Market Failures

Social demand is the demand for a good or service that reflects both the ____ and ____ benefits of its consumption,

private or internal; external, social, or public

The market interaction between buyers and sellers results in ____ and _____ efficiency

production; allocative

Externalities occur because

property rights are not clearly assigned to one party.

In 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.

Private supply is

the supply of a good or service that reflects only the private costs of its production.

At the optimal level of pollution

MB = MC

Social Demand

The demand for a good or service that reflects both the private and external benefits of its consumption.

Property Right

The exclusive right to determine how a resource is used.

Social Marginal Benefit

The full benefit to society of consuming an additional unit of a good or service; the sum of private marginal benefit and external marginal benefit. MBsocial = MBprivate + MBexternal

Free-Rider Problem

The idea that when a good is nonexcludable, people will choose to consume the good without paying for it, making it difficult for private companies to profitably provide the good.

One private solution to externalities is to

clearly assign property rights to one side.

Markets characterized by either positive or negative _____ may result in an inefficient outcome.

externalities

One of the justifications for government intervention in markets is the potential to improve on the market outcome in markets characterized by

externalities

One private solution to _____ is to clearly assign property rights to one person.

externalities

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

Public goods are

nonrival and nonexcludable

_____ costs involve the costs in terms of time energy and resources associated with searching out negotiating and completing a transaction.

transaction

Excludable

A characteristic of some goods or services whereby people can be prevented, or excluded, from consuming the good or service. Sometimes referred to as excludable in consumption. Ex: Companies that produce excludable goods can prevent people from consuming their products unless they pay for the right to do so.

Nonexcludable

A characteristic of some goods or services whereby people cannot easily be prevented from consuming the good or service, even if they don't pay for it. Sometimes referred to as nonexcludable in consumption. Ex: A fireworks display is nonexcludable because anyone can see the show once the rockets are launched.

Private Market

A market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market.

Market Failure

A situation in which a market fails to produce the efficient level of output that maximizes total surplus.

Public Good

Any good or service that is both nonrival and nonexcludable.

Private Good

Any good or service that is rival and excludable.

What would be a reason why the government would choose to tax the sale of cigarettes?

Cigarettes generate negative externalities.

When economists flip analysis of a "bad" what approach do they take?

Instead of evaluating the "bad" the evaluate prevention of the "bad."

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.

_____ demand is the demand for a good or service that reflects both the private and external benefits of its consumption.

Social

_____ supply is the supply of a good or service that reflects both the private and external costs of its production.

Social

Externality

The benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service.

External Marginal Benefit

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.

Private Marginal Benefit

The benefit to the consumer of an additional unit of a good or service.

Rival

The characteristic of some goods and services whereby the consumption of the good service by one person reduces the quantity available for consumption by others. Sometimes referred to as rival in consumption.

Nonrival

The characteristic of some goods or services whereby the consumption of the good or service by one person does not diminish the amount available to someone else. Sometimes referred to as nonrival in consumption.

External Marginal Cost

The cost of an additional unit of a good or service that is imposed on people other than the producer.

Social Marginal Cost

The cost to society of producing an additional unit of a good or service; the sum of private marginal cost and external marginal cost. MCsocial = MCprivate + MCexternal

Private Marginal Cost

The cost to the producer of an additional unit of a good or service.

Transaction Costs

The costs, in terms of time, energy, and resources, associated with searching out, negotiating, and completing a transaction.

Private Demand

The demand for a good or service that considers only the private benefits of its consumption.

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.

Socially Optimal Production/Consumption

The level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost. MCsocial = MBsocial

When a firm lacks the ability to prevent people from consuming a god or service the good is called

a nonexcludable good.

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.

A good that is both nonrival and nonexcludable is called

a public good.

When there is ______ and ______ efficiency, the market produces the right goods in the correct amounts using the fewest resources possible.

allocative; production

Something we would rather have less of is called

an economic bad.

When a firm uses price to prevent people from consuming a good or service the good is called

an excludable good.

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.

