question

is the additional cost imposed on society as a whole by an additional unit of pollution

answer

marginal cost of pollution

question

the additional gain to society as a whole from an additional unit of pollution

answer

marginal social benefit of pollution

question

the quantity of pollution that a society would choose if all the costs and benefits of pollution were fully accounted for

answer

socially optimal quantity of pollution

question

an uncompensated cost that an individual or firm imposes on others

answer

external cost

question

a benefit that an individual or firm confers on others w/o receiving compensation

answer

external benefit

question

in the absence of gov. action, the quantity of pollution will be ____; polluters will pollute up to the point at which the marginal social benefit of pollution is zero

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inefficient

question

even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low

answer

Coase theorem

question

when individuals take external costs or benefits into account

answer

internalize the externality

question

i.e. of transaction costs

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-costs of communication -costs of legally blinding agreements -costly delays involved in bargaining

question

rules that protect the environment by specifying actions by producers and consumers

answer

environmental standards

question

tax that depends on the amount of pollution a firm produces

answer

emissions tax

question

an emissions tax equal to the marginal social cost at the socially optimal quantity of pollution induces polluters to _____

answer

internalize the externality

question

in the absence of gov. action, polluters will pollute until the marginal social benefit of an additional unit of emission is ___

answer

zero

question

taxes designed to reduce external costs

answer

pigouvian taxes

question

licenses to emit limited quantities of pollutants that can be bought and sold by polluters (firms will use transactions to re-allocate pollution among themselves)

answer

tradable emission permits

question

emission taxes and tradable permits do what?

answer

-induce polluting industries to reduce output -incentive to create & use less-polluting technology

question

when the marginal social cost of a good or activity exceeds the industry's marginal cost of producing the good -in the absence of gov. intervention, the industry typically produces too much of the good

answer

external costs

question

when there are ____ from a good, the marginal social benefit exceeds the consumers' marginal benefit

answer

external benefits

question

equal to the marginal benefit that accrues to consumer plus its marginal external benefit

answer

marginal social benefit of a good or activity

question

a payment designed to encourage activities that yield external benefits

answer

pigouvian subsidy

question

a policy that supports industries believed to yield positive externalities

answer

industrial policy

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socially optimal quantity (external costs) can be found by___

answer

-optimal Pigouvian tax equal to the marginal external cost -system of tradable production permits

question

-common i.e. of external benefits -when these occur, the marginal social benefit of a good or activity exceeds the marginal benefit to the consumers -too little is produced in the absence of gov. intervention

answer

technology spillovers

question

socially optimal quantity (technology spillovers) can be found by___

answer

optimal pigouvian subsidy equal to the marginal external benefit

question

when P = AC, firms will (enter/exit) when P > AC, firms will (enter/exit) when P < AC, firms will (enter/exit)

answer

-neither -enter -exit

question

when P = AC. At this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs

answer

zero profits (normal profits)

question

the movement of resources from low-profit to high-proft industries does what?

answer

increases the value of production and in the long run this movement balances industries in a way that maximizes their total value of production

question

the entry/exit decisions not only work to eliminate profits and losses, they work to ensure that labor and capital move across industries to optimally balance production so that the greatest use is made of our limited resources

answer

second invisible hand property

question

why won't a firm shut down immediately if the price dips below average cost?

answer

-shutdown doesn't eliminate all costs -shutdown can be costly

question

when its costly to enter and exit and there is uncertainty about future prices, firms must ______

answer

estimate the effect of their decisions on their lifetime expected profit

question

above normal profits are eliminated by entry and below normal profits are eliminated by exit -to earn above normal profits a firm must innovate

answer

elimination principle

question

an industry in which industry costs increase with greater output; shown with an upward slope supply curve

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increasing cost industry

question

an industry in which industry costs do not change with greater output; shown with a flat supply curve

answer

constant cost industry

question

an industry in which industry costs decrease with an increase in output; shown with a downward sloped supply curve

answer

decreasing cost industry (rare)

question

-product being sold is similar across sellers -many buyers and sellers -each small relative to the total market -many potential sellers

answer

competitive industry

question

can expand without pushing up prices of its major inputs and this without raising its own costs

answer

constant cost industry

question

-it is small relative to its input markets so when the industry expands it does not push up price of its inputs and thus industry costs do not increase

answer

constant cost industries characteristics

question

the time period before any entry occurs

answer

short run

question

the time it takes for substantial new investment and entry to occur

answer

long run

question

even though no actor in a market economy intends to do so, in a free market P = MC1 = MC2 = MCn and as a result the total costs of production are minimized

answer

invisible hand property #1

question

the entry and exit decisions not only work to eliminate profits and losses, they work to ensure that labor and capital move across industries to optimally balance production so that the greatest use is made of our limited resources

answer

invisible hand property #2

question

individuals have no incentive to pay for their own consumption and instead will take a "free ride" on anyone who does pay -results in inefficiently low production

answer

free-rider problem

question

how public goods are supplied

answer

-voluntary contributions -self-interested individuals/firms -made excludable

question

goods may be classified according to whether or not they are __ and whether or not they are ___

answer

excludable/rival in consumption

question

-free markets can deliver efficient levels of production/consumption -are both excludable and rival in consumption

answer

private goods

question

when goods are non excludable, non rival in consumption, or both, free markets ___ achieve efficient outcomes

answer

cannot

question

cause a free-rider problem

answer

nonexcludable goods

question

-should be free -any positive price leads to inefficiently low consumption

answer

nonrival in consumption goods

question

-nonexcludable and non rival in consumption -mostly supplied by the gov. -marginal social benefit of good = sum of individual marginal benefits to each consumer

answer

public good

question

efficient quantity of a public good is the quantity at which _____ = ______

answer

marginal social benefit/marginal cost

question

is greater than any one individual's marginal benefit, so no individual is willing to provide the efficient quantity

answer

marginal social benefit

question

rationales for presence of gov.

answer

allows citizens to tax themselves in order to provide public goods

question

help gov. determine the efficient provision of public good -is difficult b/c individuals have an incentive to overstate the good's value to them

answer

cost-benefit analysis

question

-is rival in consumption but non excludable -subject to oversee (individual doesn't take into account that his/her use depletes amount for others)

answer

common resource

question

common resource problem/solutions

answer

-marginal social cost of an individuals common resource is always higher than his or her individual marginal cost -pigouvian taxes, system of tradable licenses, assignment of property rights

question

-excludable but non rival in consumption -efficient price is zero b/c no marginal cost arises from allowing another individual to consume this good - + price compensates the producer for the cost of production but leads to inefficiently low consumption

answer

artificially scarce goods

question

problem with artificially scarce goods

answer

similar to monopoly

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