ECON Ch. 10

Bob and Tom live in a dorm room. Bob values playing loud music at $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music, and there are no transactional costs?

Tom will pay Bob between $100 and $150, and Bob will stop playing loud music

Positive Externality

a situation when a person's action have a beneficial impact on a bystander

Negative Externality

a situation when a person's actions have an adverse impact on a bystander

A negative externality generates

a social cost curve that is above the supply curve (private cost curve) for a good

A positive externality generates

a social value curve that is above the demand curve (private value curve) for a good

Corrective Tax

a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

Internalizing an Externality

altering incentives so that people take into account the external effects of their actions

When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of

an attempt to internalize a positive externality

Which of the following is true regarding tradable pollution permits and corrective taxes?

corrective taxes and tradable pollution permits create an efficient market for pollution

What would not be considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?

costs incurred to reduce the pollution

A negative externality (that has not been internalized) causes the

equilibrium quantity to exceed the optimal quantity

Bob and Tom live in a dorm room. Bob values playing loud music at $100. Tom values peace and quiet at a value of $150. Which of the following statements is true?

it is efficient for Bob to stop playing loud music, regardless of who has the property right to the level of sound

A positive externality (that has not been internalizeD) causes the

optimal quantity to exceed the equilibrium quantity

To internalize a positive externality, an appropriate public policy response would be to

subsidize the good

To internalize a negative externality, an appropriate public policy response would be to

tax the good

Transaction Costs

the costs that parties incur in the process of agreeing and following through on a bargain

The most efficient pollution control system would ensure that

the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Social Cost

the sum of private costs and external costs

Externality

the uncompensated impact of one person's actions on the well-being of a bystander

According to the Coase Theorem, private parties can solve the problem of externalities if

there are no transaction costs

The government engages in an industrial policy

to internalize the positive externality associated with technology-enhancing industries