Chapter Ten
What is a problem that prevents people from privately solving externality problems?
Each party involved holds out for a better deal
Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?
The equilibrium quantity is greater than the socially optimal qauntity
Suppose that flower gardens create positive externality equal to $1 per plant. What is the relationship between equilibrium quantity and socially optimal quantity of plants grown?
The equilibrium quantity is less than socially optimal quantity
When the production of a good results in a positive externality, the social value curve is
above the demand curve, indicating that the total cost to society is equal to the private benefit
A negative externality is an
adverse impact on a bystander
A positive externality is a
benefit to someone other than the producer and consumer of the good
Two types of private solutions to the problem of externalities are
charities and the Golden Rule
If the government were to limit the release of air pollution produced by a glue factory to 75 ppm, the policy would be considered a
command-and-control policy
The difference between social cost and private cost is a measure of the
cost of an externality
When an externality is present, the market equilibrium is inefficient, and the equilibrium
does not maximize the total benefit to society as a whole
An externality results in an equilibrium that
does not maximize the total benefits to society
A positive externality arises when a person engages in an activity that has a beneficial effect on a bystander who
does not pay the person who causes the effect
Markets are often inefficient when negative externalities are present because social costs...
exceed private costs at the private market solution
Corrective taxes give
factory owners an economic incentive to reduce pollution
If an externality is present in a market, economic efficiency may be enhanced by
government intervention
If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will emit a
higher level of smoke than is socially efficient
Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
impose a tax on alcohol that is equal to the per-unit externality
A negative externality arises when a person engages in an activity that has an adverse effect on a bystander who
is not compensated by the person who causes the effect
A positive externality will cause a market to produce
less than is socially desirable
When a negative externality exists in a market, the cost to producers will be
less than the cost to society
Regulations to reduce pollution are a
more costly solution to society than a corrective tax
When a particular negative externality affects a very large number of people, it is likely that the solution to externalities suggested by the Coase theorem will
not work
An externality is the impact of one person's actions
on the well-being of a bystander
*Government should tac good with negative externalities and subsidize goods with
positive externalities
Taxes provide incentives for firms to adopt new methods to
reduce negative externalities
When producers operate in a market characterized by negative externalities, a tac that forces them to internalize the externality will give
sellers the incentive to account for external effects of their actions
In some cases, tradable pollution permits may be better than a corrective tax because the government can
set a maximum level of pollution using permits
According to the Coase theorem, private parties can solve the problem of externalities if the cost of bargaining is
small
Private contracts between parties with mutual interests can
solve some inefficiencies associated with positive externalities
What policy is the government most inclined to use when faced with a positive externality?
subsidies
