3070 module 14
Would you consider Wikipedia a public good? Wikipedia
. is a public good because it is nonrival and nonexcludable.
why markets fail
1. market power 2. consumers or producers have incomplete information 3. positive or negative externalities exist 4. good is a public good or common property resource 5. market outcome is considered inequitable
Calculate equilibrium price given the following demand and supply equations: Demand: P = 50 - 0.25Q Supply: Q = 20 + 1.5P
23.7
An example of a negative externality in consumption is
A passenger on a train littering
A lighthouse is a public good
A. because it doesn't cost any more to light the way for 105 ships than it does to light the way for 104 ships, but for no other reason. B. because there is no way to prevent those who haven't contributed to the lighthouse from seeing better because of it, but for no other reason.
Which of the following is most likely a private good?
Bicycles
Which of the following is an example of a public good?
City-wide flood control
Which of the following produces external benefits?
College students getting vaccinated against the flu
Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain.
Disagree. It is not that people and firms are unaware but, rather, that they are not forced to consider and account for all of the consequences of their actions.
When there is a common property resource, why is the marginal social cost greater than the marginal private cost of using the resource?
Each user considers only his own cost of using the resource but does not take into account the fact that his use reduces the benefit other users receive from using the resource.
What type of good is clean air?
Nonrival and nonexclusive
Simplify the following demand equation into the inverse demand equation where P = f(Q):
P = 50 - 0.25Q
Left alone, with no government interference, a profit-maximizing firm will produce emissions
at the horizontal intercept of the MCA curve
in monopolistic competition, deadweight loss is really
cost of variety
market outcome is considered inequitable
good is difficult to access - barriers
a firm will avoid producing additional admissions whenever the fee is
greater than the MAC
if households pay a fixed annual fee for trash disposal,
households have no incentive to cut back on the amount of garbage they generate.
Market power exists when a firm can:
sell its products above the existing competitive level and/or reduce the costs of its primary and support activities below the competitive level
Externalities may prevent competitive markets from operating efficiently because
the market may oversupply goods that generate negativenegative externalities on others.
The market for paper in a particular region in the United States is characterized by the following demand and supply curves: QD = 150,000 − 2,000P and QS = 45,000 + 2,000P where QD is the quantity demanded in 100-pound lots, QS is the quantity supplied in 100-pound lots, and P is the price per 100-pound lot. Currently there is no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost (MEC) associated with the production of paper is given by the curve MEC = 0.0006 QS. a. Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent
A. competitive conditions S = D B. re-write private demand and supply to include external costs as inverse demand functions MSB = MB = private demand S = supply + MEC
How should the government initially allocate transferable emissions permits among firms if it wants the target level of emissions to be achieved at minimum cost?
It doesn't matter how the permits are allocated as long as the firms can buy and sell them in a competitive market.
Any imperfection in the market mechanism that prevents optimal outcomes is known as
Market failure
External costs occur because
Private costs do not reflect the full costs to society
The market will overproduce goods that have external costs because
Producers experience lower costs than society
Why does free access to a common property resource generate an inefficient outcome?
The marginal private cost is less than the marginal social cost, which leads to the resource being overutilized.
Which of the following is NOT a negative externality for Natasha?
a hurricane that washes away her beach house
Corn flakes are
a rival good because if another person wants some corn flakes society has to use additional resources to produce corn flakes for that person.
incomplete information
a situation in which actors in a strategic interaction lack information about other actors' interests and/or capabilities - insurance markets - used car market
good is a public good or common property resource
can be made cheaply but is difficulty to prevent consumers from using (non-exlusive)
positive or negative externalities
consumption or production activity has an indirect impact on other activities that is not reflected directly in market prices
under a transferable emission permit system
firms with the lowest marginal cost will reduce emissions the most
A consumer or producer who does not pay for use of a nonexclusive good but expects others to pay is known as a
free rider.
which of the following is NOT a cause of market failure?
individuals acting according to their own self interest
Which of the following is a source of market failure?
market power
The four major sources of market failure are
market power, incomplete information, externalities, and public goods
Market power may prevent competitive markets from operating efficiently because
monopolies may provide output where price is greater than marginal cost
The optimum level of pollution emissions
occurs where the marginal external cost equals the marginal cost of abatement.
Incomplete information may prevent competitive markets from operating efficiently because
producers who lack information may produce too much of some products and too little of others.
common property rights
result in faster depletion of resources than do individual property rights.
As you move rightward on a marginal cost of abatement curve, emissions are
rising, and the cost of eliminating the marginal unit falls
The inverse demand curve for steel is P = 300−Q, where price P is dollars per ton and output Q is millions of tons of steel. The industry marginal cost of producing a ton of steel is MC = 17 + 2Q, which is the industry supply curve. The industry marginal external cost of the damage caused by pollution emitted during the production of one additional ton of steel is MEC = 99 + Q. The socially efficient amount of steel to produce is nothing million tons, and the socially efficient price is $nothing per ton. without government intervention?
socially efficient amount P = MSC without government intervention P = MC
To find the social marginal benefit of public goods, one needs to
sum the consumers' demand curves vertically.
to enforce the optimum level of emissions, a government could set an emissions fee, which would be
the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted
Common property resources like fish stocks in open waters tend to be overutilized because
the marginal social cost is greater than the private marginal cost
Public goods may prevent competitive markets from operating efficiently because
the market does not necessarily supply sufficient quantities of nonexclusive, non-rival goods
Refer to the figure at right. Which of the dashed lines corresponds to an emissions standard?
the vertical line
If households could be charged differently for different types of garbage,
there would be a change in the types of items that are disposed of as garbage.
When emissions are measured on the horizontal axis, the marginal cost of abating emissions is
upward sloping because a high level of emissions is cheap to attain and a low level of emissions is expensive to attain.