Chapter 5 Public goods, externalities and public policy MICRO FINAL EXAM

private benefit

the benefit recieved by the consumer of a good or service. It is equal to social benefit plus any external benefit such as the benefit to other resulting from your college education

d2-d1 at each output level

the size of marginal external benefits can be determined by

s2

true marginal social cost of generating electricity.

Coase theroem

(A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel.​ (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation​ (A) and situation​ (B

False

A competitive market achieves economic_ efficiency by maximizing the sum of consumer surplus and producer surplus if there are externalities in production and consumption.

Hayden + Madison = MarketD

A small town provides a fireworks​ display, which is a public​ good, every fourth of July. For​ simplicity, assume the town only has two​ residents: Hayden and Madison. Their demands for the fireworks display are illustrated in the figure to the right. Construct the market demand curve for this public good.

Coase theroem

All parties in an agreement must accept a reasonable agreement.

True

An externality causes a difference between the private cost of production and the social cost, or the private benefit from consumption and the social benefit.

impose a tax to make the industry bear the external costs it creates.

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. An efficient way to get the firm to produce the socially optimal output level is

true

Externalities and market failure will result from the difficulty of enforcing property rights.

Pigouvian Taxation

Externalities arise in an unregulated market because the economic agents who cause external harms or benefits do not pay for them. That is, external harms or benefits are not accounted for in the market price. Solution: taxation or subsidy induces economicagents to "internalize the externality." Taxation is appropriate for negative externalities. Subsidy is appropriate for positive externalities. Pigouvian taxes increase efficiency and generate tax revenue!

efficiency

Externalities interfere with ___________ of a market equilibrium

Tradeable emission permits

First, government needs to set the "right" level of pollution. Second, pollution may occur in "hot spots", i.e., some areas may have very high pollution while other areas may have very low pollution.

four categories of goods

Goods and services can be divided into four categories on the basis of whether people can be excluded from consuming them and whether they are rival in consumption. A good or service is rival in consumption if one person consuming a unit of a good means that another person cannot consume that unit.

private goods

Goods that display rivalry and excludability in​ consumption?

pollution as a negative externality

However, in competitive equilibrium, the price is PMarket and the quantity is QMarket. The level of output is too high from a social perspective. A deadweight loss results

Pigouvian Taxation

If government imposes a tax equal to the marginal external cost of pollution, utilities will internalize the externality. The supply curve will shift up from S1 to S2. The new equilibrium quantity will fall to the efficient level.

avoiding private cost and cause a social cost

If you burn your trash in the back yard in spite of regulations against​ it, then you are

Negative externality

In air pollution there is a ________ when people with asthma bear a cost even though they were not involved in the buying or selling of electricity that caused air pollution. When there is ________ the market may produce a quantity of the good or service that is greater than the efficient amount. E.g Acid Rain on homes affected by

Private costs

In producing electricity, ________ _________ are borne by the utility but some external costs of pollution are borne by people who are not customers of the utility. The social cost of producing electricity is the sum of the private cost plus the external cost.

The assembly problem

May occur as the result of the _________—some projects require several contiguous parcels of land whose ownership is disbursed. e.g., large-scale construction projects, casinos This creates the incentive for owners to hold out in an effort to extract monopoly rents.

true

Negative externalities imply there is overproduction, while positive externalities imply the existence of underproduction

True

P efficient and Q efficient is efficient.

true

Provided the existence of an externality, competitive equilibrium will not result in the efficient level of output.

