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Microeconomics- Ch 8
externalities
| Question | Answer |
|---|---|
| When individuals make decisions and other people are affected by our decisions or have a stake in the outcome | externalities |
| a cost imposed without compensation on someone not involved in the decision making | external cost/ negative externality |
| a benefit imposed without compensation to someone not involved in the decision making | external benefit/ positive externality |
| the total cost of a decision (includes both private costs and external costs and benefits) | social cost |
| the total benefit of a decision (includes both private benefits and external costs and benefits) | social benefit |
| What happens in the absence of externalities? | efficiency, MPB=MSB, MPC=MSC |
| A type of externality that does not indicate market failure and involves money | pecuniary externality |
| How can we address market failures/ inefficient outcomes? | Private solutions (negotiations) or public solutions (regulations) |
| If there are near zero transaction costs to negotiate and that agreements are enforceable (contracts0 then an efficient equilibrium through private trade can be reached, even in the presence of an externality | Coase Theorem |
| because of the cost and difficulty of coordinating private solutions, people turn to this for solutions | public policy (public solutions) |
| What are the two types of public solutions? | Command and control policies and market based policies |
| the government directly regulates the allocation of resources | command and control policies |
| the government provides incentives for private organizations to internalize the externality | market based policies |
| What are 2 types of command and control policies? | quotas and mandates |
| maximum number of allowed transactions in a market | quota |
| minimum number of allow transactions in a market | mandates |
| What are two solutions to dealing with negative externalities? | taxes and quotas |
| a type of tax that counters the effect of a negative externality | pigovian tax |
| What are the two main problems with a pigovian tax? | -setting the taxes at the right level -no guarantee that the government will help people bearing the external cost |
| MSC= ? | MPC + tax |
| What is the problem with negative externalities? | overconsumption (therefore we use quotas to restrict this) |
| a production or consumption quota that can be bought and sold | tradable allowance |
| Negative externalities cause the market quantity to be? | too high (solutions: pigovian tax, quota, tradable allowances) |
| Positive externalities cause the market quantity to be? | not enough (solutions: subsidies, mandates) |
| What are the 2 characteristics of goods? | Rival and excludable |
| it is possible for the seller to prevent its use by those who have not paid for it | excludable |
| one persons consumption prevents or decreases others ability to consume it | rival |
| excludable and rival (and example) | private goods (pizza) |
| rival and non excludable (and example) | common resources (wildlife) |
| not rival and not excludable (and example) | public goods (street lights) |
| not rival and excludable (and example) | artificially scarce goods (subscription only web-sites) |
| if someone decides to not pay for a public good and enjoys a "free ride" from those that have paid (type of market failure) | free rider |
| occurs when the non-excludability of a public good leads to undersupply due to a loss of revenue | free rider problem |
| 3 solutions to free rider problem | government provisions and regulations, relying on social norms, private property rights |
| the sum of marginal private benefits of consumers | marginal social benefit |
| government bodies can make someone responsible for the provision of the efficient quantity of the public good | government provision |
| people are less likely to free ride if it is not socially acceptable, guilt tripping people into donating | relying on social norms |
| relying on peoples donations | privitization |
| What is the issue with charity? | Efficient allocation of resources (pandas are cuter than rhinos example) |
| the depletion of a common resource due to individually rational but collectively inefficient overconsumption ( like global warming ) | tragedy of the commons |
| solutions to tragedy of the commons | relying on social norms, government regulation, private property rights |
| What are some examples of private property rights? | tradable allowances or permits |
| What is the main problem with public goods? | Non-excludability leads to undersupply |
| What is the main problems with common resources? | Overconsumption |
| Finish this sentence: Sometimes the best way to solve the tragedy of the commons is to convert a common resource into _______. | a private good |
Created by:
lmssorgi
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