question
1. How do externalities affect markets? If a positive externality in consumption is present in a market, then
answer
Answer: the private benefit from consumption will be different than the social benefit from consumption.
Right! Private Benefit is the benefit received by the consuming of a good or service, and social benefit is the total benefit of consuming a good or service, including both the private benefit and any external benefit. If there is a positive externality, private benefit and social benefit will not be equal.
Right! Private Benefit is the benefit received by the consuming of a good or service, and social benefit is the total benefit of consuming a good or service, including both the private benefit and any external benefit. If there is a positive externality, private benefit and social benefit will not be equal.
question
1. How do externalities in the production of electricity result in market failure? Because of externalities, the market for electricity will
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Answer: provide too much electricity
Right! Externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Externalities result in market failure, which is a situation where the market fails to produce the efficient level of output. For example, in the market for electricity, a negative externality results in the market providing too much electricity because the market does not account for the cost of electricity on others
Right! Externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
Externalities result in market failure, which is a situation where the market fails to produce the efficient level of output. For example, in the market for electricity, a negative externality results in the market providing too much electricity because the market does not account for the cost of electricity on others
question
1. How do property rights affect externalities and market failure?
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Answer: Externalities and market failure will result from the difficulty of enforcing property rights.
Right! Property rights: the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.
Externalities and market failure result from incomplete property rights or from the difficulty of enforcing property rights in certain situations.
Right! Property rights: the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.
Externalities and market failure result from incomplete property rights or from the difficulty of enforcing property rights in certain situations.
question
1. What must be true for the Coase Theorem to hold? For the Coase Theorem to hold,
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Answer: all parties to an agreement must be willing to accept a reasonable agreement.
Right! The Coase Theorem: the argument of economist Ronald Coase that if transaction costs are ow, private bargaining will result in an efficient solution to the problem of externalities. In practice, we must add a couple of other qualifications to the Coase Theorem. In addition to low transaction costs, parties to the agreement must have full information about the costs and benefits associated with the externality, and all parties must be willing to accept a reasonable solution.
Right! The Coase Theorem: the argument of economist Ronald Coase that if transaction costs are ow, private bargaining will result in an efficient solution to the problem of externalities. In practice, we must add a couple of other qualifications to the Coase Theorem. In addition to low transaction costs, parties to the agreement must have full information about the costs and benefits associated with the externality, and all parties must be willing to accept a reasonable solution.
question
1. Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargainingLOADING...can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution reduction?
If the electric utility and the people suffering the effects of the utility's pollution can bargain, then making the utility legally liable for the damages from its pollution will
If the electric utility and the people suffering the effects of the utility's pollution can bargain, then making the utility legally liable for the damages from its pollution will
answer
Answer: not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.
Right! In the absence of the utility being legally liable, the victims of pollution have an incentive to pay the utility to reduce pollution up to the point where the marginal benefit of the last ton of reduction is equal to the marginal cost. If the utility is legally liable, it has an incentive to pay the victims of pollution to allow it to pollute up to the same point. Therefore, property rights (and legal liability) do not matter for the amount of pollution reduction because such rights (and such liability) do not change the marginal benefits and the marginal costs of pollution reduction.
Right! In the absence of the utility being legally liable, the victims of pollution have an incentive to pay the utility to reduce pollution up to the point where the marginal benefit of the last ton of reduction is equal to the marginal cost. If the utility is legally liable, it has an incentive to pay the victims of pollution to allow it to pollute up to the same point. Therefore, property rights (and legal liability) do not matter for the amount of pollution reduction because such rights (and such liability) do not change the marginal benefits and the marginal costs of pollution reduction.
question
1. How might society solve problems associated with externalities and market failure?
If an externality is present, resulting in market failure, then
If an externality is present, resulting in market failure, then
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Answer: private solutions may reduce or correct market failure
Right! Market failure A situation in which the market fails to produce the efficient level of output.
In the presence of an externality, government intervention may actually increase economic efficiency and enhance the well-being of society. It is also possible, however, for people to find private solutions to the problem of externalities. In an important article written in 1960, Ronald Coase of the University of Chicago, winner of the 1991 Nobel Prize in Economics, argued that under some circumstances, private solutions to the problem of externalities will occur
Right! Market failure A situation in which the market fails to produce the efficient level of output.
In the presence of an externality, government intervention may actually increase economic efficiency and enhance the well-being of society. It is also possible, however, for people to find private solutions to the problem of externalities. In an important article written in 1960, Ronald Coase of the University of Chicago, winner of the 1991 Nobel Prize in Economics, argued that under some circumstances, private solutions to the problem of externalities will occur
question
1. Which of the following is an example of a transaction cost associated with negotiating the reduction of a negative externality?
