Chapter 9: Externalities and Public Goods
What are the social benefits of education?
- Higher individual wages - Decreased crime - More innovation - Better functioning society - Less reliance on social programs
What are some solutions to the Tragedy of the Commons?
- Private ownership (defined by the government) - Government regulation (Ex: fishing limits) - Tax on use of goods
How can we address inefficient outcomes?
- private solutions - government solutions
The Coase Theorem will will breakdown when ____________. (select all that apply)
- when property rights are not clearly defined - transaction costs become high - there are a large number of agents
The social cost of producing a good that generates negative externalities is the sum of the ________.
.private cost and external costs of production
What are the government solutions if private solutions do NOT work?
1.) Command- and - control: DIRECT regulation (enactment of laws) 2.) Market-based policies: provide incentives (taxes , subsidies)
What are the 4 main characteristics of public goods?
1.) Rival Goods 2.) Non-rival Goods 3.) Excludable Goods 4.) Non-excludable Goods
What are market failures?
Are situations in which market conditions distort incentives and create inefficiency.
is non-rival but excludable
Club Goods
States that private bargaining will result in an efficient allocation of resources.
Coase Theorem
states that private bargaining will result in an efficient allocation of resources
Coase Theorem
policymakers either directly restrict the level of production or mandate the use of certain technologies.
Command-and-Control Regulation
are a class of goods that are rival and non-excludable
Common Pool Resource Goods
are designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level.
Corrective Subsidies or Pigouvian Subsidies
named after economist Arthur Pigou, a pioneer in describing how taxes should work. A corrective tax is a tax designed to induce agents who produce externalities to reduce quantity toward the socially optimal level.
Corrective Taxes or Pigouvian Taxes
Must be paid for in order for you to consume them
Excludable Goods
What approach would be the least effective way to deal with free riders?
Exclude citizens from benefiting from the good or service.
_____________ cover situations when decision makers, focusing on their private benefits and costs ignore the impact of their actions on innocent bystanders.
Externalities
occurs when an economic activity has either a spillover cost to or a spillover benefit for a bystander.
Externality
When an individual does NOT pay for a good because it is non-excludable
Free-rider Problem
occurs when a person has no incentive to pay for a good because failure to pay doesn't prevent consumption.
Free-rider Problem
when the external effects of their actions are internalized, the general result is that the market equilibrium moves toward higher social well-being.
Internalizing Externality
Which of the following is not an externality?
Jordan has lung cancer from smoking cigarettes.
internalizes externalities by harnessing the power of market forces.
Market-based Regulatory Approach
An economic activity that has a negative spillover effect. Imposes an additional burden on buyers and sellers. Marginal Social Cost > Marginal Social Benefit
Negative Externality
Can be consumed, even if they are not paid for Ex: tornado sirens
Non-excludable Goods
once such goods are produced, it is not possible to exclude people from using them.
Non-excludable Goods
Which method is not a recommended approach supported by externality theory to deal with this problem?
Non-profit intervention
Goods that MORE than one person at a time can consume.
Non-rival Goods
meaning that one person's consumption does not preclude consumption by others.
Non-rival in Consumption
Which of the following best illustrates the tragedy of the commons?
Overfishing in public waters
exist when market transactions affect other people, but only through the market price.
Pecuniary Externalities
Does NOT have a social cost or social benefit. Exists when market transactions affect other people, but ONLY through the market price.
Pecuniary Externality
The subsidy necessary to make an economic agent increase consumption to the socially optimal level. (used to create/ incentivize) Ex: getting a flu shot
Pigouvian Subsidy
the tax necessary to incentivize a firm to produce the socially optimal level of output.
Pigouvian Tax
An economic activity that has a positive spillover effect Ex: getting your flu shot Marginal Social Benefit > Marginal Social Cost
Positive Externality
refers to any situation in which private citizens make contributions to the production or maintenance of a public good.
Private Provision of Good
ownership of property or resources
Property Right
are non-excludable and non-rival in consumption.
Public Goods
How do public goods differ from common pool resources? Explain.
Public goods are non-rival goods, while common pool resource goods are rival goods.
Goods that only ONE person can consume at a time
Rival Goods
What is the intent of a Pigouvian tax?
To induce producers of a negative externality to reduce production to the socially optimal level.
When common pool resources are overused
Tragedy of the Commons
occurs when a common resource is used too intensely
Tragedy of the Commons
are the costs of making an economic exchange.
Transaction Costs
How does a command-and-control policy differ from a market-based policy?
With a command and control policy, the government directly regulates the allocation of resources , while with a market- based policy, the government provides incentives for private organizations to internalize the externality.
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. A library's collection of e-books is a
club good
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. Radio Spectrum is a
common pool resource
The tragedy of the commons results when ___________.
common pool resources are overused.
An economic agent ________ when he accounts for the full costs and benefits of his actions.
internalizes an externality
Public goods are _________ in rivalry and _________ in excludability.
low; low
You are the County Commissioner of Hazard County. Jeb brings a complaint before you that Dwight's hog farm is creating a terrible odor. The noxious odor from Dwight's hog farm is a
negative externality
If this externality from Dwight's farm is left unaddressed, then Dwight will continue to _____________________ in regards to the social surplus optimum.
overproduce
The Coase Theorem states that ____________.
private bargaining will result in an efficient allocation of resources.
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. Health insurance is a _______________.
private good
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. A mosquito control program in a city is a
public good
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. A video on Youtube is a
public good
Why is it difficult for the market to deliver socially efficient quantities of goods like clean air or street lighting? These are examples of ____________ ; therefore, even if you _____________ for the good you still _______________. .
public goods; do not pay; get it to enjoy it
What is a solution to the Free-rider Problem?
the government makes paying for it mandatory (through paying taxes)