MicroEconomics - Pearson - Chapter 5 Concept Check and Vocabulary

question

Externality

answer

Benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

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Negative Externality (examples of:)

answer

Examples of Negative Externality are:
* Generation of electricity
* Polution

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Positive Externality (examples of:)

answer

Examples of Positive Externality are:
* Medical Research
* College Education

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Private Cost

answer

The cost borne by the producer of a good or service.

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Social Cost

answer

The total cost of producing a good or service including both private cost and external cost.

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Private Benefit

answer

Benefit received by the consumer of a good or service.

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Social Benefit

answer

Total benefit from consuming a good or service, including both the private benefit and external benefit.

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When there is a ______________ _______________________ in consuming a good or service, too little of the good or service will be produced at market equilibrium.

answer

Positive Externality

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The private benefit is ________, while the social benefit is ________.

answer

the benefit received by the consumer of a good or service;
the total benefits from consuming the good or service

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A positive externality causes

answer

the social benefit from consuming the good to be greater than the private benefit.

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True or False - Market failure refers to a situation in which a market ceases to exist.

answer

False

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What are the sources of externalities and market failure?

answer

Both (a) and (b).
a) the difficulty of enforcing property rights in certain countries
b) incomplete property rights

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If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society?

answer

The marginal benefit from reducing another ton of pollution should be equal to the marginal cost.

question

Refer to the graph to the right. How much reduction in sulfur dioxide can be considered economically efficient?

answer

8.5 million tons

question

Refer to the graph on the right:
If the reduction of sulfur dioxide is increased from 7.0 million to 8.5 million tons, the total benefit of this change is equal to ________ and the total cost of this change is equal to ________.

answer

$375 million; $255 million

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True or False - In the case where transactions costs are zero, if the victims of pollution could legally enforce the right of their property not to be damaged, the amount of pollution reduction would increase.

answer

False

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When there are many people involved in attempting to reach an agreement, the transactions costs are often _______ than the net benefits from reducing an externality. In such cases, a private solution to an externality problem _______ feasible.

answer

higher;
is not

question

The Coase theorem states that

answer

if transaction costs are low, private bargaining will lead to an efficient solution to externalities.

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What is the focus of a command-and-control approach to reducing pollution?

answer

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

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Which of the following statements is correct?

answer

Even though the dollar value of the total benefits of reducing SO2 emissions was much greater than the costs, the SO2 cap-and-trade system had effectively ended by 2013.

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True or False - Critics who claim that tradable emission allowances are equivalent to the government issuing licenses to pollute are ignoring the economic ideas that resources are scarce and trade-offs exist.

answer

True

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Market Failure

answer

A situation in which the market fails to produce the efficient level of output.

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Property Rights

answer

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

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Transaction Costs

answer

Costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

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Pigovian taxes and subsidies

answer

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.
** Eliminates dadweight loss and improves economic efficiency
** Can lower other taxes

question

Command-and-control approach

answer

A policy that involves the government imposing quantitive limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

question

Refer to the graphs. What procedure does this series of graphs show?

answer

The construction of market demand for a public good.

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Four Categories of Goods

answer

1) Private Good
2) Public Good
3) Quasi-Public Goods
4) Common resource

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Rivalry

answer

The situation that occurs when one person consuming a unit of a good means no one else can consume it.

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Excludability

answer

The situation in which anyone who does not pay for a good cannot consume it

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Private good

answer

A good that is both rival and excludable

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Public good

answer

A good that is both non-rival and non-excludable

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Free Riding

answer

Benefiting from a good without paying for it

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Common Resource

answer

A good that is rival but not excludable

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Refer to the graph to the right.
What is the optimal quantity of this public good?

answer

15 units

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What is the tragedy of the commons?

answer

The tragedy of the commons refers to the tendency for a common resource to be overused.

question

Refer to the graphs.
Which graph best describes the move from an inefficient use of a common resource to an efficient use of it?

answer

Graph / Panel D.

question

What is an externality?

answer

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

question

Which of the following is an example of a good or service having the effects of a positive externality?

answer

Answer: Both a and b.
A. Medical research.
B. Education.

question

Which of the folowing is an example of a good or service having the effects of a negative externality?

answer

Cigarette smoking.

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The private cost of producing a good will differ from the social cost

answer

when there is an externality, such as acid rain generated by the production of electricity.

question

When will the private benefit from consuming a good differ from the social benefit?

answer

both a and b.
A. when there is an externality, such as second-hand smoke generated by the consumption of cigarettes.
B. when there is an externality, such as fewer diseases generated by the consumption of vaccines.

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What is economic efficiency?

answer

Economic efficiency is where consumer surplus and producer surplus are maximized.

