Econ Chapter 12

Coase Theorem

If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities

Four Categories of Goods

Private Goods, Public Good, Quasi-Public Good, Common Resource

Common Resource

Rival but not excludable = only one person can consume (rival) it but you don't have to pay for it (nonexcludable)

Tragedy of Commons

The tendency for a common resource to be overused

Social Benefit

The total benefit from consuming a good or service, is equal to private benefit + positive externalities

When there is a positive externality in producing a good or service, ____________ of the good is produced at the equilibrium.

Too little

When there is a negative externality in producing a good or service, ___________ of the good is produced at the equilibrium.

Too much

Externality

a benefit or a cost that affects someone who is not directly involved in the production or consumption of a good or service - can be god or bad

Excludability

anyone that does not pay for the good may not consume it - Ex: big mac - McDonald's can exclude you from eating a big mac if you don't pay for it

Private benefit

benefit received by by the consumer of a good or service

Free-riding

benefitting from a good without paying for it

Public Good

both nonrival and nonexcludable - ex: court system, national defense; often supplied by the government rather than by private firms

Private Good

both rival and excludable - ex: big mac and running shoes

What a Pigovian does

eliminates deadweight loss and improves economic efficiency through taxes on negative externalities and subsidies on positive externalities

With no externalities, private benefit and social benefit are _________

equal

With no externalities, private cost and social cost are _________

equal

Quasi-Public Good

excludable but nonrival - if you don't pay for it you don't get it (excludable), but more than one person can consume it at the same time (nonrival) - ex: cable tv

Command-and-control approach

government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring them to install certain technologies or devices to limit pollution

Piguo argued that in order to deal with a negative externality in production, the government should _____________________________________________ or ________________________________________

impose a tax equal to the cost of the externality, or pay subsidy to consumers for the cost of the externality

Externalities and market failures result from _____________________________________________________

incomplete property rights or from difficulty enforcing property rights

If the marginal benefit of reducing pollution is less than the marginal cost, __________ reductions will make the society better off.

less

Best Level of Pollution reduction is where______________________________________________

marginal benefit from another ton of reduction is equal to the marginal cost of it

If the marginal benefit of reducing pollution is greater than the marginal cost, ___________ reductions will make society better off.

more

Private Cost

the cost borne by the producer of a good or service

Social Cost

the total cost of producing a good or service, is equal to the private cost + negative externalities

Rivalry

when one person consuming the good is the only one that can consume it - Ex: big mac -if you consume a big mac, no on else can