ECON1010 Module 3

Will a free market economy emit the optimal quantity of pollution?

The cost of pollution is paid by society, as a result firms will over pollute

Pollution charge

a tax imposed on the quantity of pollution emitted

Pigouvian tax

a tax which attempts to reduce external costs

The long run is best defined as a time period during which...

all inputs can be varied

Marketable permits

allows a firm to emit a certain amount of pollution, permits can be bought and sold

Both emissions taxes and tradable emissions permits: - are usually less effective than are environmental standards - are efficient cost-minimizing methods of pollution reduction - work only if they are coupled with environmental standards - encourage more pollution

are efficient cost-minimizing methods of pollution reduction

Economies of scale refers to the fact that

as production is scaled up, the average cost of producing a good decreases

Economies of scale show that

average costs to produce a good decrease as quantity produced increases

When an individual owns the property rights supply equals

both marginal private and social costs

Why do consumers buy more at lower prices with the income effect theorem?

changes in purchasing power as the price of a good falls

As a result of a pigouvian tax consumers pay a ______ price and producers ______ output

consumers pay a higher price producers lower output

When the price of a normal good increases, consumers will ________ their consumption of that good

decrease their consumption because the good has become relatively more expensive compared to other goods (opposite is true for inferior goods)

Variable costs often show

diminishing marginal returns

T or F Diminishing marginal utility means that consumption of an additional unit decreases utility

false

T or F Numerical utility values are relatively easy to calculate

false

Variable costs are costs that

increase as quantity produced increases

Diseconomies of scale

increasing average costs

External benefits are associated with the production of batteries, without government regulation the market will: - produce too many batteries - price batteries at less than the marginal social benefit - price batteries above the marginal social cost - price batteries at less than the marginal social cost

price batteries at less than the marginal social benefit

The Coase theorem states that

private citizens can reach efficient solutions to externalities if the transaction costs, associated with making deals, are relatively low

The law of diminishing returns explains

that the marginal cost curve often decreases at first and then starts to increase

Why do consumers buy more at lower prices with the total effect theorem?

the combination of the income and substitution effect (changes in purchasing power and the good becoming cheaper to relative goods)

One thing that distinguishes the short run and the long run is...

the existence of at least one fixed input

Why do consumers buy more at lower prices with the substitution effect theorem?

the good becoming cheaper relative to other goods

Utility is a measure of

the satisfaction people receive from their choices

Why does total cost increase faster as output increases

there are diminishing returns to labor

T or F If you eat a slice of pizza that gives you food poisoning your utility will likely decrease

true

Property rights

well defined property rights establish who has to pay compensation when infringement occurs

An example that does NOT illustrate an external cost is: - the smoke nuisance of a factory - land defilement from strip mining - a spreading patch of weeds on your next-door neighbor's lawn - zoning restrictions on your property

zoning restrictions on your property