False

Q market and P market is efficient

$(Pe-Pg)

Refer to the diagram to the right. One way to obtain the economically efficient amount of chicken pox vaccinations is for governments to subsidize these vaccinations. What is the size of the per minus vaccination Pigovian subsidy that the government must provide to internalize the external​ benefits

Government can impose restrictions

Suppose a common resource long dashwood in a public forest long dash is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being​ overused?

true

Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining LOADING...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution​ reduction? If the electric utility and the people suffering the effects of the​ utility's pollution can​ bargain, then making the utility legally liable for the damages from its pollution will not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

education as a positive externality

The marginal social benefit of a __________ is greater than the marginal private benefit to college students

False. Larger

The smaller the externality, the greater the size of the deadweight loss. True or false?

social benefit

The total benefit from consuming a good or service including both the private and any external benefit. It is equal to social benefit plus any external benefit such as the benefit to other resulting from your college education.

social cost

The total cost of producing a good or service including both the private cost and any external cost. It is equal to the private cost plus any external cost such as cost of pollution.

true

When many people are involved, the transactions costs exceed the net benefits from reducing the externality. In that case a private solution to an externality problem is not feasible

true

When economic surplus is a r a maximum, the net benefit to society from the production of the good or service is at a maximum.

true

With an equilibrium quantity of q efficient, economic surplus is at a maximum so the equilibrium is efficient.

public goods

a good that is both non-rival and non-excludable. Most often supplied by government rather than by private firms. The class example is national defense. People can free-ride these goods

private goods

a good that is both rival and excludable such as food clothing haircuts. Cannot be consumed without buying them.

Command and control

a policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution control devices. E.g., requiring car manufacturers to equip cars with catalytic converters. However, if firms have different costs associated with pollution abatement, there is no reason to believe this will coincide with the social optimum.

true

because of externalities the market will provide too much electricity

market failure

due to externalities, the efficient level of output may not occur in either the market for electricity or the market for college educations. This is an example of situation in which the market fails to produce the efficient level of output.

True

equilibrium is economically efficient if economic surplus which is the sum of consumer surplus + producer surplus is at a maximum.

public goods

goods that may not be produced at all unless the government produces them.

Common resources

if a good is rival but not excludable. Forest land in many developing countries. If one person cuts down the tree no one else can use the tree. People often over use these goods. Ex. tuna in the ocean and public pasture land.

coase theorem

if transactions costs are​ low, private bargaining will result in an efficient solution to the problem of externalities.

Externality

is a benefit of a cost that affects someone who is not directly involved in the production or consumption of a good or service.When there are_________ government intervention may increase economic efficient and enhance the well-being of society.

Command and control approach

is not efficient because firms can have different costs of reducing pollution.

Optimal Quantity of a good

is produced where the sum of consumer surplus and producer surplus is maximized, which occurs where the demand curve intersects the supply curse.

s1

is the market supply curve and represents only the PRIVATE COSTS that utilities have to bear in generating electricity. Represents the marginal cost of producing a good or service.

transactions cost

may make private solutions to reduce negative externalities no longer feasible. Time to negotiate an agreement, and other costs of negotiation, drawing up a binding contract, purchasing insurance and monitoring the agreement.

positive externality

medical research can provide this because people who are not involved in the production are benefited either way. When there is ______ the market may produce a quantity of the good that is less than the efficient amount. E.g College education because people benefit from an educated society.

free rider

one who waits for other s to produce a good and then enjoys its benefits without paying for it.

property rights

refers to the rights individuals or business have to the exclusive use of their property including the right to buy or sell it. Sometimes property rights are not fully enforced by government

quasi-public goods

some goods are excludable but not rival. Cable television. People who do not pay for cable do not receive it but one person's watching it doesn't affect other peoples watching it. Same goes for tolls. Anyone who doesn't pay toll doesn't get on the road but one person using the road doesn't interfere with someone else using the road.

tragedy of the anti commons

when numerous economic agents have divided property rights in a particular resource, they will not act in accordance with the group's best interest. e.g., Klondike Big Inch Land Promotion

true

when there is negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium

Coase theory

when transaction costs are low and property rights are well defined, the allocation of resources will be efficient regardless of the initial assignment of property rights. relies on the notion of reciprocal causation. An agent's externality causes harm. But another agent must be present in order to beharmed.