ECON 102 CHAPTER 4

A tax can correct for a negative externality and a subsidy to producers can correct for a positive externality because the tax shifts the cost onto the firms, producing the product and BLANK output, and the subsidy BLANK and BLANK output.

*decreasing *increases the supply *increases

A subsidy to consumers differs from a subsidy to producers in correcting for a positive externality in that the subsidy to consumers BLANK, but the subsidy to producers BLANK

*raises the price *lowers the price

Consider a carbon-tax and a cap-and-trade strategy for reducing carbon dioxide and other so-called greenhouse gases. Which of the following statements is true?

A cap-and-trade system improves efficiency by creating scarcity.

Is the U.S. border patrol a public or private good? How about satellite TV?

The U.S. border patrol is a public good, but satellite TV is a private good.

Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government:

a. French fries: Market system b. Airport screening: Government c. Court systems: Government d. Mail delivery: Combined market and government e. Medical care: Combined market and government

Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality.

a. Overallocation of resources: Negative externality b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block: Positive externality c. Market demand curves are too far to the left (too low): Positive externality d. Underallocation of resources: Positive externality e. Water pollution from a factory forces neighbors to buy water purifiers: Negative externality

When negative externalities exist at a market,

equilibrium output will be greater than the efficient output.

The Lojack car recovery system allows the police to track stolen cars. As a result, they not only recover 90% of Lojack-equipped cars that are stolen but also arrest many auto thieves and shut down many "chop shops" that take apart stolen vehicles to get at their used parts. Thus, Lojack provides both private benefits and positive externalities. If the government were to subsidize Lojack purchases, this would

have both private and social benefits.

Spillover costs and spillover benefits are also called negative and positive externalities because

he unintended spillover costs have a negative impact on third parties and the unintended spillover benefits have a positive impact on third parties.

A public good is

nonrival and non excludable

The free-rider problem occurs when

people benefit from the public good without contributing to the cost.

An example of an external benefit is

safety provided by motion-detector lights.

The government could correct the difference between the equilibrium output level and the efficient output level by

using a regulation that requires firms to internalize the external costs.

Public goods are not privately provided because

when goods are nonrival, those people purchasing the good could simply allow others use without requiring compensation.