microecon chapter 7

Externalities

Cost and benefits of a market occurrence that affect a third party, typically causing an undesirable consequence.
Exists when an internal cost or benefit diverges from a social cost

Market Failure

Happens when there is a inefficient allocation of resources in the market

Internal costs

the costs of a market activity that only the individual involved pays

External costs

the costs of a market activity that is imposed on individuals who aren't involved in that market

Social costs

sum of internal and external costs of a market activity

Third-party problem

when an individual not directly involved in a market activity experiences a positive or negative externality

Social optimum

price and quantity combination if there were no externalities

Negative Externalities

when a third party is negatively effected from a market activity

Internalize

When a firm takes external costs/benefits that affect society into account as a result of their actions

Positive Externalities

when a third party is positively effected from a market activity, by-products of consumption or production that benefit third parties

Property Rights

lets owners exercise control over a resource

Private Property

provides an exclusive right over a piece of land for use and exchange

The Coase Theorem

when property rights are specified and there are no barriers to negotiations, an externality could be internalized by bargaining by interested parties

Excludable good

a good that access is limited to paying customers

Rival good

a good that cannot be enjoyed by more than one person at a time

Private good

a good that is rival and excludable

Public good

a shared good that is consumed by more than one person and is difficult to exclude nonpayers

Club good

when a good is non-rival but excludable

Free-Rider problem

when an individual takes advantage of a good without paying for it

Common Resource good

when a good is rival in consumption but nonexcludable

Four Types of Goods

common resource, club, private, and public goods

Cost-Benefit Analysis

a process to assess if the benefits of a public good outweigh the costs

Cap and Trade

A system used to decrease pollution by permitting emissions that are traded in a open market

Your friend Seltic wants to study more. You realize that when you study, he is more likely to study. Your increased desire to study is ____________ and if you ignore this effect Seltic will study ___________ than the socially optimum level.

a positive externality; less

Rick recently moved into an apartment complex that is located next to an extremely busy highway. Rick plays his stereo pretty loudly, but its sound is indistinguishable from the noise of the traffic. The noise created by Rick's stereo is an example of

a negligible externality.

London and Stockholm each use congestion charges to discourage driving. Which city has the best system and why?

Stockholm because they established a dynamic-price congestion charge.

A roofing company decides to fix the leaky roof during your scheduled class. The noise impairs the ability of you and the others in class to learn the material. This is a

negative externality

A group of friends goes out to eat together and they agree to split the bill equally. They order a series of tapas, or small dishes to share. However, the best dishes get consumed very quickly while the less appetizing dishes go largely uneaten. What economic concept explains why the best tapas are consumed so quickly?

It is a common property problem

How would alter your transportation decisions if you had to pay for the pollution (a social cost) that your vehicle creates?

You would drive less since the social cost (of pollution) is now be considered part of the private cost of driving.

Which type of congestion charge will be the most effective at managing traffic flow?

A dynamic congestion price

If government regulations force a business to take into account social costs, it will

reduce production and charge a higher market price.

Which of the following would be viewed as a common property problem?

People pick all of the flowers in a public park.

When social and private costs differ, economists state that

there is an externality.

If a firm does not have to take social costs into account, it will establish a private optimum where

there is increased production and it charges a lower market price.

Generally speaking, the government is better at providing public goods than the market is, because public goods are:

non-excludable

My neighbor has a large satellite dish on his roof that blocks sunlight into my house. Since I need my sun, I talk to him and I agree to pay him $200 and he switches to basic cable and takes down the satellite dish. We reached this agreement because

when the transactions costs are low people have an incentive to find solutions to private property problems.

Which of the following is the best example of a public good?

National defense

Consider a public television station that relies on donations to maintain operation. Herman enjoys watching this channel a lot, but he does not donate any money to keep the channel alive. Herman is:

a free-rider

My neighbor has a rooster that crows at the break of dawn. I like to sleep in, so I give my neighbor $100 and she sells the rooster. This solution is most consistent with:

The Coase Theorem.

In order to encourage more recycling, we

should price curbside trash service by weight.

What is the optimal amount of pollution?

Occurs where the MB of abating pollution is equal to the MC of abating pollution.

If society taxes polluting firms to achieve the socially optimal level of production, this leads to _______ prices and _______ output.

higher; lower

My neighbor and I share a property line but there is no fence. She lets her dog out each morning and it poops on my property. I asked her to clean up or build a fence, she noted that there is no leash law for dogs where we live and said it was not her problem. I decide to build a fence around my property.

this is an example of internalizing an externality.