Principles of Microeconomics Test 2
Positive externality
A benefit that is enjoyed by a third party as a result of an economic transaction
The sign on a church in your neighborhood reads, "All are welcome at Sunday Service." Because the church has limited seating, and is usually full, the Sunday Service is
A common resource
A city street is
A common resource when it is congested, but a public good when it is not congested
Negative externality
A cost that is suffered by a third party as a result of an economic transaction
A public good
A good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others
A common resource
A resource that provides users with tangible benefits
The parable called the Tragedy of the Commons applies to goods such as
Clean air and clean water
Cost-benefit analysis is important to determine the role of government in our economy because
Cost-benefit analysis identifies the possible gains to society from government provision of a particular good
The U.S. patent system
Makes specific, technical knowledge excludable
The free-rider problem
Occurs when those who benefit from resources, goods or services do not pay for them, which results in an underprovision of those goods or services
The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. We might expect that
Over time, the aquifer is likely to be overused
The provision of a public good generates a
Positive externality and the use of a common resource generates a negative externality
A common theme among examples of market failure is
Some items of value do not have an owner with the legal authority to control it.
Producers have little incentive to produce a public good because
There is a free-rider problem
On holiday weekends thousands of people picnic in state parks. Some picnic areas become so overcrowded that the benefit or value of picnicking diminishes to zero. An overcrowded picnic area is an example of
Tragedy of the Commons
The Coase theorem
a legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided.
Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to
pay you at least $60 but less than $80 to live with the clutter.
Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to
pay your roommate at least $25 but no more than $50 to clean up after herself
