(2.3) Market Failure 1
When externalities exist:
outside intervention may be able to improve the market outcome increasing efficiency and economic surplus.
A(n) _____ externality is the unpaid benefit of an activity that is enjoyed by a third party.
positive
Governments may use public policy to encourage the production of goods that generate _____ externalities.
positive
When a _____ externality exists, the socially optimal level of output will be greater than that resulting from a private market.
positive
When a _____ externality exists, the socially optimal level of output will be greater than that resulting from a _____ market.
positive private
A market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market is a _____ market.
private
_____ supply is the supply of a good or service that considers only the private costs of its production.
private
The demand for a good or service that considers only the private benefits of its consumption is called
private demand
Social marginal cost is the sum of _____ marginal cost and _____ marginal cost.
private external
Social supply is the supply of a good or service that reflects both the _____ and _____ costs of its production.
private external
The supply of a good or service that reflects only the private costs of its production is called
private supply
The private marginal cost is the cost to the:
producer of producing an additional unit of a good or service.
The costs and benefits of how a resource is used may not be properly considered when _____ _____ are not clearly defined.
property rights
Externalities occur because
property rights are not clearly assigned to one party.
Externalities occur when
property rights are not clearly defined.
The exclusive right to determine how a resource is used
refers to property rights.
According to the Coase Theorem if a property right is well defined and transaction costs are low
resources will gravitate to their highest-valued use.
_____ demand is the demand for a good or service that reflects both the private and external benefits of its consumption.
social
_____ marginal cost is the sum of private marginal cost and external marginal cost.
social
_____ supply is the supply of a good or service that reflects both the private and external costs of its production.
social
The demand for a good or service that reflects both the private and external benefits of its consumption is called _____
social demand
Ideally encouraging the production of goods that generate positive externalities will result in the _____ optimal output level.
socially
In general low-income countries
spend less on pollution prevention than high-income countries.
n general, high-income countries
spend more on pollution prevention than low-income countries.
When externalities exist:
the outcome observed may not be the most efficient outcome.
If the marginal cost of a pollution prevention program exceeds the marginal benefit of the program
the program will not proceed.
Social supply is
the supply of a good or service that reflects both the private and external costs of its production.
In general when people have ownership (or control) of a resource
they have incentive to improve it.
Suppose you observe a market where wild-caught salmon is over consumed and farm-raised chicken in not over consumed. What might explain this?
It is easier to define and enforce the property rights of a chicken farm than a wild salmon fishery.
At the optimal level of pollution
MB = MC
If we flip analysis of pollution to evaluate pollution prevention what is true of the marginal benefit (MB) and the marginal cost (MC) curves?
Pollution prevention has standard MB and MC curves.
_____ demand is the demand for a good or service that considers only the private benefits of its consumption.
Private
_____ rights involve the exclusive right to determine how a resource is used.
Property
Suppose that the benefit to a community of cleaning a polluted lake is $150000 and it will cost $120000 to clean it. What can we expect to happen?
The lake is cleaned since the benefit exceeds the cost.
Suppose that the benefit to a community of cleaning a polluted lake is $100000 and it will cost $120000 to clean it. What can we expect to happen?
The lake remains polluted since the cost exceeds the benefit.
The benefit enjoyed by or cost imposed on a third party that is not directly involved in the production or consumption of a good or service is called:
an externality.
The marginal _____ of preventing pollution is measured in terms of reduced health expenses and improved living standards.
benefit
Social demand is the demand for a good or service that reflects
both the private and external benefits of its consumption.
One private solution to externalities is to
clearly assign property rights to one side.
Well-defined property rights, low transaction costs, and resources that naturally gravitate toward the highest-valued function describe the _____ theorem.
coase
From an economic perspective pollution involves _____ and _____
costs; benefits
In general, the optimal level of pollution to either prevent or to clean up occurs where the marginal benefit of preventing pollution _____ the marginal cost of preventing pollution.
equals
Markets characterized by _____ may result in inefficient outcomes.
externalities
One of the justifications for government intervention in markets is the potential to improve on the market outcome in markets characterized by _____.
externalities
When _____ exist, the outcome observed may not be the efficient outcome.
externalities
A negative _____ is the uncompensated cost of an activity that is imposed on a third party.
externality
When economists evaluate the prevention of crime instead of crime they are
flipping the analysis.
