Econ 202: Chapter 8: Externatlities
Terms in this set (105)
If the production of a good gives rise to negative externalities, ________.
the social cost of production exceeds the private cost of production
The marginal social cost curve ________ when production involves negative externalities.
lies right above the supply curve
A negative externality exists if
the marginal social cost of producing a good or service exceeds the private cost.
When there is a negative externality, the competitive output is greater than the economically efficient output level.
A market demand curve reflects the
private benefits of consuming a product
Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?
the social cost of production
A ________ occurs when an economic activity has a spillover cost that does not affect those directly engaged in the activity.
Which of the following conditions holds in an economically efficient competitive market equilibrium?
There are no positive and no negative external effects from consumption and production.
Conceptually, the efficient level of carbon emissions is the level for which
the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.
Pollution is an example of a
Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity?
a positive externality
If the social benefit of consuming a good or a service exceeds the private benefit
a positive externality exists
Which of the following is an example of a positive externality?
planting trees along a sidewalk which add beauty and create shade
The presence of a positive externality in a market leads to ________.
an underproduction of the good
When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit.
Which of the following describes how a positive externality affects a competitive market?
The externality causes a difference between the private benefit from consumption and the social benefit
If the production of a good involves positive externalities, ________.
the market price of the good is lower than its optimal price
A positive externality _________.
gives rise to external benefits
The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community. This is an example of a ________.
a positive externality
Which of the following is true if the production of a good gives rise to a positive externality?
The marginal social benefit from each level of output exceeds the consumers' willingness to pay.
The Coase theorem states that
if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.
Which of the following will lead to an efficient private solution if negative externalities are present in a market?
The parties involved negotiate with each other and reach an agreement.
Consider the following characteristics:
a. low transactions costs
b. small levels of pollution
c. high levels of pollution
d. clear assignment of property rights
Which of the above are assumptions behind the Coase Theorem?
a and d
If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered
Private solutions to externalities are most effective if ________.
transaction costs associated with bargaining are low
Refer to Figure 5-7. What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units?
the value of the area QB BE QE
The Coase Theorem states that ________.
negotiation between economic agents leads to an efficient allocation of resources
Which of the following is an implication of the Coase Theorem?
Government intervention is not always necessary to solve externality problems.
Which of the following must be present to reach a private solution to an externality problem?
The transactions costs to negotiate a solution must be relatively low.
The Coase theorem relies on internalizing externalities through ________.
negotiations between the parties involved
In the past the federal government often employed what is called a "command-and-control" approach to the reduction of pollution emissions. Many economists are critical of this approach because
they believe a market-based approach will reduce pollution more efficiently.
A Pigouvian tax is a tax designed to ________.
induce producers generating negative externalities to reduce production
An economic agent ________ when he accounts for the full costs and benefits of his actions.
internalizes an externality
When a Pigouvian tax is imposed, ________.
the marginal private cost curve shifts upward
What does the phrase "internalizing an external cost" mean?
forcing producers to factor into their production costs the cost of the externalities created in the production of their output
When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalize the externality.
An advantage of imposing a tax on the producer that generates pollution is that
it forces the polluting producer to internalize the external cost of the pollution.
Which of the following is true?
a. If consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good.
b. If production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good.
c. If production of a good gives rise to a positive externality, it can be internalized by taxing the consumers of the good.
d. If consumption of a good gives rise to a positive externality, it can be internalized by taxing the producers of the good.
Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain. This is an example of
a Pigovian tax
The production of steel in a factory generates a negative externality. A per-unit tax on the factory that equals ________ of steel production will internalize the externality entirely.
a marginal external cost
Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behavior known as
The free rider problem refers to a situation in which
people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.
Which of the following is an example of a quasi-public good?
________ occurs when an individual has no incentive in paying for a good because failure to pay does not prevent consumption.
A free-rider program
A public good is
a good that is nonrivalrous and nonexcludable.
A private good is
a good that is rivalrous and excludable.
Space on a popular, public beach is ________ in consumption.
non-excludable but rival
Which of the following displays these two characteristics: rivalry and nonexcludability?
a common resource
Private goods are ________.
excludable and rival in consumption
Alex is a non-union employee in a factory. If the union negotiates certain benefits for the employees, Alex enjoys all the benefits although he does not pay the union fee. His behavior is an example of ________.
The market demand for a public good can be determined by
adding up how much each consumer is willing to pay for each unit of the public good.
For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?
It evaluates the costs and benefits of producing the good
The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.
How does the construction of a market demand curve for a private good differ from that for a public good?
The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good.
Private producers have no incentive to provide public goods because
once produced, it will not be possible to exclude those who do not pay for the good.
Overfishing leading to a rapid depletion of the stock of fish is an example of ________.
A tragedy of the commons
Which of the following is an example of a common resource?
sea otters in the coastal waters of the Pacific Ocean
A green pasture has turned barren due to overgrazing. This happened because the pasture was ________.
non-excludable but rival
Which of the following leads to the tragedy of the commons?
the use of common pool resources above the socially optimal level
The "tragedy of the commons" refers to the phenomenon where
people overuse a common resource
In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was
the area of pasture was nonexcludable and the consumption of the grass was rival.
