MicroEconomics - Pearson - Chapter 5 Concept Check and Vocabulary

Refer to the graph to the right. How much reduction in sulfur dioxide can be considered economically​ efficient?

8.5 million tons

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.

Public good

A good that is both non-rival and non-excludable

Private good

A good that is both rival and excludable

Common Resource

A good that is rival but not excludable

Market Failure

A situation in which the market fails to produce the efficient level of output.

Which of the following is an example of a good or service having the effects of a positive​ externality?

Answer: Both a and b. A. Medical research. B. Education.

Externality

Benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Transaction Costs

Costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

True or False - In the case where transactions costs are​ zero, if the victims of pollution could legally enforce the right of their property not to be​ damaged, the amount of pollution reduction would increase.

False

True or False - Market failure refers to a situation in which a market ceases to exist.

False

Private Cost

The cost borne by the producer of a good or service.

Property Rights

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

Externalities affect the economic efficiency of a market equilibrium by causing a difference between

both a and b. A. the private cost of production and the social cost of production. B. the private benefit of consumption and the social benefit of production.

Refer to the graph on the right: If the reduction of sulfur dioxide is increased from 7.0 million to 8.5 million​ tons, the total benefit of this change is equal to​ ________ and the total cost of this change is equal to​ ________.

$375 million;​ $255 million

When is market failure likely to​ arise? ​(Check all that​ apply.)

** Market failure is likely to arise when property rights are incomplete. ** Market failure is likely to arise when it is difficult to enforce property rights.

Four Categories of Goods

1) Private Good 2) Public Good 3) Quasi-Public Goods 4) Common resource

Refer to the graph to the right. What is the optimal quantity of this public​ good?

15 units

What is a market​ failure?

A market failure is when the market fails to produce the efficient level of output.

Command-and-control approach

A policy that involves the government imposing quantitive limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

Private Benefit

Benefit received by the consumer of a good or service.

Free Riding

Benefiting from a good without paying for it

What are the sources of externalities and market​ failure?

Both​ (a) and​ (b). a) the difficulty of enforcing property rights in certain countries b) incomplete property rights

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.

Which of the following statements is​ correct?

Even though the dollar value of the total benefits of reducing SO2 emissions was much greater than the​ costs, the SO2​ cap-and-trade system had effectively ended by 2013.

Negative Externality (examples of:)

Examples of Negative Externality are: * Generation of electricity * Polution

Positive Externality (examples of:)

Examples of Positive Externality are: * Medical Research * College Education

Pigovian taxes and subsidies

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities. ** Eliminates dadweight loss and improves economic efficiency ** Can lower other taxes

Refer to the graphs. Which graph best describes the move from an inefficient use of a common resource to an efficient use of​ it?

Graph / Panel D.

When there is a ______________ _______________________ in consuming a good or service, too little of the good or service will be produced at market equilibrium.

Positive Externality

Refer to the graphs. What procedure does this series of graphs​ show?

The construction of market demand for a public good.

What is the focus of a​ command-and-control approach to reducing​ pollution?

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

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.

Excludability

The situation in which anyone who does not pay for a good cannot consume it

Rivalry

The situation that occurs when one person consuming a unit of a good means no one else can consume it.

Tragedy of the Commons

The tendecy for a common resource to be overused.

Social Cost

The total cost of producing a good or service including both private cost and external cost.

What is the tragedy of the​ commons?

The tragedy of the commons refers to the tendency for a common resource to be overused.

Social Benefit

Total benefit from consuming a good or service, including both the private benefit and external benefit.

True or False - Critics who claim that tradable emission allowances are equivalent to the government issuing licenses to pollute are ignoring the economic ideas that resources are scarce and​ trade-offs exist.

True

When will the private benefit from consuming a good differ from the social​ benefit?

both a and b. A. when there is an​ externality, such as​ second-hand smoke generated by the consumption of cigarettes. B. when there is an​ externality, such as fewer diseases generated by the consumption of vaccines.

When there are many people involved in attempting to reach an​ agreement, the transactions costs are often​ _______ than the net benefits from reducing an externality. In such​ cases, a private solution to an externality problem​ _______ feasible.

higher; is not

The Coase theorem states that

if transaction costs are​ low, private bargaining will lead to an efficient solution to externalities.

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

A positive externality causes

the social benefit from consuming the good to be greater than the private benefit.

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.