An example of a transaction cost is
An example of a transaction cost is
answer
Answer: the cost associated with monitoring an agreement to reduce a negative externality.
Right! Transaction costs The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
In the case of externalities, transaction costs would include the time and other costs of negotiating an agreement, drawing up a binding contract, purchasing insurance, and monitoring the agreement.
How might transaction costs affect private solutions to externality problems?
Transaction costs
Right! Transaction costs The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.
In the case of externalities, transaction costs would include the time and other costs of negotiating an agreement, drawing up a binding contract, purchasing insurance, and monitoring the agreement.
How might transaction costs affect private solutions to externality problems?
Transaction costs
question
1. In England during the Middle Ages, each village had an area of pasture, known as a commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used optimally?
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Answer: Grazing created a negative externality, resulting in the commons being overused.
Right! The commons ended up overgrazed. For example, a family thinking of buying another cow and grazing it on the commons would gain the benefits from increased milk production, but adding another cow to the commons would create a negative externality by reducing the amount of grass available for the cows of other families. Because this family - and the other families in the village - did not take this negative externality into account when deciding whether to add another cow to the commons, too many cows were added. The grass on the commons was eventually depleted, and no family's cow got enough to eat.
Right! The commons ended up overgrazed. For example, a family thinking of buying another cow and grazing it on the commons would gain the benefits from increased milk production, but adding another cow to the commons would create a negative externality by reducing the amount of grass available for the cows of other families. Because this family - and the other families in the village - did not take this negative externality into account when deciding whether to add another cow to the commons, too many cows were added. The grass on the commons was eventually depleted, and no family's cow got enough to eat.
question
1. Consider the consumption of electricity. What type of good is electricity?
Electricity is
Electricity is
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Answer: a quasi - public good.
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
Rivalry The situation that occurs when one person's consuming a unit of a good means no one else can consume it.
Excludability The situation in which anyone who does not pay for a good cannot consume it. Electricity is a quasi - public good because it is not nonrival and excludable
9b. National defense is
Answer: a public good.
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
Rivalry The situation that occurs when one person's consuming a unit of a good means no one else can consume it.
Excludability The situation in which anyone who does not pay for a good cannot consume it. Electricity is a quasi - public good because it is not nonrival and excludable
9b. National defense is
Answer: a public good.
question
1. Suppose a common resource - wood in a public forest - is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being overused?
To prevent overuse of the common resource,
To prevent overuse of the common resource,
answer
Answer: the government could impose restrictions on access to wood in the forest.
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
The source of the overuse of common resources is the same as the source of negative externalities: lack of clearly defined and enforced property rights. In situations in which enforcing property rights is not feasible, two types of solutions to the overuse of common resources are possible.
If the geographic area involved is limited and the number of people involved is small, access to the commons can be restricted through community norms and laws (limits enforced by social pressure). If the geographic area or the number of people involved is large, legal restrictions on access to the commons are required (taxes, quotas, and tradable permits)
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
The source of the overuse of common resources is the same as the source of negative externalities: lack of clearly defined and enforced property rights. In situations in which enforcing property rights is not feasible, two types of solutions to the overuse of common resources are possible.
If the geographic area involved is limited and the number of people involved is small, access to the commons can be restricted through community norms and laws (limits enforced by social pressure). If the geographic area or the number of people involved is large, legal restrictions on access to the commons are required (taxes, quotas, and tradable permits)
question
1. Consider a pair of Gap Jeans. Is the consumption of Gap Jeans rival and excludable?
The consumption of Gap Jeans is
The consumption of Gap Jeans is
answer
Answer: rival and excludable
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
Rivalry is the situation that occurs when one person's consuming a unit of a good means no one else can consume it. If you consume a can of Coke, for example, no one else can consume it.
Excludability is the situation in which anyone who does not pay for a good cannot consume it. If you don't pay for a can of Coke, for example, Coca Cola can exclude you from consuming it. Therefore, the consumption of a can of Coke is rival and excludable.
Right! Private good A good that is both rival and excludable.
Public good A good that is both nonrivalrous and nonexcludable.
Quasi-public good A good that is excludable but not rival.
Common resource A good that is rival but not excludable.
Rivalry is the situation that occurs when one person's consuming a unit of a good means no one else can consume it. If you consume a can of Coke, for example, no one else can consume it.
Excludability is the situation in which anyone who does not pay for a good cannot consume it. If you don't pay for a can of Coke, for example, Coca Cola can exclude you from consuming it. Therefore, the consumption of a can of Coke is rival and excludable.
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