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Externalities affect the economic efficiency of a market equilibrium by causing a difference between

answer

both a and b.
A. the private cost of production and the social cost of production.
B. the private benefit of consumption and the social benefit of production.

question

What is a market failure?

answer

A market failure is when the market fails to produce the efficient level of output.

question

When is market failure likely to arise? (Check all that apply.)

answer

** Market failure is likely to arise when property rights are incomplete.
** Market failure is likely to arise when it is difficult to enforce property rights.

question

Tragedy of the Commons

answer

The tendecy for a common resource to be overused.

1 of 47

question

Externality

answer

Benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

question

Negative Externality (examples of:)

answer

Examples of Negative Externality are:
* Generation of electricity
* Polution

question

Positive Externality (examples of:)

answer

Examples of Positive Externality are:
* Medical Research
* College Education

question

Private Cost

answer

The cost borne by the producer of a good or service.

question

Social Cost

answer

The total cost of producing a good or service including both private cost and external cost.

question

Private Benefit

answer

Benefit received by the consumer of a good or service.

question

Social Benefit

answer

Total benefit from consuming a good or service, including both the private benefit and external benefit.

question

When there is a ______________ _______________________ in consuming a good or service, too little of the good or service will be produced at market equilibrium.

answer

Positive Externality

question

The private benefit is ________, while the social benefit is ________.

answer

the benefit received by the consumer of a good or service;
the total benefits from consuming the good or service

question

A positive externality causes

answer

the social benefit from consuming the good to be greater than the private benefit.

question

True or False - Market failure refers to a situation in which a market ceases to exist.

answer

False

question

What are the sources of externalities and market failure?

answer

Both (a) and (b).
a) the difficulty of enforcing property rights in certain countries
b) incomplete property rights

question

If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society?

answer

The marginal benefit from reducing another ton of pollution should be equal to the marginal cost.

question

Refer to the graph to the right. How much reduction in sulfur dioxide can be considered economically efficient?

answer

8.5 million tons

question

answer

$375 million; $255 million

question

answer

False

question

answer

higher;
is not

question

The Coase theorem states that

answer

if transaction costs are low, private bargaining will lead to an efficient solution to externalities.

question

What is the focus of a command-and-control approach to reducing pollution?

answer

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

question

Which of the following statements is correct?

answer

Even though the dollar value of the total benefits of reducing SO2 emissions was much greater than the costs, the SO2 cap-and-trade system had effectively ended by 2013.

question

answer

True

question

Market Failure

answer

A situation in which the market fails to produce the efficient level of output.

question

Property Rights

answer

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

question

Transaction Costs

answer

Costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

question

Pigovian taxes and subsidies

answer

question

Command-and-control approach

answer

A policy that involves the government imposing quantitive limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

question

Refer to the graphs. What procedure does this series of graphs show?

answer

The construction of market demand for a public good.

question

Four Categories of Goods

answer

1) Private Good
2) Public Good
3) Quasi-Public Goods
4) Common resource

question

Rivalry

answer

The situation that occurs when one person consuming a unit of a good means no one else can consume it.

question

Excludability

answer

The situation in which anyone who does not pay for a good cannot consume it

question

Private good

answer

A good that is both rival and excludable

question

Public good

answer

A good that is both non-rival and non-excludable

question

Free Riding

answer

Benefiting from a good without paying for it

question

Common Resource

answer

A good that is rival but not excludable

question

Refer to the graph to the right.
What is the optimal quantity of this public good?

answer

15 units

question

What is the tragedy of the commons?

answer

The tragedy of the commons refers to the tendency for a common resource to be overused.

question

Refer to the graphs.
Which graph best describes the move from an inefficient use of a common resource to an efficient use of it?

answer

Graph / Panel D.

question

What is an externality?

answer

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

question

Which of the following is an example of a good or service having the effects of a positive externality?

answer

Answer: Both a and b.
A. Medical research.
B. Education.

question

Which of the folowing is an example of a good or service having the effects of a negative externality?

answer

Cigarette smoking.

question

The private cost of producing a good will differ from the social cost

answer

when there is an externality, such as acid rain generated by the production of electricity.

question

When will the private benefit from consuming a good differ from the social benefit?

answer

question

What is economic efficiency?

answer

Economic efficiency is where consumer surplus and producer surplus are maximized.

question

Externalities affect the economic efficiency of a market equilibrium by causing a difference between

answer

both a and b.
A. the private cost of production and the social cost of production.
B. the private benefit of consumption and the social benefit of production.

question

What is a market failure?

answer

A market failure is when the market fails to produce the efficient level of output.

question

When is market failure likely to arise? (Check all that apply.)

answer

** Market failure is likely to arise when property rights are incomplete.
** Market failure is likely to arise when it is difficult to enforce property rights.

question

Tragedy of the Commons

answer

The tendecy for a common resource to be overused.

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MicroEconomics – Pearson – Chapter 5 Concept Check and Vocabulary

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