# Module 2

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ECO/SMCC Mississippi William Ashley

### Nonexcludability describes a condition where:

￼ there is no effective way to keep people from using a good once it comes into being.

### (Consider This) Brinley puts on an art show in a public space, asking for donations based on how much people enjoy his work. Economists would expect that:

￼ people will understate their enjoyment of the art in order to "free ride."

### Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). The shift of the supply curve from S to S2 in diagram (b) might be caused by a per unit:

￼ subsidy paid to the producers of this product.

### If a good that generates positive externalities were produced and priced to take into account these spillover benefits, then its:

￼ price and output would increase.

### The socially optimal amount of pollution abatement occurs where society's marginal

￼ benefit of abatement equals its marginal cost of abatement.

### (Last Word) In a cap-and-trade program:

￼ government fixes the maximum amount of a pollutant that firms can discharge and issues permits that firms can buy from and sell to each other.

### (Consider This) Suppose that Susie creates a work of art and displays it in a public place. Economists would expect:

￼ those enjoying the art to "free ride" since they cannot be made to bear any of the cost.

### (Consider This) Darcy and Rachel live down the hall from each other in the same dorm. Darcy likes to play her music loudly down the hall, and Rachel finds the music annoying. A Coase theorem solution for this problem would be for:

￼ Darcy and Rachel to negotiate a mutually agreeable level of volume and/or selection of music.

### At the output level defining allocative efficiency:

￼ the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

### What two conditions must hold for a competitive market to produce efficient outcomes? Answer

￼ Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

￼ \$0.

### Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the equilibrium output is Q2, we can conclude that the existence of external: Answer

￼ costs has resulted in an overallocation of resources to X.

### The following data are for a series of increasingly extensive flood control projects: Refer to the above data. Plan C entails: Answer ￼ an overallocation of resources to flood control.

￼ an overallocation of resources to flood control.

### Unlike a private good, a public good: Answer

￼ has benefits available to all, including nonpayers.

### Refer to the above diagram of the market for product X. Curve St embodies all costs (including externalities) and Dt embodies all benefits (including externalities) associated with the production and consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the existence of external: Answer

￼ benefits has resulted in an underallocation of resources to X.

￼ Q1.

### An efficiency loss (or deadweight loss) declines in size when a unit of output is produced for which: Answer

￼ maximum willingness to pay exceeds minimum acceptable price.

### The two main characteristics of a public good are: Answer

￼ nonrivalry and nonexcludability.

### Economists consider governments to be "wasteful:" Answer

￼ whenever they over- or underallocate resources to a project.

### Nonrivalry and nonexcludability are the main characteristics of: Answer

￼ public goods.

￼ assigns a property right to polluting the atmosphere.

### Answer the question on the basis of the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. Refer to the above data. If the marginal cost of producing this good at the optimal quantity is \$4, the optimal quantity must be: Answer

￼ 3 units.

￼ is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.

### The market system does not produce public goods because: Answer

￼ private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.

￼ is measured as the combined loss of consumer surplus and producer surplus.

Example: