ch 5 homework – Flashcards
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a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
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externality
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where the social cost and social benefit curve intersect
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efficient equilibrium
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too little of the good or service will be produced at the market equilibrium- creating a deadweight loss between the social benefit curve and the social cost curve for the units produced at the efficient equilibrium but not at the market equilibrium
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positive externality in consumption
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the cost borne by the production of a good or service, and social cost is the total cost of production a good or service, including both the private cost and any external cost
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private cost
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private cost and social cost will not be equal
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negative externality
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the private cost of production will be different than the social cost of production
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if a negative externality in production is present in a market then
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a situation in which the market fails to produce the efficient level of output
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market failure
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which is a situation where the market fails to produce the efficient level of output
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externalities result in market failure
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provide insufficient college eductions
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because of externalities , the market for college education will
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of market equilibrium
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efficient equilibrium will be on top
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rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
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property rights
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externalities and market failure will result from the difficulty of enforcing property rights
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How do property rights affect externalities and market failure?
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the argument of economist Ronald Coase that if transaction costs are low, private bargaining will result in an efficient solution to problem of externalities
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the Coase theorem
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parties to the agreement must have full info about the cost and benefits associated with the externality, and all parties must be willing to accept a reasonable solution
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for the Coase Theorem to hold
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not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change
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if the electric company utility and the people suffering the effects of the utility pollution can bargain, then making the utility legal liable for the damages from its pollution will
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private solutions may reduce or correct market failure
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How might society solve problems associated with externalizes and market failure?
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the cost in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services
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transaction cost
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the time required to negotiate an agreement to reduce a negative externality
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example of transaction cost
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may make private solutions to reduce negative externalities no longer feasible
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how might transaction cost affect private solutions to externality problems?
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approach that involves the gov imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices
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command and control
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different firms have different cost of reducing pollution
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command and control is not efficient because
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negative externalities should be tax
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A.C Pigou argued that
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a good that is both rival and excludable
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private good
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good that is both nonrivalrous and nonexcludable
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public good
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a good that is excludable but not rival
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quasi public good
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good that is rival but not excludable
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common resource
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situation that occurs when one person consuming a unit of a good means no one else can consume it
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rivary
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the situation in which anyone who does not pay for a good cannot sume it
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excludability
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public good
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national defense is a
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common resourses
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trees are
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public goods
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dams are
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underprovide public goods
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private markets tend to
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community norms and laws (limited enforced by social pressure)
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access to commons can be restricted through
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rival and excludable
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A Lacoste shirt is
