ECO202 Chp5
What is an externality?
-A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
What is a market failure?
-A market failure is when the market fails to produce the efficient level of output.
Which of the folowing is an example of a good or service having the effects of a negative externality?
-Cigarette smoking.
What is economic efficiency?
-Economic efficiency is where consumer surplus and producer surplus are maximized.
If the marginal cost of reducing a certain type of pollution is zero, should all of that pollution be eliminated? Briefly explain.
-Economic theory typically shows that it is not efficient to completely reduce pollution because the marginal cost of doing so typically exceeds the marginal benefit. However, one instance when pollution should completely be eliminated is when the marginal cost of reducing pollution is zero.
Your neighbor John has a barking dog what is true?
-It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders.
Refers to a situation in which the market fails to produce the efficient level of output.
-Market failure
When is market failure likely to arise?
-Market failure is likely to arise when it is difficult to enforce property rights. Your answer is correct. and Market failure is likely to arise when property rights are incomplete.
Which of the following is an example of a good or service having the effects of a positive externality?
-Medical research and Education.
When campers and hikers leave human food for bears to consume, that poses
-Negative externalities result from actions of individuals that impose external costs on others. When campers and hikers leave food that are consumed by the bears, they become aggressive and threaten the safety of others. Eventually they are removed from the park or destryed. **Thus the actions of some campers and hikers impose external costs on bears.
Ira Goldman, the inventor of the Knee Defender, used to keep the airline seat in front of you from reclining, argues that airlines have sold the space between two seats to the person occupying the seat, but also to the person in the seat in front of that seat by allowing the occupant of that seat to recline it. Assuming that Goldman is correct, according to the Coase theorem, does this airline policy make it impossible for passengers to achieve an economically efficient outcome with respect to the issue of reclining seats?
-No, because in this case, since the passengers are near each other and transactions cost are low, private bargaining can result in an efficient solution to the problem of externalities. **The airline policy does not make it impossible to achieve an economically efficient outcome with respect to reclining seats. The Coase theorem is the argument that if transactions cost are low, private bargaining will result in an efficient solution to the problem of externalities. Before an airline passenger wishes to recline his seat, he or she may ask for permission from the person seated behind. If the second passenger objects to the first passenger reclining his seat, a compromise could be reached; for example, a partial recline or a complete recline for only part of the flight. Or the second passenger could make a payment to the first passenger in exchange of the first passenger agreeing not to recline his seat.
An article in the Economist discussing the struggle among airline passengers over reclining seats offered the following observation: "Given that airlines are unlikely to increase the [distance between] their seats any time soon, better that all planes come with fixed, non-reclining chairs in the first place." Would the proposed change result in an economically efficient outcome?
-No, because in this case, the passengers are not able to negotiate and achieve an economically efficient outcome. **Replacing reclining airline seats with non-reclining seats would eliminate disputes between passengers over this issue, but it would not be an economically efficient outcome. Bargaining between passengers regarding how much seats are allowed to recline can make both parties better off. This outcome would not be possible if none of the seats were allowed to recline.
Would it be economically efficient to reduce the amount of crime to zero? Briefly explain.
-No. It would not be efficient to completely reduce crime because the marginal cost of doing so likely exceeds the marginal benefit.
Every year at the beginning of flu season, many people, including the elderly, get a flu shot to reduce their chances of contracting the flu. One result is that people who do not get a flu shot are less likely to contract the flu.
-Positive
The benefit received by the consumer of a good or service.
-Private benefit
The cost borne by the producer of a good or service.
-Private cost
The total benefit from consuming a good or service, including both the private benefit and any external benefit.
-Social benefit
If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society?
-The marginal benefit from reducing another ton of pollution should be equal to the marginal cost. **To maximize the net benefit to society, the marginal benefit from reducing another ton of pollution should be equal to the marginal cost.
Why should it be any more costly to clean up the last 10 percent of polluted air than to clean up the first 90 percent?
-The marginal cost of cleaning up air pollution is increasing because the air that is easiest to clean up is cleaned up first.
What trade-offs would be involved in cleaning up the final 10 percent?
-The opportunity cost of cleaning up air pollution.
Why do most economists favor tradable emissions allowances to the command-and-control approach to pollution?
-Tradable emissions allowances eliminate pollution at lower cost than the command-and-control approach.
When are we likely to see private solutions to the problem of externalities?
-When the parties involved have information about the externality, When transaction costs are low, and When the number of parties involved is small.
