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EXAM 2
ECON
| Question | Answer |
|---|---|
| externality | a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service |
| positive externality | people who do not pay for them will nonetheless benefit from them - shift demand curve right - market fails to produce optimal quantity on its own |
| negative externality | people incur a cost even though they don’t purchase electricity (pollution) - shift supply curve left, increase price and decrease quantity, market on its own produces too much |
| private cost | the cost borne by the producer of a good or service - initial supply curve |
| social cost | the total cost of producing a good and it is equal to the private cost plus any external cost - equal to private cost unless of externality - shifted supply curve |
| private benefit | the benefit received by the consumer of a good - initial demand curve |
| social benefit | : the total benefit from consuming a good and it is equal to the private benefit plus any external benefit - equal unless of externality - shifted demand curve |
| market failure | situations in which the market fails to produce the efficient level of output (more or less) – the larger the externality the greater extent of market failure |
| property rights | refer to the rights individuals or businesses have to the exclusive use of their property |
| transaction cost | the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services - larger externality = larger transaction cost |
| coase theorem | if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities - |
| private solutions only occur if | all parties have full information about costs and benefits, all parties are willing to accept a reasonable agreement |
| pigouvian tax | To deal with negative externality, government should impose a tax equal to the cost of negative externality |
| pigouvian subsidy | Deal with positive externality by giving consumers a subsidy equal to the value of positive externality |
| command and control approach | involves the government imposing quantitative limits on the “amount of pollution” firms are allowed to emit or requiring firms to install “pollution control devices” |
| cap and trade | tradable emissions allowances; gov establish allowable amount of emissions, allowances distributed, firms can trade allowances |
| carbon tax | market-based policy to reduce carbon dioxide emissions, incentive to adopt renewable sources of electricity generation |
| rivalry good | occurs when one person’s consumption of a unit of a good means no one else can consume it |
| excludable good | means that anyone who does not pay for a good cannot consume it |
| nonrival good | means that one person’s consumption does not interfere with another person’s |
| nonexcludable good | means that it is impossible to exclude others from consuming the good, whether paid or not |
| private good | both rival and excludable; food, clothing, etc - people value different quantities at same price |
| public good | both nonrival and non-excludable; national defense, court system - people value same quantity at different prices |
| free riding | individuals benefit from a good without paying for it |
| cost benefit analysis | can be useful to determine the correct level of public goods |
| quasi-public good | excludable but not rival, streaming service |
| common resource | rival but not excludable; forestland |
| tragedy of the commons | tendency for common resources to be overused |
Created by:
kayleejh0829