Chapter 10 - Externalities

An efficient equilibrium occurs when:

social costs equals social benefits

A viable government solution to an external benefit is a:

subsidy to the party incurring the cost.

How can a government help to minimize an externality? (positive & negative)

By: command & control (not very effective), taxes & subsidies, tradable allowances.

Tradable Allowances

Congress sets the total amount of allowances (effective)

Why are markets with positive externalities still inefficient?

Markets with externalities are not at equilibrium. Whenever a market is not at equilibrium, it is not maximizing gains from trade.

Efficient Equilibrium

Not MKT =, cars would factor in pollution, cheaper vaccines

Negative Externalities

People who have cars and don't consider pollution

Which answer suggests that private markets can be effective in dealing with external costs and benefits?

The Coase Theorem

Positive Externalities

Vaccines

When is it easiest to find a solution to an externality?

When transaction costs are low and property rights are well-defined.

If a market solution provides greater marginal social benefits than marginal social costs, then:

a positive externality is present.

External Cost

cost paid by other people who aren't the consumer or producer (bystanders)

Social Cost

cost to everyone (private cost + external cost)

In the case of an external cost, marginal private cost:

is less than marginal social cost for all quantity levels.

Which statement is TRUE?

To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry.

Private Cost

cost paid by the consumer or producer

Externalities

external costs or benefits that fall on bystanders

The external benefit of honey production is internalized when:

farmers pay beekeepers to pollinate their crops.

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

higher than the marginal cost to antibiotic sellers.

A free market with an external benefit is ______, and one with an external cost is ______.

inefficient; inefficient

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

low, and the product will be overproduced.

When external costs are present in a market:

market prices send incorrect signals.

In the presence of significant externalities, a market equilibrium maximizes:

nothing

Fewer people get flu shots than is efficient because:

people usually perceive that the private cost of getting flu shots is higher than their private benefit.

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

taxing sardine tins at a rate of $1 per tin.

Market solutions to externality problems are more likely to occur when:

the costs of reaching an agreement are low and property rights are well-defined.

Command & Control

the government orders firms to use (or make) less to reduce external costs (not effective)

When patients or farmers choose whether to use more antibiotics, they compare:

their private benefits with the market price.

Command and control methods do not always produce the most efficient outcomes because:

they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior.

When external benefits are present, the market price is ________; however, when external costs are present, the market price is ________.

too high; too low

Private solutions to externalities are MOST likely to occur when there are:

well-defined property rights and low transaction costs.