external costs on others

Question 7

How does efficiency effect activity levels

Answer 7

It is efficient to increase the level of activity as long as MSB (Marginal Social Benefit) > MSC (Marginal Social Cost)

Question 8

What is an example of externalities between firms and people

Answer 8

A mining firm that pollutes a lake people use for recreation

Question 9

What is an example of externalities between people

Answer 9

Your neighbor plays loud music, making it hard to study

Question 10

Define Private cost

Answer 10

The cost of production only, not including externalities

Question 11

Define social cost

Answer 11

The private cost + the cost from externalities
The presence of externalities may cause the market to operate inefficiently

Question 12

Graphically, where would the socially optimal output be

Answer 12

Where MSC = MSB

Question 13

Why does a deadweight loss occur

Answer 13

The competitive market equates price with marginal cost instead of with social marginal cost

A competitive market produces excessive negative externalities

Question 14

What is the Coase Theorem

Answer 14

The Coase Theorem shows that market efficiency will result if there are clearly defined property rights

Assumes 0 transactional cost

Inefficiencies result only if it is costly or impractical to negotiate agreements to correct them.

Question 15

What is an example of the Coase Theorem

Answer 15

A beekeeper and an apple grower operating on adjacent plots confer positive externalities on each other

Question 16

Define a pure public good

Answer 16

Doesn’t Diminish
Non-Excludable

e.g. National Defence

Question 17

Define a Pure Private Good

Answer 17

Excludable
Rivalrous - High degree of diminishability

e.g. Food

Question 18

Define Rivalry

Answer 18

Only one person can consume a good
High degree of diminishability

Question 19

Define Exclusion

Answer 19

Others can be prevented from consuming a good

Question 20

Define a collective good

Answer 20

A good that is excludable but has a high degree of non-diminishability

e.g. Community services / Cable TV

Question 21

Define an in-pure public good

Answer 21

A good that has some non-diminishability and non-excludability

e.g. Education

Question 22

How does Private provision of a Public good occur

Answer 22

• Funding by donation
• Sale of by-products
• Private Contracts
• Free Riding

Question 23

Define the free rider problem

Answer 23

The burden on a shared resource, created by its use / overuse by people who don’t pay their fair share

Question 24

How are public goods funded

Answer 24

The government must raise taxes
The willingness to pay for public goods is generally an increasing function of income