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Chapter 5

Terms in this set (60)

Externality
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
pollution fact 1
pollution is part of economic life
externality example 1
pollution
Negative externality
people were not involved at the externality will be affected
Positive externalities
people who were not involved gets benefited
Externality fact 1
when negative externality is involved firms can produce goods at quantity greater than the efficient amount
Externality fact 2
when positive externality is involved firms can produce goods at quantity greater than the efficient amount
economic efficiency reduced
government intervention in the economy
Externality fact 3
government intervention in the economy may actually increase the efficiency and enhance the wellbeing of society when there are externalities
Externality fact 4
it interferes with the economic efficiency of a market equilibrium
competitive market achieves economic efficiency
by maximizing the sum of consumer surplus and producer surplus only if there are no externalities
Private cost
the cost borne by the producer of a good or service
Social cost
the total cost of producing a good or service, including both the private cost and any external cost
Private benefit
the benefit received by the consumer of a good or service
social benefit
the total benefit from consuming a good or service, including both the private benefit and any external benefit
Externality fact 5
without an externality private cost and the social cost are equal
social cost of electricity
sum of private cost plus the external cost
Deadweight loss graph
it is between efficient equilibrium and market equilibrium
Economic surplus is maximum
the net benefit to society from the production of the good or services is at a maximum (with equilibrium of quantity)
deadweight loss occurs
because the supply curve is above the demand curve for the production of the units of electricity (between Qeffiitent and Qmarket)
Externality fact 6
when there is a negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium.
Externality fact 7
when there is a positive externality in consuming a good or service, too little of the good or service will be produced at market equilibrium.
Market failure
A situation in which the market fails to produce the efficient level of output
Property rights
the rights individuals or business have to the exclusive use of their property, including the right to buy or sell it.
market failure fact 1
producing at a quantity greater than efficient level can cause market failure due to external (negative ) externality
market failure and externalities
externalities and market failures result from the incomplete property rights or from the difficulty of enforcing property rights in certain situations
Coase Theorem by Ronald Coase in 1960
(The argument of economist Ronald Coase the) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities
Optimal decision
it is to continue any activity up to the point where the marginal benefit equals the marginal cost.
additional benefits
marginal benefits
net benefit to society from reducing pollution
is equal to the difference between the benefit of reducing pollution and the cost
optimal cost of cleaning your room
equals to the the money and time you spend to clean it.
Transactions costs
the costs in time and other resources the parties incur in the process of agreeing to and carrying out an exchange of goods or services
transactions costs involved
negotiating an agreement between the people suffering from pollution and the firms causing the pollution often fails because of the transaction cost involved
transactions costs fact 1
when many people are involved the cost is higher than the net benefit.
an economically efficient level of​ pollution
The economically efficient level of pollution is that amount where the marginal cost of pollution reduction equals the marginal benefit of pollution reduction.
If the marginal cost of reducing a certain type of pollution is​ zero, should all of that pollution be​ eliminated?
rarely would economic theory suggest that completely eliminating pollution is efficient because the marginal cost of doing so typically exceeds the marginal benefit. One instance where pollution should be completely eliminated is when the marginal cost of doing so is zero.
Which one of the following factors helps determine the marginal cost of reducing​ crime?
resources devoted to courts.
Which one of the following factors helps determine the marginal benefit of reducing​ crime?
personal injury from crime.
Would it be economically efficient to reduce the amount of crime to​ zero? Briefly explain.
No. It would not be efficient to completely reduce crime because the marginal cost of doing so likely exceeds the marginal benefit.
A.C. Pigou of Cambridge University
first analyze market failure systematically
first analyze market failure systematically
A.C. Pigou of Cambridge University
Pigovian taxes and subsidies
Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.
Command-and-control approach
A policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.
Pigovian tax fact 1
it eliminates deadweight loss and improves economic efficiency, unlike most taxes, which are intended simply to raise revenue and can reduce consumer surplus and producer surplus and create deadweight loss.
Rivalry
the situation that occurs when one person's consumtion of a unit of a good means no one else can consume it
excludability
the situation in which anyone does not pay for a good cannot consume it.
Nonrival
one perrsons consumption does not interfere with another person's consumption
non excludable
it is impossible to exclude others from consuming the good, whether they have paid for it or not
Good can fall into 4 catagories
1) Private good
2) Public Good
3) Free Riding
4) Common resource
Private good
a good that is both rival and excludable
Public good
a good tha is both nonrival and nonexcludable
Free riding
benefiting from a good without paying for it
common resource
a good that is rival but not excludable
Tragedy of the commons
the tendency for a common resource to be overused
private cost of producing a good will differ from the social cost
when there is an​ externality, such as acid rain generated by the production of electricity.
When will the private benefit from consuming a good differ from the social​ benefit?
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.
What is economic​ efficiency?
Economic efficiency is where consumer surplus and producer surplus are maximized.
Externalities affect the economic efficiency of a market equilibrium by causing a diffenence between
A.
the private cost of production and the social cost of production.

B.
the private benefit of consumption and the social benefit of production.
What is a market​ failure?
A market failure is when the market fails to produce the efficient level of output.
When is market failure likely to​ arise?
C.
Market failure is likely to arise when property rights are incomplete.
Your answer is correct.
E.
Market failure is likely to arise when it is difficult to enforce property rights.
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