Chapter 10 – Externalities: When the Price Is Not Right

FILL_IN_THE_BLANK flashcards covering key definitions, efficiency conditions, and outcomes associated with negative and positive externalities.

A cost or benefit that falls on bystanders rather than the decision maker is called an __.

externality

An external cost faced by society but not by the producer is known as a __ externality.

negative

An external benefit enjoyed by others but not captured by the consumer is known as a __ externality.

positive

A cost paid directly by the consumer or producer is called a __ cost.

private

The total cost to everyone (private cost plus external cost) is the __ cost.

social

__ surplus equals consumer surplus + producer surplus + everyone else’s surplus.

Social

The price–quantity combination that maximizes social surplus is called the __ equilibrium.

efficient

With a negative externality, the market produces __ (too much / too little) compared to the efficient quantity.

too much

With a positive externality, the market produces __ (too much / too little) compared to the efficient quantity.

too little

Deadweight loss arises between Qmarket and Qefficient whenever marginal exceed marginal or vice-versa and trade does not adjust.

costs; benefits

A tax on a "bad" such as pollution can __ (reduce / increase) the deadweight loss created by a negative externality.

reduce

Markets are efficient only when individuals and firms face the full __ of their decisions.

consequences (all costs and benefits)

Economists describe price as "a wrapped up in an ."

signal; incentive

The social cost curve lies __ (above / below) the private cost curve when there is a negative externality.

above

Because vaccinated individuals reduce disease spread, the flu shot generates an external __, leading to fewer shots than is efficient.

benefit