Chapter 16: Public Goods, Externalities, and Information Asymmetries

Consumers

________ demand private goods, and profit- seeking suppliers produce goods that satisfy the demand.

Free rider problem

________- Once a producer has provided a public good, everyone including nonpayers can obtain the benefit.

Private goods

________- Produced through competitive market system; offered for sale.

Qualification

________- Ways to overcome information difficulties.

Rivalry

________- When one person buys and consumes a product, it is not available for another person to buy and consume.

Coase theorem

________- Government is not needed to remedy external costs or benefits where (1) property ownership is clearly defined, (2) the number of people involved is small, and (3) bargaining costs are negligible.

negative externalities

Market for externality rights- Market- based approach to correcting ________.

Cap

________- and- trade program- An appropriate pollution- control agency determines the amount of pollutants that firms can discharge into the water or air of a specific region annually while maintaining the water or air quality at some acceptable level.

excludability

Non- ________- No effective way of ________ individuals from the benefit of the good once it comes into existence.

Direct

________ controls- Legislation limiting activities causing negative externalities; raise marginal cost of production.

Demand

________ schedules show the price someone is willing to pay for the extra unit of each possible quantity.

Tragedy of the commons

________- As long as "rights "to air, water, and certain land resources are commonly held and are freely available, there is no incentive to maintain them or use them carefully.

Non rivalry

________- One persons consumption of a good does not preclude consumption of the good by others.

Market demand

________ curve D lies to the left of (or below) the full- benefits demand curve.

Adverse selection problem

________- Arises when information known by the first party to a contract or agreement is not known by the second and, as a result, the second party incurs major costs.

Climate change problem

________- The earths surface has warmed over the last century by about 1 degree Fahrenheit, with an acceleration of warming during the past two decades.

Externalities

________- Cost or a benefit accruing to an individual or group- a third party- that is external to a market transaction.

Cost benefit analysis

________- Used to decide whether to provide a particular public good and how much of it to provide.

Excludability

________- Sellers can keep people who do not pay for a product from obtaining its benefits.

Private goods

Produced through competitive market system; offered for sale

Public goods

Non-rivalry + non-excludability

Free-rider problem

Once a producer has provided a public good, everyone including nonpayers can obtain the benefit

Cost-benefit analysis

Used to decide whether to provide a particular public good and how much of it to provide

Marginal-cost-marginal-benefit rule

Tells us which plan provides the maximum excess of total benefits over total costs or, in other words, the plan that provides society with the maximum net benefit

Externalities

Cost or a benefit accruing to an individual or group—a third party—that is external to a market transaction

Coase Theorem

Government is not needed to remedy external costs or benefits where (1) property ownership is clearly defined, (2) the number of people involved is small, and (3) bargaining costs are negligible

Tragedy of the commons

As long as “rights” to air, water, and certain land resources are commonly held and are freely available, there is no incentive to maintain them or use them carefully. As a result, these natural resources are overused and thereby degraded or polluted

Market for externality rights

Market-based approach to correcting negative externalities

Cap-and-trade program

An appropriate pollution-control agency determines the amount of pollutants that firms can discharge into the water or air of a specific region annually while maintaining the water or air quality at some acceptable level

Optimal reduction of an externality

Occurs when society’s marginal cost and marginal benefit of reducing that externality are equal (MC = MB)

Climate-change problem

The earth’s surface has warmed over the last century by about 1 degree Fahrenheit, with an acceleration of warming during the past two decades

Asymmetric information

Unequal knowledge possessed by the parties to a market transaction

Moral hazard problem

Tendency of one party to a contract or agreement to alter her or his behavior, after the contract is signed, in ways that could be costly to the other party

Adverse selection problem

Arises when information known by the first party to a contract or agreement is not known by the second and, as a result, the second party incurs major costs