Micro Chapter 5

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If a positive externality in consumption is present in a market, then

the private benefit from consumption will be different than the social benefit from consumption

How do externalities in the production of electricity result in market failure?

Because of externalities, the market for electricity will

provide too much electricity

How do property rights affect externalities and market failure?

Externalities and market failure will result from the difficulty of enforcing property right

What must be true for the coase theorum to hold?

For the coase theorem to hold,

All parties to an agreement must be willing to accept a reasonable agreement

If electric utility and the people suffering the effect of the utility’s pollution can bargain, then making utility legally liable for the damages from its pollution will

Not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

If an externality is present, resulting in market failure, then

Private solutions may reduce or correct market failure

An example of a transaction cost is

The cost associated with monitoring an agreement to reduce a negative externality

How might transaction costs affect private solutions to externality problems?

Transaction costs

may make private solutions to reduce negative externalities no longer feasible

In england during the middle ages, each village had an area of pasture, known as commons, on which any family in the village was allowed to graze its cows or sheep without charge. was the common land used optimally?

Grazing created a negative externality, resulting in the commons being overused

consider the consumption of electricity. what type of good is electricity?
Electricity is

A quasi – public good

An externality

a. is a benefit or cost to parties who are not involved in a transaction. b. can be positive or negative. c. arises when property rights don’t exist or can’t be enforced.

A negative externality causes the social cost of production to be

greater than the private cost.

The private benefit is ________, while the social benefit is ________.

the benefit received by the consumer of a good or service; the total benefits from consuming the good

Market failure is

a. a situation where the market doesn’t produce the optimal level of a good or service because of externality. b. can be a consequence of externalities.

Positive externality_________ cause a market failure and negative
externality_________ cause a market failure.

can; can

The Coase theorem states that

if transaction costs are low, private bargaining will lead to an efficient solution to externalities

When we talk about property rights in the discussion of externalities, which rights do we refer to?

the rights of individuals to have exclusive use of their property

Externalities result in

a. market failure. b. deadweight loss

Successful application of Coase theorem requires that

a. the bargaining parties have full information regarding the costs and benefits associated with the externalities. b. the bargaining parties are willing to accept a reasonable agreement. c. transaction costs are low.

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.

less; more

To get the market demand curve for a private good, you add _________. To get the
market demand curve for a public good, you add_________.

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

_________ causes a positive externality, while a _________ causes a negative

Higher education; neighbor’s dog barking all night

If we are considering further reductions in pollution, what rule should we follow to maximize the net
benefit to society?

The marginal benefit from another ton of reduction should be equal to the marginal cost.

Pigovian taxes and subsidies are intended to

a. internalize the externality associated with production or consumption. b. bring about the efficient level of output in the presence of externality.

. According to the Coase theorem, if transaction costs are low ________ will result in
an efficient solution to the externality problem.

private bargaining between the parties

The command-and-control approach

a. is used to reduce pollution. b. involves the government imposing quantitative limits on the amount of pollution firms are allowed to generate.

To deal with externalities, the government uses

a. Pigovian tax and subsidy. b. command-and-control approach.

A public good is ________, while a private good is _________.

nonrival and nonexcludable; rival and excludable

A common resource is

rival but not excludable

A quasi-public good is

excludable but not rival.

What is the tragedy of the commons?

The tragedy of the commons refers to the tendency for a common resource to be overused.

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