Chapter 10: Externalities and Public Goods

(Figure: Market) Use the graph to answer the question. The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. What are the socially optimal quantity and price in this market?

4; $8

(Figure: Market) Use the graph to answer the question. The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. If market forces prevail, this market will produce and sell _____ units of output at a price of _____.

6; $6

(Figure: Market 3) Use the graph to answer the question. The graph shows the marginal social cost, supply, and demand curves in the hand sanitizer market. At what quantity could the government set a quota to control this externality?

8

An externality is defined as:

A side-effect of an activity that affects bystanders whose interests are not taken into account

Which of the following would be both nonrival and nonexcludable?

A siren tornado warning system

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is:

An externality

What conditions must be met for private bargaining to be effective in resolving an externality?

Bargaining costs must be low, and property rights must be clear.

Which of the following statements describes the Coase Theorem?

If bargaining is costless, and property rights are clearly established and enforced, then externality problems can be solved through private bargaining.

By contrast with a market that produces the socially optimal output, a market with negative externalities will:

Overproduce

The outcome that is most efficient for society as a whole — including the interests of buyers, sellers, and bystanders — is the _____ outcome.

Socially optimal

A good has a free-rider problem when:

Someone can enjoy the benefits of the good without bearing the costs

The tragedy of the commons is the:

Tendency to overconsume common resources

Which of the following illustrates a positive externality?

The value of Maria's house rises when the city builds a park nearby, enhancing her view.

The marginal private benefit is the:

extra benefit enjoyed by the buyer of one extra unit of a good or service.

All of the solutions to externality problems involve:

getting buyers and sellers to consider marginal external costs and benefits.

A good is characterized as _____ when one person's use of the good does not reduce another person's ability to use the same unit of the good.

nonrival

The Rational Rule for Society is that society should produce another unit of a good if:

the marginal social benefit exceeds the marginal social cost.

Externalities tend to occur because decision makers consider _____ and do NOT consider _____.

their own costs and benefits; the effects of their actions on others