Market Failures
_______ costs involve the costs in terms of time, energy, and resources associated with searching out, negotiating, and completing a transaction.
transaction
Excludable (excludable in consumption)
A character of some goods or serivices wereby people can be prevented, or excluded, from consuming the good or service.
Nonexcludable (Nonexcludable in consumption
A characteristic of some goods or services whereby people cannot easily be prevented from consuming the good or service, even if they don't pay for it.
Private market
A market in which the demand and supply curves represent the benefits and costs to only the consumers and producers in the market.
______ rights involve the exclusive right to determine how a resource is used.
Blank 1: Property
The market interaction between buyers and sellers results in _______ and _______ efficiency.
Blank 1: allocative or allocation Blank 2: productive or production
When there is ________ and ______ efficiency, the market produces the right goods in the correct amounts using the fewest resources possible.
Blank 1: allocative or allocation Blank 2: productive or production
The marginal _______ of preventing pollution is measured in terms of reduced health expenses and improved living standards.
Blank 1: benefit or benefits
When goods and services are nonrivalrous, the ______ of a good or service by one person does not change the quantity available for consumption by others.
Blank 1: consumption, purchase, or use
In general, the optimal level of pollution to either prevent or to clean up occurs where the marginal benefit of preventing pollution ______ (one word) the marginal cost of preventing pollution
Blank 1: equals, equal, or matches
When _____ exist, outside intervention may be able to improve the market outcome increasing efficiency and economic surplus.
Blank 1: externalities
Markets characterized by either positive or negative ______ may result in an inefficient outcome.
Blank 1: externalities or externality
One of the justifications ______ for intervention in markets is the potential to improve the market outcome in markets characterized by externalities.
Blank 1: government, governmental, or outside
Many of the goods that are taxed by the government, such as cigarettes, gasoline, and alcohol generate ______ externalities.
Blank 1: negative
When a _____ externality exists, the socially optimal level of output will be less than that resulting from a private market.
Blank 1: negative
Cigarettes create ______ externalities. When the government earmarks revenues generated from cigarette taxes to help pay for public-health initiatives smokers are in effect helping pay for the ________ externality smoking creates.
Blank 1: negative Blank 2: negative
When a firm lacks the ability to prevent people from consuming a good or service, the good is called a good.
Blank 1: nonexcludable or non-excludable
Governments may use public policy to encourage the production of goods that generate _____ externalities.
Blank 1: positive
Governments may use public policy to encourage the production of goods that generate _______ externalities.
Blank 1: positive
When a _______ externality exists, the socially optimal level of output will be greater than that resulting from a ______ market.
Blank 1: positive Blank 2: private
______ supply is the supply of a good or service that considers only the private costs of its production.
Blank 1: private
The costs and benefits of how a resource is used may not be properly considered when _____ ______ are not clearly defined
Blank 1: property Blank 2: rights or right
Any good or service that is nonrivalrous and nonexcludable is a ______ good.
Blank 1: public
Ideally, encouraging the production of goods that generate positive externalities will result in the ______ optimal output level.
Blank 1: socially or social
Which of the following is most likely considered an economic bad?
Brussels sprouts Professional football Organic lawn care -Answer-Nuclear waste-
What would be a reason why the government would choose to tax the sale of cigarettes?
Cigarettes generate negative externalities. Reason: (Many of the items taxed by the government generate negative externalities. Tax an item with negative externalities seeks to decrease output to reduce the effect of the negative externality.)
Suppose you observe a market where wild-caught salmon is over consumed and farm-raised chicken in not over consumed. What might explain this?
It is easier to define and enforce the property rights of a chicken farm than a wild salmon fishery.
At the optimal level of pollution
MB = MC
Which of the following is most susceptible to poorly-defined or difficult-to-define/enforce property rights?
Sandals Music ------Ideas------- Farm land
Social Marginal Cost MC_social =MC_private +MC_external
The cost to society of producing an additional unit of a good or service; the sum of private marginal cost and external marginal cost.
Transaction Cost
The costs, in terms of time, energy, and resources, associated with searching out, negotiating, and completeing a transaction
Social Demand
The demand for a good or service that reflects both the private and external benefits of its consumption.
Suppose that the benefit to a community of cleaning a polluted lake is $150000 and it will cost $120000 to clean it. What can we expect to happen?
The lake is cleaned since the benefit exceeds the cost.
Suppose that the benefit to a community of cleaning a polluted lake is $100000 and it will cost $120000 to clean it. What can we expect to happen?
The lake remains polluted since the cost exceeds the benefit.
Socially Optimal Production/Consumption MC_social = MB_social
The level of production and consumption of a good or service such that the marginal social benefit is equal to the marginal social cost.
When a firm lacks the ability to prevent people from consuming a good or service the good is called
a nonexcludable good.
A good that is both nonrival and nonexcludable is called
a public good.
Market Failure
a situation in which a market fails to produce the efficient level of output that maximizes total surplus
Something we would rather have less of is called
an economic bad.
Public Good
any good or service that is both nonrival and nonexcludable
Private Good
any good or service that is rival and excludable
The marginal ______ of preventing pollution is the opportunity cost of the dollars spent.
cost
Ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal benefit of pollution prevention decreases?
equilibrium quantity decreases(MB shifts to the left)
One private solution to _____ is to clearly assign property rights to one person.
externalities
When _____ exist, the outcome observed may not be the efficient outcome.
externalities
_________ occur when property rights are not clearly defined.
externalities
When economists evaluate the prevention of crime instead of crime they are
flipping the analysis.
