ECON Ch. 10
Bob and Tom live in a dorm room. Bob values playing loud music at $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music, and there are no transactional costs?
Tom will pay Bob between $100 and $150, and Bob will stop playing loud music
Positive Externality
a situation when a person's action have a beneficial impact on a bystander
Negative Externality
a situation when a person's actions have an adverse impact on a bystander
A negative externality generates
a social cost curve that is above the supply curve (private cost curve) for a good
A positive externality generates
a social value curve that is above the demand curve (private value curve) for a good
Corrective Tax
a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality
Internalizing an Externality
altering incentives so that people take into account the external effects of their actions
When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of
an attempt to internalize a positive externality
Which of the following is true regarding tradable pollution permits and corrective taxes?
corrective taxes and tradable pollution permits create an efficient market for pollution
What would not be considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?
costs incurred to reduce the pollution
A negative externality (that has not been internalized) causes the
equilibrium quantity to exceed the optimal quantity
Bob and Tom live in a dorm room. Bob values playing loud music at $100. Tom values peace and quiet at a value of $150. Which of the following statements is true?
it is efficient for Bob to stop playing loud music, regardless of who has the property right to the level of sound
A positive externality (that has not been internalizeD) causes the
optimal quantity to exceed the equilibrium quantity
To internalize a positive externality, an appropriate public policy response would be to
subsidize the good
To internalize a negative externality, an appropriate public policy response would be to
tax the good
Transaction Costs
the costs that parties incur in the process of agreeing and following through on a bargain
The most efficient pollution control system would ensure that
the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount
Coase Theorem
the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Social Cost
the sum of private costs and external costs
Externality
the uncompensated impact of one person's actions on the well-being of a bystander
According to the Coase Theorem, private parties can solve the problem of externalities if
there are no transaction costs
The government engages in an industrial policy
to internalize the positive externality associated with technology-enhancing industries