Econ Chapter 12
Coase Theorem
If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities
Four Categories of Goods
Private Goods, Public Good, Quasi-Public Good, Common Resource
Common Resource
Rival but not excludable = only one person can consume (rival) it but you don't have to pay for it (nonexcludable)
Tragedy of Commons
The tendency for a common resource to be overused
Social Benefit
The total benefit from consuming a good or service, is equal to private benefit + positive externalities
When there is a positive externality in producing a good or service, ____________ of the good is produced at the equilibrium.
Too little
When there is a negative externality in producing a good or service, ___________ of the good is produced at the equilibrium.
Too much
Externality
a benefit or a cost that affects someone who is not directly involved in the production or consumption of a good or service - can be god or bad
Excludability
anyone that does not pay for the good may not consume it - Ex: big mac - McDonald's can exclude you from eating a big mac if you don't pay for it
Private benefit
benefit received by by the consumer of a good or service
Free-riding
benefitting from a good without paying for it
Public Good
both nonrival and nonexcludable - ex: court system, national defense; often supplied by the government rather than by private firms
Private Good
both rival and excludable - ex: big mac and running shoes
What a Pigovian does
eliminates deadweight loss and improves economic efficiency through taxes on negative externalities and subsidies on positive externalities
With no externalities, private benefit and social benefit are _________
equal
With no externalities, private cost and social cost are _________
equal
Quasi-Public Good
excludable but nonrival - if you don't pay for it you don't get it (excludable), but more than one person can consume it at the same time (nonrival) - ex: cable tv
Command-and-control approach
government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring them to install certain technologies or devices to limit pollution
Piguo argued that in order to deal with a negative externality in production, the government should _____________________________________________ or ________________________________________
impose a tax equal to the cost of the externality, or pay subsidy to consumers for the cost of the externality
Externalities and market failures result from _____________________________________________________
incomplete property rights or from difficulty enforcing property rights
If the marginal benefit of reducing pollution is less than the marginal cost, __________ reductions will make the society better off.
less
Best Level of Pollution reduction is where______________________________________________
marginal benefit from another ton of reduction is equal to the marginal cost of it
If the marginal benefit of reducing pollution is greater than the marginal cost, ___________ reductions will make society better off.
more
Private Cost
the cost borne by the producer of a good or service
Social Cost
the total cost of producing a good or service, is equal to the private cost + negative externalities
Rivalry
when one person consuming the good is the only one that can consume it - Ex: big mac -if you consume a big mac, no on else can