EC Pt. 3
Both public goods and common resources are
non-excludable
Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called
transaction costs
We can measure the profits earned by a firm in a competitive industry as
(P-ATC) x Q
Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible (ii) set the price of the product as high as possible (iii) maximize profit
(iii) only
The local fire department wants to buy some new equipment at a cost of $300,000. If a human life is worth $10 million, the equipment is worth buying if it reduces the risk of someone dying in a fire over the life of the equipment by at least
3 percentage points
Which of the following is a characteristic of a competitive market?
Buyers and sellers are price takers
How long does it take a firm to go from the short tun to the long run?
It depends on the nature of the firm
Exist when the social cost of a good exceeds the private cost of a good
Negative externality
Exist when the social value of a good exceeds the private value of a good
Positive externality
The tax on gasoline is an example of
a corrective tax
A firm that wants to achieve economies of scale could do so by
assigning limited tasks to its employees, so they can master those tasks
The cost of producing the typical unit of output is the firm's
average total cost
When MC exceeds ATC,
average total cost must be rising
The cost that parties incur in the process of agreeing to and following through on a bargain
transaction costs
Goods that are rival in consumption but not excludable would be considered
common resources
A tax produced to induce private decision makers to take account of the social costs that arise from a negative externality
corrective (pigovian) taxes
Which of the following represents the firm's long-run condition for exiting a market?
exit if P<ATC
The uncompensated impact of one person's actions on the well being of a bystander
externality
Private markets fail to account for externalities because
decision makers in the market fail to include the costs of their behavior to third parties
If a competitive firm is currently producing a level of output in which marginal cost exceeds marginal revenue, then
decreasing output would increase the firm's profit
A positive externality has 2
demand curves, so 2 values to consider
When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing
diminishing marginal product
In the long run Irene's Ice Cream Parlor incurs total costs of $2,500 when output is 1,250 units and $4,000 when output is 1,500 units. For this range of output, Irine's exhibits
diseconomies of scale
Excessive fishing occurs because
each individual fisherman has little incentive to maintain the species for the next year
For a firm in a perfectly competitive market, the price of the good is always
equal to marginal revenue
One economically efficient way to eliminate the Tragedy of the Commons is to
establish private ownership of the resource
Negative externalities lead markets to produce
greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels
A difference between explicit and implicit cost is that
implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do
In the short run, a firm operating in a competitive industry will shut down if price is
less than average variable cost
The cost of producing an additional unit of output is the firm's
marginal cost
The average total cost curve intersects
marginal cost at the minimum of average total cost
When a good is excludable,
people can be prevented from using the good
The provision of public goods gives rise to
positive externalities
A streetlight is a
public good
A free rider is a person who
receives the benefit of a good but avoids paying for it
If one person's use of a good diminishes another person's enjoyment of it, the good it
rival in consumptions
A negative externality has 2
supply curves, so 2 costs to consider
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, is called
the Coase theorem
The overuse of a common resource relative to its economically efficient use is called
the Tragedy of the commons
Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick andJane bears the cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that
the current situation is efficient
An externality is
the uncompensated impact of one person's actions on the well-being of a bystander
Because market participants in a positive externality dont fully capture the benefits of their behavior,
they engage in LESS of the behavior than is socially optimal
Because market participants in a neg. ext. do not bear the full cost of their behavior,
they engage in MORE of the behavior than is socially optimal
Without government intervention, public goods tens to be
underproduced and common resources tend to be over-consumed
In the long run, each firm in a competitive industry earns
zero economic profits