Chapter 9: Externalities and Public Goods

What are the social benefits of education?

- Higher individual wages - Decreased crime - More innovation - Better functioning society - Less reliance on social programs

What are some solutions to the Tragedy of the Commons?

- Private ownership (defined by the government) - Government regulation (Ex: fishing limits) - Tax on use of goods

How can we address inefficient outcomes?

- private solutions - government solutions

The Coase Theorem will will breakdown when​ ____________. ​(select all that​ apply)

- when property rights are not clearly defined - transaction costs become high - there are a large number of agents

The social cost of producing a good that generates negative externalities is the sum of the​ ________.

.private cost and external costs of production

What are the government solutions if private solutions do NOT work?

1.) Command- and - control: DIRECT regulation (enactment of laws) 2.) Market-based policies: provide incentives (taxes , subsidies)

What are the 4 main characteristics of public goods?

1.) Rival Goods 2.) Non-rival Goods 3.) Excludable Goods 4.) Non-excludable Goods

What are market failures?

Are situations in which market conditions distort incentives and create inefficiency.

is non-rival but excludable

Club Goods

States that private bargaining will result in an efficient allocation of resources.

Coase Theorem

states that private bargaining will result in an efficient allocation of resources

Coase Theorem

policymakers either directly restrict the level of production or mandate the use of certain technologies.

Command-and-Control Regulation

are a class of goods that are rival and non-excludable

Common Pool Resource Goods

are designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level.

Corrective Subsidies or Pigouvian Subsidies

named after economist Arthur Pigou, a pioneer in describing how taxes should work. A corrective tax is a tax designed to induce agents who produce externalities to reduce quantity toward the socially optimal level.

Corrective Taxes or Pigouvian Taxes

Must be paid for in order for you to consume them

Excludable Goods

What approach would be the least effective way to deal with free​ riders?

Exclude citizens from benefiting from the good or service.

_____________ cover situations when decision makers, focusing on their private benefits and costs ignore the impact of their actions on innocent bystanders.

Externalities

occurs when an economic activity has either a spillover cost to or a spillover benefit for a bystander.

Externality

When an individual does NOT pay for a good because it is non-excludable

Free-rider Problem

occurs when a person has no incentive to pay for a good because failure to pay doesn't prevent consumption.

Free-rider Problem

when the external effects of their actions are internalized, the general result is that the market equilibrium moves toward higher social well-being.

Internalizing Externality

Which of the following is not an​ externality?

Jordan has lung cancer from smoking cigarettes.

internalizes externalities by harnessing the power of market forces.

Market-based Regulatory Approach

An economic activity that has a negative spillover effect. Imposes an additional burden on buyers and sellers. Marginal Social Cost > Marginal Social Benefit

Negative Externality

Can be consumed, even if they are not paid for Ex: tornado sirens

Non-excludable Goods

once such goods are produced, it is not possible to exclude people from using them.

Non-excludable Goods

Which method is not a recommended approach supported by externality theory to deal with this​ problem?

Non-profit intervention

Goods that MORE than one person at a time can consume.

Non-rival Goods

meaning that one person's consumption does not preclude consumption by others.

Non-rival in Consumption

Which of the following best illustrates the tragedy of the​ commons?

Overfishing in public waters

exist when market transactions affect other people, but only through the market price.

Pecuniary Externalities

Does NOT have a social cost or social benefit. Exists when market transactions affect other people, but ONLY through the market price.

Pecuniary Externality

The subsidy necessary to make an economic agent increase consumption to the socially optimal level. (used to create/ incentivize) Ex: getting a flu shot

Pigouvian Subsidy

the tax necessary to incentivize a firm to produce the socially optimal level of output.

Pigouvian Tax

An economic activity that has a positive spillover effect Ex: getting your flu shot Marginal Social Benefit > Marginal Social Cost

Positive Externality

refers to any situation in which private citizens make contributions to the production or maintenance of a public good.

Private Provision of Good

ownership of property or resources

Property Right

are non-excludable and non-rival in consumption.

Public Goods

How do public goods differ from common pool​ resources? Explain.

Public goods are non-rival ​goods, while common pool resource goods are rival goods.

Goods that only ONE person can consume at a time

Rival Goods

What is the intent of a Pigouvian​ tax?

To induce producers of a negative externality to reduce production to the socially optimal level.

When common pool resources are overused

Tragedy of the Commons

occurs when a common resource is used too intensely

Tragedy of the Commons

are the costs of making an economic exchange.

Transaction Costs

How does a​ command-and-control policy differ from a​ market-based policy?

With a command and control policy, the government directly regulates the allocation of resources ​, while with a​ market- based​ policy, the government provides incentives for private organizations to internalize the externality.

Classify the following goods and services as private​ goods, common pool​ resources, club​ goods, or public goods. A library's collection of e-books is a

club good

Classify the following goods and services as private​ goods, common pool​ resources, club​ goods, or public goods. Radio Spectrum is a

common pool resource

The tragedy of the commons results when​ ___________.

common pool resources are overused.

An economic agent​ ________ when he accounts for the full costs and benefits of his actions.

internalizes an externality

Public goods are _________ in rivalry and _________ in excludability.

low; low

You are the County Commissioner of Hazard County. Jeb brings a complaint before you that​ Dwight's hog farm is creating a terrible odor. The noxious odor from​ Dwight's hog farm is a

negative externality

If this externality from​ Dwight's farm is left​ unaddressed, then Dwight will continue to _____________________ in regards to the social surplus optimum.

overproduce

The Coase Theorem states that​ ____________.

private bargaining will result in an efficient allocation of resources.

Classify the following goods and services as private​ goods, common pool​ resources, club​ goods, or public goods. Health insurance is a _______________.

private good

Classify the following goods and services as private​ goods, common pool​ resources, club​ goods, or public goods. A mosquito control program in a city is a

public good

Classify the following goods and services as private​ goods, common pool​ resources, club​ goods, or public goods. A video on Youtube is a

public good

Why is it difficult for the market to deliver socially efficient quantities of goods like clean air or street​ lighting? These are examples of ____________ ​; ​therefore, even if you _____________ for the good you still _______________. .

public goods; do not pay; get it to enjoy it

What is a solution to the Free-rider Problem?

the government makes paying for it mandatory (through paying taxes)