micro - ch 4 & 5

excludability

refers to the ability of the seller to exclude a person from consuming the product if the person does not pay for it.

Coase theorem

some negative or positive externality situations can be addressed through individual or private bargaining and without government intervention.

private goods

such as a soft drink, is characterized by rivalry and excludability

public goods

such as national defense or street lighting, is characterized by nonrivalry and nonexcludability.

An externality is a cost or benefit accruing to an individual or group—a third party—that is external to the market transaction

True

Changes in technology or changes in society's attitudes toward pollution can affect the optimal amount of pollution abatement.

True

Consumer surplus is a utility surplus that reflects a gain in total utility or satisfaction.

True

Demand-side market failures arise when demand curves do not reflect consumers' full willingness to pay for a product.

True

If demand and supply reflected all the benefits and costs of a product, the equilibrium output of a competitive market would be identical with its optimal output.

True

If demand and supply reflected all the benefits and costs of producing a product, there would be economic efficiency in the production of the product.

True

In a competitive product market and in the absence of negative externalities, the supply curve reflects the costs of producing the product.

True

One solution to the negative externalities caused by pollution is to create a market for pollution rights in which the negative externalities from pollution are turned into private costs.

True

Political pressure can make it difficult to find and implement an economically efficient solution to an externality problem.

True

Private goods are characterized by rivalry and excludability and public goods are characterized by nonrivalry and nonexcludability.

True

Producer surplus is the difference between the actual price a producer receives for a product and the minimum price the producer would have been willing to accept for the product.

True

Subsidizing the firms producing goods that provide positive externalities will usually result in a better allocation of resources.

True

When determining the collective demand for a public good, you add the prices people are willing to pay for the last unit of the public good at each possible quantity demanded.

True

When negative externalities are involved in the production of a product, more resources are allocated to the production of that product and more of the product is produced than is optimal or most efficient.

True

Consumer surplus and price are directly or positively related.

False

Consumer surplus is the difference between the minimum and maximum prices a consumer is willing to pay for a good.

False

Efficiency losses are increases in the combined consumer and producer surplus.

False

If a society has marginal costs of $10 for pollution abatement and the marginal benefit of pollution abatement is $8, to achieve an optimal amount of the pollution the society should increase the amount of pollution abatement.

False

One way for government to correct for a negative externality from the production of a product is to increase the demand for the product.

False

Taxes that are imposed on businesses that create an externality will lower the marginal cost of production and increase supply.

False

The Coase theorem suggests that government intervention is required whenever there are negative or positive externalities.

False

The higher the actual price, the less the amount of producer surplus.

False

The optimal allocation of a public good is determined by the rule that marginal cost (MC) equals marginal revenue (MR).

False

There is an underallocation of resources to the production of a commodity when negative externalities are present.

False

When the marginal benefit of a public good exceeds the marginal cost, there will be an overallocation of resources to that public good use.

False

quasi-public goods

Government also provides quasi-public goods that have large external benefits. Although these goods (such as education or highways) can be provided by the private market because people can be excluded from obtaining them if they do not pay for them, if left to be provided by the private market, these goods will be underproduced or underconsumed. Government provides access to these quasi-public goods at a reduced cost to encourage their production or consumption and increase the external benefits for society.

efficiency losses (or deadweight losses)

If quantity is less than or greater than the equilibrium quantity or most efficient level, there are efficiency losses (or deadweight losses) to buyers and sellers. The efficiency losses reduce the maximum possible size of the combined consumer and producer surplus.

market failures

an occur when competitive markets do not allocate the scarce resources to their most valued or best use. These market failures can be of two types.

demand-side market failures

arise when the consumers' full willingness to pay for a good or service is not fully captured in the demand for the good or service. For example, people will not have much incentive to pay to view outdoor fireworks because they can usually still view the fireworks without paying.

externality

is a spillover from a market transaction to a third party that did not purchase the product. The spillover to the third party can be either positive or negative depending on the conditions.Negative externalities occur when the cost for the product does not reflect the full cost of producing it from society's perspective, Positive externalities are outcomes that benefit third parties without these parties paying for the benefits

consumer surplus

is the difference between the maximum price consumers are willing to pay for a product and the actual (equilibrium) price paid.

producer surplus

is the difference between the minimum price producers are willing to accept for a product and the actual (equilibrium) price received.

marginal-cost-marginal-benefit rule

is used to make the decision. Additional resources should be devoted to a project only so long as the marginal benefits to society from the project exceed society's marginal costs. In this case, the total benefits minus the total costs (net benefits) are at a maximum amount.

rivalry

means that consumption of the product by a buyer eliminates the possibility of consumption of that product by another person.

nonrivalry

means that once a public good is consumed by one person, it is still available for consumption by another person

nonexcludability

means that those individuals who do not pay for the public good can still obtain the benefits from the public good.

supply-side market failures

often result from a situation where a business firm does not have to pay the full cost of producing a product. For example, a power plant that uses coal may not have to pay completely for the emissions it discharges into the atmosphere as part of the cost of producing electricity.

cost-benefit analysis

to decide if it should use resources for a project and to determine the total quantity of resources it should devote to a project.

free-rider problem

where once a producer provides a public good everyone, including nonpayers, can receive the benefits.