When goods and services are nonrivalrous, the _____ of a good or service by one person does not change the quantity available for consumption by others.

consumption

The marginal _____ of preventing pollution is the opportunity cost of the dollars spent.

cost

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

If some people can be prevented or excluded from consuming a good or service then that good or service is called:

excludable

When _____ exist outside intervention may be able to improve the market outcome increasing efficiency and economic surplus.

externalities

When _____ exist, outside intervention may be able to improve the market outcome increasing efficiency and economic surplus.

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 people consume a nonexcludable good without paying for it, it is called the _____ problem.

free-rider

If excessive transaction costs of pollution prevention generate externalities the _____ tends to get involved.

government

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.

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

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

When some people cannot be prevented or excluded from consuming a good or service, that good or service is sald to be:

nonexcludable.

When externalities exist

outside intervention may be able to improve the market outcome increasing efficiency and economic surplus

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

Any good or service that is rivalrous and excludable is a _____ good.

private

Private markets fail to provide the optimal amount of some goods such as public firework displays because:

private companies will have difficulty getting anybody to pay for them.

The demand for a good or service that considers only the private benefits of its consumption is called

private demand

Social supply is the supply of a good or service that reflects both the _____ and _____ costs of its production.

private or internal; external or public

The costs and benefits of how a resource is used may not be properly considered when _____ are not clearly defined.

property rights

Externalities occur when

property rights are not clearly defined.

One potential role of government is to provide _____ goods (goods which are nonrival and nonexcludable in nature) that otherwise would be underprovided or not provided at all.

public

Private markets fall to provide the optimal amount of _____ because they are non rival and non excludable.

public goods

Governments can provide _____ goods because they have the ability to force people to _____ for a good or service by collecting taxes.

public; pay

The development of a new technology that changes a good from being nonexcludable to excludable would _____ the effect of the _____ problem.

reduce; free-rider

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.

When the consumption of a good or service by one person diminishes the amount available to someone else the good or service is said to be

rivalrous,

A private good is any good or service that is _____ and _____.

rivalrous; excludable

Ideally encouraging the production of goods that generate positive externalities will result in the _____ optimal output level.

socially

If the government taxes revenues in order to provide a public good it is attempting to

solve the free-rider problem.

In general low-income countries

spend less on pollution prevention than high-income countries.

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.

Private demand is

the demand for a good or service that considers only the private benefits of its consumption.

A property right is

the exclusive right to determine how a resource is used.

When people consume a nonexcludable good without paying for it it is called

the free-rider problem.

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.

In general when people have ownership (or control) of a resource

they have incentive to improve it

The social marginal benefit is the benefit:

to society of consuming an additional unit of a good or service.

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 panibus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal cost of pollution prevention decreases?

Equilibrium quantity increases.

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

Which of the following is most susceptible to poorly-defined or difficult-to-define/enforce property rights?

Ideas

Coase Theorem

If a property right is well-defined and transaction costs are low, resources will naturally gravitate to their highest-valued use, regardless of who owns the property right.

Which of the following is most likely considered an economic bad?

Nuclear waste

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.

____ supply is the supply of a good or service that considers only the private costs of its production.

Private

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

Social Supply

The supply of a good or service that reflects both the private and external costs of its production.

Private Supply

The supply of a good or service that reflects only the private costs of its production.

Negative Externality

The uncompensated cost imposed on a third party not directly involved in the production or consumption of a good or service. Ex: If you live near a large factory that emits lots of noise and bad odors. you've experienced a negative externality.

Positive Externality

The unpaid benefit enjoyed by a third party not directly involved in the production or consumption of a good or service. Ex: If you've ever walked past a bakery in the morning and smelled fresh- baked bread, you've experienced a positive externality. You didn't pay to produce or consume the bread, but you derived a benefit from it anyway.

involve(s) the costs in terms of time energy and resources associated with searching out negotiating and completing a transaction.

Transaction costs

A good can be a public good and not be provided by the government.

True

Not all goods provided by the government are public goods.

True

Sometimes private markets can successfully provide public goods.

True

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 marginal _____ of preventing pollution is measured in terms of reduced health expenses and improved living standards.

benefit

Well-defined property rights, low transaction costs, and resources that naturally gravitate toward the highest-valued function describe the

coase theorem.