ECN 150 Chap 10

When the government intervenes in markets with external costs, it does so in order to:

protect the interests of bystanders.

All of the following would be government solutions to externality problems EXCEPT:

public sector charities.

An efficient equilibrium occurs when:

social costs equals social benefits.

A free market with an external benefit is ______, and one with an external cost is ______.

inefficient; inefficient

An external cost:

is a cost paid by people other than the producer or consumer trading in the market.

A Pigouvian tax:

is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss.

An external benefit in a market will cause the market to produce:

less than is socially desirable.

When external benefits are significant:

market output is too low.

When external costs are present in a market:

market prices send incorrect signals.

An efficient equilibrium occurs whenever:

social surplus is maximized.

A free market void of externalities ______ social surplus.

sometimes maximizes

When external benefits are present in a market:

the market outcome is inefficient.

When patients or farmers choose whether to use more antibiotics, they compare:

their private benefits with the market price.

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

too high; too low

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

False

An example of a transaction cost for a shirt is the price you pay for a shirt.

False

An external cost is built into the market price of a good and thus paid by the consumers.

False

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

False

When externalities are present in a market, social surplus is maximized.

False

When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market.

I and III only

A(n) ______ subsidy is a subsidy on a good with external benefits.

Pigouvian

A(n) ______ is a tax on a good with external costs.

Pigouvian tax

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Your neighbor's dog routinely gets out of his yard and does his "business" in your yard.

A Pigouvian subsidy should be set equal to the amount of the external benefit.

True

An externality is either an external cost or external benefit that spills over to bystanders.

True

An external cost is:

a cost paid by people other than the consumer or the producer trading in the market.

Transaction costs:

can keep private parties from solving externality problems.

A free market with externalities ______ social surplus.

does not maximize

Tradable pollution permits:

have helped reduce sulfur dioxide and carbon emissions.

Antibiotics may be ________ since people consider only the ________.

overused; private and not the social costs of consumption

An external cost is a cost paid by:

people other than the consumer and the producer trading in the market.

An external benefit is a benefit received by:

people other than the consumers or producers trading in the market.