Public Goods and Externalities
What is the Nash Equilibrium in this situation?
$0, $0
Which of the following are ways in which the government promotes positive externalities?
- Spending on research and development. - Protection of intellectual property.
Which of the following are examples of positive externalities?
- You are a bird watcher, and your neighbor puts up birdhouses and gardens to attract birds. - Investments in private education raise your country's standard of living.
social benefits:
the sum of private benefits and external benefits
Which of the following are examples of negative externalities?
- Your neighbor paints her house a hideous color. - Trash dumped upstream flows downstream right past your house.
Suppose a city releases 16 million gallons of raw sewage into a nearby lake. The table below shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.) Using the information in the table, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. What is the optimal level of sewage for this city?
4 million gallons
What is the dominant strategy for player A?
Do not contribute
What is the dominant strategy for player B?
Do not contribute
Which of the following market has positive externalities?
Honey production because bees also help pollinate fruit trees and increase fruit crop yield. The social benefit include the private benefit for the beekeepers as well as the external benefit for the tree growers who do not keep the bees but still benefit from them.
The Brock and Stack families live by the river and their homes are protected by a levee or dam built and maintained by the local government. What best describes their situation?
The Brock family are free riders because they benefit from the levee but did not pay their property taxes.
Which of the following statements identify a COST and a BENEFIT of environment protection, respectively?
The added cost for businesses to comply with the regulation; a healthier population.
The country of Hazeland plans to reduce the levels of lead in drinking water by 1 part per billion every year for the next 5 years. Which statement will be true, given this situation?
The cost will be highest and the benefit the lowest in the last year of the program.
Which is an example of command and control regulation?
The government imposes limits the amount of pollutant that can be released and charges fines to the firms who exceed those limits.
Which of the following would be classified as a positive externality?
The increase in neighborhood property values from converting a derelict empty lot to a public vegetable garden.
market failure:
When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure
non-rivalrous:
a good that does not get used up, meaning that if one person uses the public good, another can also use it
non-excludable goods:
a good that no one is excluded from using
externality:
a market exchange that affects a third party who is outside or "external" to the exchange; sometimes called a "spillover"
marketable permit program:
a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms
positive externality:
a situation where a third party, outside the transaction, benefits from a market transaction by others
negative externality:
a situation where a third party, outside the transaction, suffers from a market transaction by others
free ride:
a song written by Dan Hartman and performed by The Edgar Winter Group. The single, engineered by Jim Reeves, was a top 20 U.S. hit in 1973, hitting number 14 on the Billboard Hot 100 Chart.
effluent (or pollution) charge:
a tax imposed on the quantity of pollution that a firm emits; also called a pollution tax
Which of the following market has negative externalities?
an oil spill off the coast of Alaska hurt the fish farming industry
external benefits (or positive externalities):
beneficial spillovers to a third party of parties, who did not purchase the good or service that provided the externalities
positive externalities:
beneficial spillovers to a third party or parties
effluent standard:
environmental regulation that limits pollution to a certain maximum quantity
The tragedy of the commons refers to the fact that
fish in common water areas tend to be overfished.
An individual who wants others to pay for public goods, but plans to use those goods without paying, is often referred to as a ________.
free rider
A public good is a good that is ________, and thus is difficult for market producers to sell to individual consumers.
nonexcludable and nonrivalrous
In order for a good to be classified as ________ , when one person uses the good, others are also able to use it.
nonrivalrous
Flood control is a good example of a public good because
people who did not pay cannot be prevented from receiving the good.
Scotty invents a new technology to teleport objects that revolutionizes the transportation industry. This technology has
positive externalities because the benefits of this new technology for society are greater than the private benefit for Scotty.
private costs:
production costs incurred by a company
There has been a lot of talk lately of self-driving cars, but farmers have already been making good use of self-driving tractors for more than a decade—in part due to a partnership between John Deere and NASA's Jet Propulsion Laboratory (JPL) on GPS receivers. A long partnership with the Jet Propulsion Laboratory helped John Deere spread self-driving tractor capabilities all over the world, lowering costs and improving yields for farmers while popularizing the idea of precision agriculture. Funding research programs such as NASA (National Aeronautics and Space Administration) ________.
promotes technological innovations that can benefit many sectors in the economy.
spillover:
see externality
The Kim family had to close their trout fish farm because a recent chemical spill in the river killed all the fish. The market of this chemical product represents a market failure because
the activity in the chemical product market generated cost for third parties. The chemical market fails because it has imposed costs to the Kim family (and others) who are not directly involved in the chemical market and therefore the production of chemicals has greater cost for society than the market recognizes.
Assuming the Brown family cannot pay their mortgage, the property rights to the house would now belong to the bank or mortgage company. Assume a broken pipe leads to flooding in the neighbor's basement. The payment of damages would be the responsibility of
the bank or mortgage company.
private benefits:
the benefits a person who consumes a good or service receives, or a new product's benefits or process that a company invents that the company captures
marginal private benefits (MPB):
the benefits obtained by consumers from purchasing additional units of some product; shown by the market demand curve
intellectual property:
the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions
social costs:
the costs of production plus the external costs that are passed on to society
A new government policy requires ChemUnited to reduce their release of pollutant in the local river or pay a $15,000 tax per year. ChemUnited calculates that it will cost $25,000 to comply with the new policy. It follows that
the government policy will be ineffective for ChemUnited because cost of complying is higher than the cost of not complying.
property rights:
the legal rights of ownership on which others are not allowed to infringe without paying compensation
If large numbers of individuals choose to behave as free riders, ________.
the public good may never be provided
A pollution charge is a form of tax imposed on
the quantity of pollution that a firm emits.
The population in a 20 mile radius from the chemical plant of ChemIndustry Inc. experience higher than average upper respiratory diseases and therefore higher medical expenses. In the chemical product market
the social cost of the chemical product would be higher than the private cost of the product and the market would inefficient.
marginal social benefits (MSP):
the sum of the private and external benefits when additional units of some product are purchased; also known as the social demand curve
The population in a 20 mile radius from the chemical plant of ChemIndustry Inc. experience higher than average upper respiratory diseases and therefore higher medical expenses. Assuming no government intervention in the chemical product market,
the supply curve for chemical products is higher than it should be because external costs are not included and is therefore resulting in overproduction of chemical product compared to the optimal production level.
Markets fail when
they reach an equilibrium that is inefficient. Markets fail when the equilibrium reached has a price and quantity that are not the most efficient, the product may be overproduced or under produced and therefore resources not properly allocated throughout the economy.
free rider:
those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided
In a market with a few firms with various levels of pollutant release, the appropriate regulatory approach would be ________.
tradable permits
private rates of return:
when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account
social rate of return:
when the estimated rates of return go primarily to society; for example, providing free education