When campers and hikers leave human food for bears to consume, that poses
-a negative externality for the future campers and hikers since they may be attacked by aggressive bears who are searching for more human food.
A Pigovian tax is
-a tax to bring about an efficient level of output in the presence of externalities.
In big cities, city officials may favor installing more bike lanes because
-automobiles create negative externalities.
In another example, if you buy a college education and you have no property right that will enable you to prevent others from benefiting from your education, then your private benefit will likely ___________ the social benefit.
-be less than
The parties involved in an externality have an incentive to reach an efficient solution because
-both parties become better off when an efficient solution is reached.
The author of a newspaper article remarks that many economists "support Pigovian taxes because, in some sense, we are already paying them." A Pigovian tax is a government tax intended to
-bring about an efficient level of output in the presence of externalities.
One such negative externality associated with driving is due to the
-emissions from automobiles that create air pollution.
For example, if you buy a house and the government protects your right to exclusive use of that house, then your private benefit from the house will likely ___________ the social benefit of the house.
-equal
Some coal is mined by private companies on land owned by the federal government. Two economists writing in an opinion column argue, "The federal government should also take into account the economic consequences of burning coal when pricing this fuel. The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions." a. By "the added costs associated with the impacts of greenhouse gas emissions," the economists mean the
-external costs (negative externalities) such as global warming and health effects of pollution.
The Coase theorem states that
-if transaction costs are low, private bargaining will lead to an efficient solution to externalities.
The Coase Theorem states that
-if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
An individual producer or a consumer "internalizes an externality" when
-in their own decisions they take into account the external effects of their actions.
The price the federal government charges the coal companies should
-include this cost because including this cost makes the marginal social cost equal to the marginal social benefit and economic efficiency is achieved.
Without property rights (or if property rights are difficult to enforce), externalities are
-likely to result
In a sense, consumers in a market might be "paying" a Pigovian tax even if the government hasn't imposed an explicit tax if there are
-negative externalities in that market so that consumers are experiencing an external cost.
Mabel is an advocate for a "zero tolerance" policy regarding all illegal street drugs, including cocaine, marijuana, and heroin. Mabel has witnessed high crime and violence in her neighborhood and believes that only by arresting and prosecuting anyone who sells or uses illegal drugs will she and her neighbors and their children live without fear. The policy that Mabel endorses is
-not economically efficient because at some point the additional benefit from reducing drug use would be less than the additional cost.
Which one of the following factors helps determine the marginal benefit of reducing crime?
-personal injury from crime.
Which one of the following factors helps determine the marginal cost of reducing crime?
-resources devoted to courts.
When the article says that these reductions will result in "ever diminishing returns in terms of public health," it means that
-the additional public health gains will get smaller as there are more reductions in pollution.
The private benefit is ________, while the social benefit is ________.
-the benefit received by the consumer of a good or service; the total benefits from consuming the good or service
At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to
-the cost of the externality.
What are the sources of externalities and market failure?
-the difficulty of enforcing property rights in certain countries and incomplete property rights
Additional reductions in air pollution might come at "ever higher cost" because
-the marginal cost of additional pollution reduction rises as there is less pollution to reduce. **Additional reductions in air pollution might come at "ever higher cost" because the marginal cost of additional pollution reduction rises as there is less pollution to reduce. Initial reductions in pollution can occur at a lower marginal cost than eventual reductions in pollution.
What do economists mean by "an economically efficient level of pollution"? The economically efficient level of pollution is that amount where
-the marginal cost of pollution reduction equals the marginal benefit of pollution reduction.
The government should take action to reduce air pollution further if
-the marginal cost of reducing air pollution is less than the marginal benefit of reducing air pollution.
Externalities affect the economic efficiency of a market equilibrium by causing a difference between
-the private cost of production and the social cost of production Your answer is not correct and the private benefit of consumption and the social benefit of production.
A positive externality causes
-the social benefit from consuming the good to be greater than the private benefit.
Examples of transaction costs include
-the time required to negotiate an agreement, the cost of monitoring an agreement, and the cost of drafting a contract or agreement.
A producer or a consumer will internalize an externality because
-they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.
The private cost of producing a good will differ from the social cost
-when there is an externality, such as acid rain generated by the production of electricity.
When will the private benefit from consuming a good differ from the social benefit?
-when there is an externality, such as second-hand smoke generated by the consumption of cigarettes and when there is an externality, such as fewer diseases generated by the consumption of vaccines.
