AP Micro Economics ch. 14-16

There is little incentive for an individual firm to voluntarily internalizae its external or spillover costs because to do so would

put it at a competitive disadvantage compared to rival prducers

In a market for pollution rigts, an increase in demand would:

raise the price of pollution rights, but leave the quantity unchanged

the creation of a market for pollution rights would

stimulate the search for pollution-reducing technologies

An important problem in evaluating public projects through the use of benefit-cost analysis is that:

spillover costs and benefits associated with such projects may be difficult to measure

Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even though it is Federally subsidized. This illustrates:

the moral hazard problem

What does MRP measure?

Difference in total revenue associated with another unit of input. Relationship between wage rates and the quantity of labor demanded. Increase in total revenue resulting from the hire of one more unit of labor.

A purely competitive employer of resource A will maximize profits by producing where the price of A =

MRP (general rule MRC=MRP but in perfect competition MRC is also price)

Tragedy of the Commons

a situation within a shared-resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action.

The Coase theorem states that:

bargaining between private partiws will remedy externality problems where property rights are clearly defines, the number of people involved are few, and bargaining costs are small.

the socially optimal amount of pollution abatement occurs where society's marginal

benefit of abatement equals its marginal cost of abatement

the creation of markets for pollution rights would provide:

both an incentive not to polllute and revenue which could be devoted to environmental imporvement

Benefit-cost analysis attempts to:

compare the benefits and costs associated with any economic project or activity

MRP is also the firm's resource

demand curve

The demand for airline pilots is __________ from the demand for air travel.

derived

the marginal benefit to society of reducing pollution declines with increases in pollution abatement because of the law of

diminishing marginal utility

Ed, Mike, and Scott are the only three people in a community and Ed is willing to pay $20 for the 5th unit of a public good; Mike, $15, and Scott, $25. Government should produce the 5th unit of the public good if the marginal cost is:

less than $60

Where there is asymmetric information between buyers and sellers

markets can produce inefficient outcomes

In the market for used cars"

new cars lose much value immediately when buyers drive them off dealers' lots because potential used-car buyers cannot easily distinguish the defective lemons" from the high- quality cars.

Public Good

non-depletable and non-excludable

Suppose that Mich and Cher are the only two members of society and are willing to pay $10 and $8 respectively, for the 3d unit of a public good. Also, assume that the marginal cost of the 3d unit is $17. We can conclude that:

the 3d unit should be produced.

a positie externality or spillover benfit occurs when:

the benefits associated with a product exceed those accruing to people who consume it

a negative externality or spillover cost occurs when:

the total cost of producing a good exceeds the costs borne by the producer

as it applies to insurance, the moral hazard problem is the tendency for

those who buy insurance to take less precaution in avoiding the insured risk

clarly defined property rights and liability rules reduce negative spillovers byL

threatening the perpetrators with lawsuits