Chapter Ten

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What is a problem that prevents people from privately solving externality problems?

Each party involved holds out for a better deal

Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

The equilibrium quantity is greater than the socially optimal qauntity

Suppose that flower gardens create positive externality equal to $1 per plant. What is the relationship between equilibrium quantity and socially optimal quantity of plants grown?

The equilibrium quantity is less than socially optimal quantity

When the production of a good results in a positive externality, the social value curve is

above the demand curve, indicating that the total cost to society is equal to the private benefit

A negative externality is an

adverse impact on a bystander

A positive externality is a

benefit to someone other than the producer and consumer of the good

Two types of private solutions to the problem of externalities are

charities and the Golden Rule

If the government were to limit the release of air pollution produced by a glue factory to 75 ppm, the policy would be considered a

command-and-control policy

The difference between social cost and private cost is a measure of the

cost of an externality

When an externality is present, the market equilibrium is inefficient, and the equilibrium

does not maximize the total benefit to society as a whole

An externality results in an equilibrium that

does not maximize the total benefits to society

A positive externality arises when a person engages in an activity that has a beneficial effect on a bystander who

does not pay the person who causes the effect

Markets are often inefficient when negative externalities are present because social costs...

exceed private costs at the private market solution

Corrective taxes give

factory owners an economic incentive to reduce pollution

If an externality is present in a market, economic efficiency may be enhanced by

government intervention

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will emit a

higher level of smoke than is socially efficient

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

impose a tax on alcohol that is equal to the per-unit externality

A negative externality arises when a person engages in an activity that has an adverse effect on a bystander who

is not compensated by the person who causes the effect

A positive externality will cause a market to produce

less than is socially desirable

When a negative externality exists in a market, the cost to producers will be

less than the cost to society

Regulations to reduce pollution are a

more costly solution to society than a corrective tax

When a particular negative externality affects a very large number of people, it is likely that the solution to externalities suggested by the Coase theorem will

not work

An externality is the impact of one person's actions

on the well-being of a bystander

*Government should tac good with negative externalities and subsidize goods with

positive externalities

Taxes provide incentives for firms to adopt new methods to

reduce negative externalities

When producers operate in a market characterized by negative externalities, a tac that forces them to internalize the externality will give

sellers the incentive to account for external effects of their actions

In some cases, tradable pollution permits may be better than a corrective tax because the government can

set a maximum level of pollution using permits

According to the Coase theorem, private parties can solve the problem of externalities if the cost of bargaining is

small

Private contracts between parties with mutual interests can

solve some inefficiencies associated with positive externalities

What policy is the government most inclined to use when faced with a positive externality?

subsidies


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