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CAS EC 101 Lecture Notes - Lecture 39: Imperfect Competition, Perfect Competition, Externality

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coralcaribou304
4 Dec 2018
School
Boston University
Department
Economics
Course
CAS EC 101
Professor
Bruce Watson

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CAS EC 101 Lecture 38: notes11.30.18

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CAS EC 101 Lecture Notes - Lecture 39: Imperfect Competition, Perfect Competition, Externality

40

CAS EC 101 Lecture Notes - Lecture 40: Deadweight Loss, Demand Curve, Externality

Document Summary

Externality: the effect on a third party (who was not involved in the production/consumption process) caused by the production or consumption of a good or service. The reason why externalities exist is bc of well specified property rights like who owns the air. Results from the production of a good or service. Externalities only occur in a market that is not a perfect competition. Complete information: well informed buyers and sellers. Well-specified property rights: we need to know exactly who owns the site of the production or consumption. Exceptions: externalities; public goods (like the air) The production of a good or service has a negative effect on someone. Example: electricity: the production of electricity causes pollution, which is a negative impact on the environment. Supply curve: shows the cost that the producer pays for every unit produced (powerpoint, slide 46) Msc = mpc +additional cost to society. **the supply curve always shows marginal private cost (mpc) in production.

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Related Questions

Question 1

An externality

   

enhances market efficiency.
   

is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
   

is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
   

refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

   

the high price of goods and services
   

individuals; firms
   

market prices; market incomes
   

oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

   

the level of output is too high, and the supply curve should shift to the left to account for the externality.
   

the price of the product is too high, and production should be expanded to lower the price.
   

the level of output is optimal, and there should be no change in the supply curve.
   

the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

   

MSC = MPC - MD
   

MPC = MSC + MD
   

MSC = MPC + MD
   

MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

   

the demand curve will shift to the left.
   

the supply curve will shift to the right.
   

the demand curve will shift to the right
   

the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

   

government intervention is always needed if externalities are present.
   

assigning property rights is the only thing the government should do in a market economy.
   

if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
   

a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

   

the use of private property rights on cattle and common property rights on buffalo.
   

the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
   

cattle existing in Europe also while buffalo were specific to North America.
   

the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

   

cause firms to generate less pollution than their allowed limits.
   

raise the production costs of all firms.
   

cause firms to generate more pollution than their allowed limits.
   

lower the production costs of all firms.

5 points

Question 9

A cap-and-trade policy

   

has a set number of permits.
   

allows polluters to trade permits.
   

caps the total level of pollution allowed.
   

all of the above.

Question 10

A Pigouvian tax corrects for

   

market congestion.
   

market losses.
   

inefficient sales.
   

low market prices.

1. The marginal product of labor is:

A. equal to the demand for labor.

B. the payment made to workers for their contribution to the output they produce.

C. the change in a firm's revenue as a result of hiring one more worker.

D. the additional output a firm produces as a result of hiring one more worker.

2. What does the phrase "internalizing an external cost" mean?

A. limiting the extent to which domestic firms can outsource production

B. prohibiting economic activities that create externalities

C. finding a way to address cross-border pollution

D. forcing producers to factor into their production costs the cost of the externalities created in the production of their output

3. The highest-valued alternative that must be given up to engage in an activity is the definition of

A. implicit cost

B. opportunity cost.

C. utility.

D. economic sacrifice.

4. What is market failure?

A. It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost.

B. It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event.

C. It refers to a breakdown in a market economy because of widespread corruption in government.

D. It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.

5. Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labor is the only input. If the last worker hired increases output by three units per hour, then to maximize profits the firm should

A. lay off some of its workers.

B. does not change the number of workers it currently hires.

C. hire additional workers.

D. There is not enough information to answer the question.

6. When the price of summer tank tops falls and you buy more of them because they are relatively less expensive, this is called

A. the deadweight loss effect.

B. the income effect.

C. the substitution effect.

D. the elasticity effect.

7. An externality is

A. a benefit realized by the purchaser of a good or service.

B. a benefit or cost experienced by someone who is not a producer or consumer of a good or service.

C. a cost paid for by the producer of a good or service.

D. anything that is external or not relevant to the production of a good or service.

8. Firms pay famous individuals to endorse their products because

A. apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. '

B. famous people only consume high-quality products.

C. famous people obviously know what are the best goods and services.

D. the firms are irrational and are wasting advertising expenditures.

9. If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the second candy bar is

A. 25 utility units.

B. 20 utility units.

C. 5 utility units.

D. unknown as more information is needed to determine the answer.

10. When there is a negative externality, the private cost of production ________ the social cost of production.

A. is less than

B. is greater than

C. eliminates

D. is equal to

We hear so much about the depletion of the ozone, the destruction of the rain forest, the pollution of the oceans and rivers, and the depletion of wildlife because

a. private individuals and businesses lack the time to take full account of these issues.

b. private individuals and businesses don�t care about our environment.

c. scientists are looking to make names for themselves and thereby gain a lot of publicity.

d. the media focuses on negative stories.

e. private individuals and businesses lack incentives to take full account of the consequences of their actions.

4. An externality exists when

a. some of the costs of producing a product affect people unable, within a market system, to influence how much of a product should be produced.

b. only the buyers and sellers are affected by the production of a product or service.

c. every person in a market system has a chance to influence how much of a product should be produced.

d. the benefits from consuming the service affect only the purchasers of that service.

e. the costs of producing a service affect only the sellers of that service.

Why are chickens and cows not listed on the endangered species list?

a. People want to eat chickens and cows.

b. People cannot own a chicken or a cow.

c. Chickens and cows reproduce regularly.

d. Private property rights exist for chicken and cows.

e. People will pay to have chicken or beef.

10. Public radio raises its funding by staging telethons where no programs are aired for a period of time as the station solicits contributions. The stations have trouble raising money because

a. the government assigns private property rights to goods.

b. the consumption of a good cannot be limited to the person who purchased it.

c. the broadcasts are private.

d. people do not act in their own self-interest.

e. a monopoly produces a good.

The United States is a major trading partner for many nations because of the

a. size of the U.S. economy and its relatively high level of income.

b. free market benefits of capitalism.

c. commitment of the United States to help immigrants by both importing from and exporting to their countries of origin.

d. active participation of the United States in both the International Monetary Fund and the World Bank.

e. protection to shipping offered by the U.S. strategic presence in vital commercial areas, such as the Middle East.

18. Which of the following statements about international trade restrictions is true?

a. They typically benefit foreign producers at the expense of domestic consumers.

b. They ensure that countries will specialize in those products which they can produce most efficiently.

c. In the majority of cases they harm consumers.

d. They ensure that only efficient producers survive.

e. They ensure that higher-quality goods are provided at lower prices.