A tragedy of the commons occurs when a resource is
rival and non-excludable
A retired athlete built a gym near his house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________.
tragedy of the commons
Which of the following is an example of a common resource?
elephants in the wild
Haiti was once a heavily forested country. Today, 80 percent of Haiti's forests have been cut down, primarily to be burned to create charcoal. The reduction in the number of trees has lead to devastating floods when it rains heavily. This is an example of
the tragedy of the commons
The government can be relied on to efficiently solve problems associated with pollution through (Pigovian) taxes.
The best solution to water pollution is to make the responsible people clean the water and return it to its natural state.
One problem with using taxes to solve economic externalities is that politicians may spend the money on things they like, rather than things their constituents want.
The possibility of "government failures" should be evaluated before getting the government involved in addressing "market failures."
Key limitations on the government correcting "market failures" include:
-Misaligned incentives between the government and citizens
-The incetive of the government to tax and spend to help politicians get elected or re-elected.
Beginning in the 1950s economists began to investigate incentives within government. They found that:
One should be cautious in calling on the government to improve economic performance.
The central question In trying to determine whether to involve the government in an economic issue is
Determining whether or not the government can be relied on to make things better
The key problem(s) with externalities is that
-Private costs do not equal social costs.
-Private benefits do not equal social benefits.
Sewage treatment is an example of
The point of the video is that the government can seldom enhance economic efficiency.
Smoking in restaurants is generally a bad idea because of the diseases caused by passive smoking.
The social problem of smoking in restaurants is caused because smokers want to pollute the air, causing harm to people around them.
The social problem of smoking in restaurants because smokers and nonsmokers want to use the air in different ways.
The key to solving problems associated with smoking in restaurants is to
assign property rights to the restaurant owners
Restaurant owners have an incentive to
-Fully account for the value impact of restaurant smoking on nonsmokers.
-Fully account for the value of restaurant smoking to smokers.
-Take into account how smoking shifts the overall demand curve for restaurant meals.
Banning smoking in restaurants is clearly economically efficient because passive smoke is harmful.
W. Kip Viscusi studied tobacco smoking and concluded that
The external costs and benefits of smoking were about equal, so there wasn't a significant negative externality to smoking.
The key to Viscusi's findings about the net impact of smoking on healthcare costs is that
People who smoke need more medical care, but they also (unfortunately) tend to die younger, and that creates an offsetting reduction in health care costs.
A key advantage of assigning property rights to owners of restaurants is that
Smokers and nonsmokers are likely to be able to eat meals the way they like.
The net effect of smoking in a restaurant is to
there is no general answer
Recycling is not an economic problem because it involves running out of basic resources that our children might need.
Recycling is not an economic problem because there is only so much land that can be used for landfill, and that land is substantially damaged by the creation of garbage dumps.
To evaluate recycling, you must consider
- The demand for recycled products,
- The incremental costs to society for recycling products,
- The value of the land used for landfills
The opportunity cost of using land for a landfill is determined by:
The value of the land before the landfill was developed, minus the cost of the land after the landfill is full.
The appropriate charge for trash disposal should be set by
- The opportunity cost of using the landfill,
- The cost of the trucks and labor needed to haul trash away,
The economically efficient amount of recycling will occur if
Recyclers pay the full cost of picking up recycled products
It is well-known that the use of landfills effectively destroys the value of land for subsequent use.
Economics shows that it is inefficient to recycle plastic bottles because they have little value.
The video indicated that there is a significant difference between recycling fluorescent lights and plastic bottles.
Recycling is an economic issue because the goods that are recycled, the land for landfills, and the trucks and labor needed for both recycling and trash disposal are all examples of scarce resources.
Financial contributions to the campaigns of members of Congress, state legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are
examples of rent seeking
Megan McArdle argues that regulatory capture happens for all of the following reasons except
Regulators want the regulated industry to spend a lot of time and effort on compliance.
the public choice model
applies economic analysis to government decision making.
George Stigler's paper, "The Theory of Economic Regulation," argues that special interest pressure from producers for leads to regulations that are designed for the benefit of consumers.
Which of the following statements refers to rent seeking?
"Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws."
The U.S. government has imposed quotas on the importation of sugar that makes sugar prices higher because
Sugar farmers lobbied for regulation that would increase their profits by limiting competition.
Which of the following is not an example of rent-seeking behavior?
engaging in aggressive advertising that slams a competitor's product
Which of the following statements about rent seeking is false?
A. Because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law.
B. Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for.
C. A person is engaging in rent-seeking behavior when he uses the political process to acquire ownership of a resource that belongs to the public.
D. If a firm can benefit from government intervention in the economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market.
If voters lack an economic incentive to become informed about pending legislation, then their preferences become a constraint on legislators voting for rent-seeking legislation.
What is regulatory capture?
It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.
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