Question 1

Externality:

Accepted Answer

Arises when one engages in an activity that influences the well-being of a bystander (type of market failure; no compensation involved)

Question 2

Negative Externality:

Accepted Answer

Adverse impact on bystander (Cost to society exceeds the cost to the good producers)

Question 3

Positive Externality:

Accepted Answer

Beneficial impact on bystander (Demand curve doesn’t reflect value to society of the good)

Question 4

Welfare Economics:

Accepted Answer

Study of how the allocation of resources affects economic well-being (equilibrium in competitive markets maximizes total benefits)

Question 5

Welfare Economics Demand Curve:

Accepted Answer

reflects value to consumers

Question 6

Welfare Economics Supply Curve:

Accepted Answer

reflects cost to producers

Question 7

Social Cost:

Accepted Answer

Private costs of producers as well as the costs to those bystanders harmed by negative externalities

Question 8

Social-cost Curve:

Accepted Answer

Above supply curve; takes into account external costs imposed on society

Question 9

Internalizing the externality:

Accepted Answer

Altering incentives so people take into account the external effects of their actions

Question 10

Ways government can correct market failure:

Accepted Answer

Internalize externality; subsidy

Question 11

Negative Externality Effects:

Accepted Answer

Market quantity > Socially desirable

Question 12

Positive Externality Effects:

Accepted Answer

Market quantity < Socially desirable

Question 13

Internalize the Externality Effects:

Accepted Answer

Tax goods with negative externalities, subsidize goods with positive externalities

Question 14

Market-Based Policy 1: Corrective Taxes and Subsidies:

Accepted Answer

Provide incentives so private decision makers will choose to problem solve on their own

Question 15

Taxing activities with negative externalities:

Accepted Answer

Ideal corrective tax = External cost

Question 16

Subsidizing activities with positive externalities:

Accepted Answer

Ideal corrective subsidy = External benefit

Question 17

Corrective Tax:

Accepted Answer

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

Question 18

Command-and-Control Policies:

Accepted Answer

Externalities can be corrected by requiring or forbidding certain behavior (regulate behavior directly)

Question 19

Market-Based Policy 2: Tradable Pollution Permits

Accepted Answer

Voluntary transfer of the right to pollute from one firm to another (firms willingness to pay depends on its cost of reducing pollution)

Question 20

Advantages of Market Pollution Permits:

Accepted Answer

reducing pollution at a low cost = sell whatever permits you get; reducing at a high cost = buy whatever permits you need

Question 21

Pollution Permits/Corrective Taxes:

Accepted Answer

Corrective taxes pay a tax to the government; firms can pollute as much as they want by paying the tax (pay to buy permits)

Question 22

Objections to the Economic Analysis of Pollutions:

Accepted Answer

People face trade-offs, Clean environment is a normal good, Clean air and clean water obey law of demand

Question 23

Types of Private Solutions:

Accepted Answer

Moral codes/social sanctions, charities, self-interest of relative parties

Question 24

Coase Theorem:

Accepted Answer

if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Question 25

Transaction Costs:

Accepted Answer

the costs that parties incur in the process of agreeing and following through on a bargain

Chap 10 Econ

Exam 2 Econ

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