If excessive transaction costs of pollution prevention generate externalities the _____ tends to get involved.
government
One of the justifications for _____ intervention in markets is the potential to improve on the market outcome in markets characterized by externalities.
government
When a positive externality exists, the socially optimal level of output will be _____ than that resulting from a private market.
greater
From an economic perspective pollution
has both costs and benefits.
From an economic perspective pollution:
has both costs and benefits.
A system that allows a person a certain percentage of the allowable catch in an open-water fishery is called a(n)
individual transferable quota.
The lack of clear property rights for fish has led by many estimates to over fishing. A successful solution adopted by many countries is
individual transferable quotas.
Transaction costs
involve the costs in terms of time energy and resources associated with searching out negotiating and completing a transaction.
Cigarettes create _____ externalities. When the government earmarks revenues generated from cigarette taxes to help pay for public-health initiatives smokers are in effect helping pay for the _____ externality smoking creates.
negative negative
When a _____ externality exists, the socially optimal level of output will be less than that resulting from a _____ market.
negative private
What would be a reason why the government would choose to tax the sale of cigarettes?
Cigarettes generate negative externalities.
Ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal benefit of pollution prevention decreases?
Equilibrium quantity decreases.
Ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal cost of pollution prevention decreases?
Equilibrium quantity increases.
If the marginal cost of pollution increases, what will happen to the equilibrium quantity of pollution?
Equilibrium quantity of pollution increases
If the marginal benefit of pollution increases, what happens to the equilibrium quantity of pollution?
Equilibrium quantity of pollution increases.
If the conditions of the Coase Theorem are not met what is the result?
Externalities
One private solution to _____ is to clearly assign property rights to one person.
Externalities
_____ occur when property rights are not clearly defined.
Externalities
Which of the following is most susceptible to poorly-defined or difficult-to-define/enforce property rights?
Ideas
Two groups have different uses for a local field. A bird watching society enjoys studying the ground-nesting swallows that visit each summer. A mountain bike camp prefers to use the field to build jumps and hold other events and receives a benefit of $1,000 from using the field. When it does, the activities scare away the birds and the bird-watching society faces a wealth reduction of $700. What is the optimal use of the field during the summers?
The mountain bike camp using the field to hold events
_____ costs involve the costs in terms of time energy and resources associated with searching out negotiating and completing a transaction.
Transaction
_____ involve(s) the costs in terms of time energy and resources associated with searching out negotiating and completing a transaction.
Transaction costs
Pollution is an example of an economic bad. As a result it causes negative externality in the economy.
True
Something we would rather have less of is called
an economic bad.
Two groups have different uses for a local field. A bird watching society enjoys studying the ground-nesting swallows that visit each summer. A mountain bike camp prefers to use the field to build jumps and hold other events and receives a benefit of $1000 from using the field. When it does the activities scare away the birds and the bird-watching society faces a wealth reduction of $700.
Yes. It is their right and this right is more valuable to the camp than to the birdwatchers.
If property rights are clearly defined can the economy still experience externalities?
Yes. Transaction costs could be significant.
Suppose you live near a large factory that produces a good that you do not consume. If you are subjected to loud noises and bad odors from the factory then you experienced
a negative externality.
The unpaid benefit of an activity that is enjoyed by a third party is called
a positive externality
The benefit enjoyed by a third party that is not directly involved in the production or consumption of a good or service is called:
a positive externality.
The market interaction between buyers and sellers results in _____ and _____ efficiency.
allocative productive
When there is _____ and _____ efficiency, the market produces the right goods in the correct amounts using the fewest resources possible.
allocative productive
When a negative externality exists, the socially optimal level of output will be _____ than that resulting from a private market.
less
External _____ benefit is the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service.
marginal
When the market does not produce an output level that maximizes total surplus it is called a
market failure
The marginal benefit of preventing pollution is
measured in terms of reduced health expenses and improved living standards.
Many of the goods that are taxed by the government, such as cigarettes, gasoline, and alcohol generate _____ externalities.
negative
When a _____ externality exists, the socially optimal level of output will be less than that resulting from a private market.
negative
An externality is:
the benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service.
A pollution prevention/clean-up program will occur so long as
the benefit exceeds the cost.
A property right is
the exclusive right to determine how a resource is used.
If excessive transaction costs of pollution prevention generate externalities
the government often get involved.
In general, the optimal level of pollution to either prevent or to clean up occurs where
the marginal benefit of preventing pollution equals the marginal cost of preventing pollution.
A market failure occurs when
the market does not produce an output level that maximizes total surplus.
