Chapter 10

_____ tax is designed to encourage people to take responsibility for the negative externalities they cause.

A corrective

Which of the following is a positive externality?

After measles vaccinations increase by 20%, the number of cases of measles falls by 35%.

What conditions must be met for private bargaining to be effective in resolving an externality?

Bargaining (transaction) costs must be low, and property rights must be clear.

Which of the following illustrates a positive externality?

The value of Maria's house rises when the city builds a park nearby, enhancing her view.

Which of the following is an example of a negative externality?

When Fazio parks his big truck at the grocery store, people in the cars on each side of his parking space have a hard time opening their car doors.

An external cost is:

a cost imposed by bystanders

The extra external cost imposed on bystanders from one extra unit is _____ cost.

a marginal external

When a market transaction has a beneficial effect on bystanders who were not involved in the transaction, this effect is called:

a positive externality

An externality is defined as:

a side-effect of an activity that affects bystanders whose interests are not taken into account.

Marginal social benefit is the term for:

all marginal benefits, no matter who gets them.

A side effect of an activity that affects bystanders whose interests are not taken into account is known as:

an externality

Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is:

an externality

The extra external benefit accruing to bystanders from one extra unit is the marginal _____ benefit.

external

A marginal external benefit is the:

extra benefit accruing to bystanders as a result of one extra unit of output.

A corrective subsidy:

incentivizes an increase in the output when positive externalities exist.

The socially optimal (efficient) outcome is the outcome that:

is most efficient for society as a whole, including for buyers, sellers, and bystanders.

A corrective tax designed to resolve a negative externality problem is typically set at an amount equal to the _____ cost.

marginal external

The supply curve of a firm is also its _____ cost curve.

marginal private

Marginal private cost plus marginal external cost equals _____ cost.

marginal social

The socially optimal (efficient) outcome occurs where the _____ benefit equals the _____ cost.

marginal social ; marginal social

By contrast with a market that produces the socially optimal output, a market with negative externalities will:

over produce

A market with negative externalities will tend to _____ compared to a market producing the socially optimal output.

overproduce and sell at a lower price

Marginal social cost equals marginal _____ cost plus marginal _____ cost.

private; external

All marginal benefits, no matter who gets them, are referred to as the marginal _____ benefit.

social

marginal private cost is the

the cost paid by the seller in producing one additional unit of output.