If excessive transaction costs of pollution prevention generate externalities the ______ tends to get involved.
government
From an economic perspective pollution
has both costs and benefits.
Coase Theorem
if a property right is well-defined and transaction costs are low, resources will naturally gravitate to their highest-valued use, regardless of who owns the property right
A system that allows a person a certain percentage of the allowable catch in an open-water fishery is called a(n)
individual transferable quota.
The lack of clear property rights for fish has led by many estimates to over fishing. A successful solution adopted by many countries is
individual transferable quotas.
When the market does not produce an output level that maximizes total surplus it is called a
market failure
When most people think about the term "public good" they usually think about goods provided by the government. However in economics the term "public good" refers to goods that are _____ and _____.
nonrivalrous nonexcludable
Private markets fail to provide the optimal amount of some goods such as public firework displays because:
private companies will have difficulty getting anybody to pay for them.
Private markets fail to provide the optimal amount of ____________ because they are non rival and non excludable.
public goods
Private markets fail to provide the optimal amount of public goods because:
public goods are non rival and non excludable.
Governments can provide ______ goods because they have the ability to force people to ______ for a good or service by collecting taxes.
public; pay.
The development of a new technology that changes a good from being nonexcludable to excludable would ________ the effect of the _______ problem.
reduce; free-rider
If the government taxes revenues in order to provide a public good it is attempting to
solve the free-rider problem.
In general low-income countries
spend less on pollution prevention than high-income countries.
In general, high-income countries
spend more on pollution prevention than low-income countries.
Private companies cannot provide public goods, because it doesn't have the ability to force people to pay for a goo or service by collecting
taxes
Externality
the benefit enjoyed by or cost imposed on a third party not directly involved in the production or consumption of a good or service
External Marginal Benefit
the benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service
Private Marginal Benefit
the benefit to the consumer of an additional unit of a good or service
Rival (Rival in consumption)
the characteristic of some goods and services whereby the consumption of the good or service by one person reduces the quantity available for consumption by others
Nonrival (norival in consumption)
the characteristic of some goods or services whereby the consumption of the good or service by one person does not diminish the amount available to someone else
External Marginal Cost
the cost of an additional unit of a good or service that is imposed on people other than the producer
Private Marginal Cost
the cost to the producer of an additional unit of a good or service
Private Demand
the demand for a good or service that considers only the private benefits of its consumption
Property Right
the exclusive right to determine how a resource is used
Social Marginal Benefit MB_social =MB_private + MB_external
the full benefit to society of consuming an additional unit of a good or service; the sum of private marginal benefit and external marginal benefit
If excessive transaction costs of pollution prevention generate externalities
the government often get involved.
Free-Rider Problem
the idea that when a good is nonexcludable, people will choose to consume the good without paying for it, making it difficult for private companies to profitably provide the good
If the marginal cost of a pollution prevention program exceeds the marginal benefit of the program
the program will not proceed.
The high cost of a pollution reduction program that increases access to cleaner water and reduces airborne industrial waste from factories could be offset by
the reduction in health-care expenses due to cleaner air.
Social Supply
the supply of a good or service that reflects both the private and external costs of its production
Private Supply
the supply of a good or service that reflects only the private costs of its production
negative externality
the uncompensated cost imposed on a third party not directly involved in the production or consumption of a good or service
Positive Externality
the unpaid enjoyed by a third party not directly involved in the production or consumption of a good or service
In general when people have ownership (or control) of a resource
they have incentive to improve it.
Ceteris paribus, what do you expect to happen to the equilibrium quantity of pollution prevented if the marginal cost of pollution prevention decreases?
Equilibrium quantity increases.
If the marginal cost of pollution increases, what will happen to the equilibrium quantity of pollution?
Equilibrium quantity of pollution increases
If the marginal benefit of pollution increases, what happens to the equilibrium quantity of pollution?
Equilibrium quantity of pollution increases. Reason: If MB increases, the MB curve will shift to the right, causing the equilibrium quantity of pollution to rise.
If the conditions of the Coase Theorem are not met what is the result?
Externalities
If we flip analysis of pollution to evaluate pollution prevention what is true of the marginal benefit (MB) and the marginal cost (MC) curves?
Pollution prevention has standard MB and MC curves.
Two groups have different uses for a local field. A bird watching society enjoys studying the ground-nesting swallows that visit each summer. A mountain bike camp prefers to use the field to build jumps and hold other events and receives a benefit of $1,000 from using the field. When it does, the activities scare away the birds and the bird-watching society faces a wealth reduction of $700. What is the optimal use of the field during the summers?
The mountain bike camp using the field to hold events Yes. It is their right and this right is more valuable to the camp than to the birdwatchers.
A good can be a public good and not be provided by the government.
True
Not all goods provided by the government are public goods.
True
Pollution is an example of an economic bad. As a result it causes negative externality in the economy.
True
Sometimes private markets can successfully provide public goods.
True
If property rights are clearly defined can the economy still experience externalities?
Yes. Transaction costs could be significant.
One private solution to externalities is to
clearly assign property rights to one side.
