Econ Chap. 5 – Flashcards
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An externality
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is a benefit or cost to parties who are not involved in a transaction, can be positive or negative, arises when property rights don't exit or can't be enforced
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A negative externality causes the social cost of production to be
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greater than the private cost
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The private benefit is , while the social benefit is .
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the benefit recieved by the consumer of a good or service; the total benefits from consuming the good
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Market failure is
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a situation where the market doesn't produce the optimal level of a good or service because of externality, can be consequence of externalities
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Positive externality causes a market failure and negative externality causes a market failure
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can; can
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The Coase theorem states that
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if transaction costs are low private bargaining will lead to an efficient solution to externalities
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When we talk about property rights in the discussion of externalities, which rights do we refer to?
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the rights of individuals to have exclusive use of their property
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Externalities result in
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market failure, deadweight loss
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Successful application of Coase theorem requires that
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the bargaining parties have full information regarding the costs and benefits associates with the externalities, the bargaining parties are willing to accept a reasonable agreement, transaction costs are low
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Positive externality results in producing than the economically efficient level of output, whereas negative externality results in producing than the economically efficient level of output
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less; more
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To get the market demand curve for a private good, you add . To get the market demand curve for a public good, you add .
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the quantity of the good demanded by each consumer at each price; the price each consumer is willing to pay for each quantity of the good
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causes a positive externality, while a causes a negative externality
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Higher education; neighbor's dog barking all night
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If we are considering further reductions in pollution, what rule should we follow to maximize the net benefit to society?
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The marginal benefit from another ton of reduction should be equal to the marginal cost MB=MC
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Pigovian taxes and subsidies are intended to
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internalize the externality associated with production or consumption, bring about the efficient level of output in the presence of externality
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According to the Coase theorem, if transactions costs are low will result in an efficient solution to the externality problem.
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private bargaining between the parties
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The command-and-control approach
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is used to reduce pollution, involves the government imposing quantitative limits on the amount of pollution firms are allowed to generate
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To deal with externalities, the government uses
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Pigovian tax and subsidy, command-and-control approach
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A public good is , while a private good is .
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nonrival and nonexcludable; rival and excludable
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A common resource is
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rival but not excludable
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A quasi-public good is
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excludable but not rival
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What is the tragedy of the connoms?
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The tragedy of the commons regers to the tendency for a common resource to be overused
