MicroEconomics - Pearson - Chapter 5 Concept Check and Vocabulary
Refer to the graph to the right. How much reduction in sulfur dioxide can be considered economically efficient?
8.5 million tons
What is an externality?
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Public good
A good that is both non-rival and non-excludable
Private good
A good that is both rival and excludable
Common Resource
A good that is rival but not excludable
Market Failure
A situation in which the market fails to produce the efficient level of output.
Which of the following is an example of a good or service having the effects of a positive externality?
Answer: Both a and b. A. Medical research. B. Education.
Externality
Benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Transaction Costs
Costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
True or False - In the case where transactions costs are zero, if the victims of pollution could legally enforce the right of their property not to be damaged, the amount of pollution reduction would increase.
False
True or False - Market failure refers to a situation in which a market ceases to exist.
False
Private Cost
The cost borne by the producer of a good or service.
Property Rights
The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.
Externalities affect the economic efficiency of a market equilibrium by causing a difference between
both a and b. A. the private cost of production and the social cost of production. B. the private benefit of consumption and the social benefit of production.
Refer to the graph on the right: If the reduction of sulfur dioxide is increased from 7.0 million to 8.5 million tons, the total benefit of this change is equal to ________ and the total cost of this change is equal to ________.
$375 million; $255 million
When is market failure likely to arise? (Check all that apply.)
** Market failure is likely to arise when property rights are incomplete. ** Market failure is likely to arise when it is difficult to enforce property rights.
Four Categories of Goods
1) Private Good 2) Public Good 3) Quasi-Public Goods 4) Common resource
Refer to the graph to the right. What is the optimal quantity of this public good?
15 units
What is a market failure?
A market failure is when the market fails to produce the efficient level of output.
Command-and-control approach
A policy that involves the government imposing quantitive limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.
Private Benefit
Benefit received by the consumer of a good or service.
Free Riding
Benefiting from a good without paying for it
What are the sources of externalities and market failure?
Both (a) and (b). a) the difficulty of enforcing property rights in certain countries b) incomplete property rights
Which of the folowing is an example of a good or service having the effects of a negative externality?
Cigarette smoking.
What is economic efficiency?
Economic efficiency is where consumer surplus and producer surplus are maximized.
Which of the following statements is correct?
Even though the dollar value of the total benefits of reducing SO2 emissions was much greater than the costs, the SO2 cap-and-trade system had effectively ended by 2013.
Negative Externality (examples of:)
Examples of Negative Externality are: * Generation of electricity * Polution
Positive Externality (examples of:)
Examples of Positive Externality are: * Medical Research * College Education
Pigovian taxes and subsidies
Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities. ** Eliminates dadweight loss and improves economic efficiency ** Can lower other taxes
Refer to the graphs. Which graph best describes the move from an inefficient use of a common resource to an efficient use of it?
Graph / Panel D.
When there is a ______________ _______________________ in consuming a good or service, too little of the good or service will be produced at market equilibrium.
Positive Externality
Refer to the graphs. What procedure does this series of graphs show?
The construction of market demand for a public good.
What is the focus of a command-and-control approach to reducing pollution?
The government imposing quantitative limits on the amount of pollution firms are allowed to generate.
If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society?
The marginal benefit from reducing another ton of pollution should be equal to the marginal cost.
Excludability
The situation in which anyone who does not pay for a good cannot consume it
Rivalry
The situation that occurs when one person consuming a unit of a good means no one else can consume it.
Tragedy of the Commons
The tendecy for a common resource to be overused.
Social Cost
The total cost of producing a good or service including both private cost and external cost.
What is the tragedy of the commons?
The tragedy of the commons refers to the tendency for a common resource to be overused.
Social Benefit
Total benefit from consuming a good or service, including both the private benefit and external benefit.
True or False - Critics who claim that tradable emission allowances are equivalent to the government issuing licenses to pollute are ignoring the economic ideas that resources are scarce and trade-offs exist.
True
When will the private benefit from consuming a good differ from the social benefit?
both a and b. A. when there is an externality, such as second-hand smoke generated by the consumption of cigarettes. B. when there is an externality, such as fewer diseases generated by the consumption of vaccines.
When there are many people involved in attempting to reach an agreement, the transactions costs are often _______ than the net benefits from reducing an externality. In such cases, a private solution to an externality problem _______ feasible.
higher; is not
The Coase theorem states that
if transaction costs are low, private bargaining will lead to an efficient solution to externalities.
The private benefit is ________, while the social benefit is ________.
the benefit received by the consumer of a good or service; the total benefits from consuming the good or service
A positive externality causes
the social benefit from consuming the good to be greater than the private benefit.
The private cost of producing a good will differ from the social cost
when there is an externality, such as acid rain generated by the production of electricity.