Micro Ch 10

Private solutions to externalities are not always possible because: a. the government has a vested interest in the outcome and will always intervene. b. private parties are simply not good at negotiating problems related to externalities. c. there are sometimes too many people involved for them to be able to reach a negotiated solution. d. externalities affect other people who are not participating in the market.

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Which of the following statements is true regarding externalities? a. Both negative and positive externalities lead to inefficient outcomes in markets. b. Negative externalities lead to inefficiencies in markets, but positive externalities do not. c. Negative externalities occur when a good harms those who consume it. d. Positive externalities occur when a good benefits those who consume it.

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Negative externalities cause the market to trade a quantity: a. greater than the optimal quantity. b. smaller than the optimal quantity. c. that is exactly the optimal quantity. d. of zero.

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Markets with negative externalities do not trade the optimal quantity because: a. the government fails to provide markets with all the information needed for an efficient outcome. b. producers fail to consider the external cost in their decision making process. c. consumers fail to consider the external benefit in their decision making process. d. bystanders are not important members of society.

B

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

internalizing the economy

altering incentives so that people take account of the external effects of their actions

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

Coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

externality

the uncompensated impact of one person's actions on the well-being of a bystander