ECON 1010 Lecture Notes - Lecture 16: Marginal Cost, Demand Curve, Externality

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12 Dec 2017

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Negative production externalities: include factors like pollution, congestion and carbon emissions. Congestion: like traf c jams, the fuel and time costs of one traf c situation is imposed to other people. Pollution and carbon emission: air pollution contribute to economic costs. Positive production externalities: things that bene t people with production (letting bees out in a ower place) Positive consumption externalities: doing things that bene t humanity or the person (getting u shots) Value on external cost: external costs are calculated with market value to give an accurate sense of loss. External cost and output: the msc curve is above the mc curve because it is the addition of mc and external costs which increase with things like pollution. Application of the coarse theorem: transaction costs, opportunity costs of conducting a transaction, must be low for the coarse theorem to work. Government actions in a market with external costs. Government deals with external costs with taxes, emission charges, and cap-and-trade.

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.

harlequingoldfish8

1. What is meant by the Pareto Efficiency of an allocation of resources? How unique is it for an allocation of resources to be Pareto efficient? What consideration is overlooked by Pareto efficiency? What does the First Theorem of Welfare Economics assert?

2. What is the distinction between a pecuniary externality versus a real (or technical) externality? Give an example of an interaction that constitutes a pecuniary externality. Give an example of an interaction that constitutes a real externality.

3. Imagine a price-taking producer whose production causes a real, negative externality. Draw a diagram to depict the economic outcome in this case, and how this differs from what is the socially optimal outcome. Also, depict Pigou's tax proposal to correct the externality.

4. Acme Charcoal is a charcoal producing company in Cleveland. Its total cost function is

C(QA) = 5 + 20QA + 2QA2, where QA is charcoal production per week in thousands of tons.

a) What is the formula for Acme's marginal cost function?

b) This is the nineteenth century, and no pollution control laws have yet been passed in the US. If charcoal sells in Cleveland for $420 per thousand tons, how much charcoal will Acme produce?

Clearview is an eyeglass company located near Acme Charcoal in Cleveland. Clearview's production of eyeglasses is negatively affected by the smoke from Acme's production of charcoal. Clearview's total cost function to produce eyeglasses is

C(QE) = 60QE + 2QE2 + 1.5QA where QE is Clearview's weekly production of eyeglasses and QA is Acme's weekly production of charcoal in thousands of tons.

c) What is the extra cost to Clearview from an additional thousand tons of charcoal production by Acme?

d) Eyeglasses sell for $160 per eyeglass. How many eyeglasses would you predict that Clearview produces per week?

e) How much profit do Acme and Clearview each earn in this situation?

f) What is the socially optimal level of production of charcoal by Acme? Explain the reason for your answer.

g) If Acme produced the level of production given in your answer to (f), how much would Clearview choose to produce?

h) Given your answer to (f) and (g), how much profit would Acme and Clearview each earn in that situation?

i) How might the outcome in (f) and (g) be brought about according to Pigou?

j) How might the outcome in (f) and (g) be brought about according to Coase if (I) the law makes Acme legally liable for damages resulting from his pollution, or (II) the law imposes no liability on Acme for the consequences of his pollution?

5. The Burnbright Electric Power Company has a coal-fired power plant located in Northern Utah. Consider three alternative scenarios.

(i) The air pollution generated by burning coal at the Burnbright plant doesnâ't cause any pollution, but the trucks that ferry coal to the plant on a daily basis cause traffic congestion for the residents of a small town nearby.

(ii) The air pollution generated by burning coal at the Burnbright plant causes severe haze to occur at the Grand Canyon National Park during the summer season.

(iii) The air pollution generated by burning coal at the Burnbright plant contributes to worldwide greenhouse gas emissions, which contribute to global warming over the next fifty years.

a) Do you think it is likely that Coasian bargaining will take care of the externality and generate a Pareto-efficient allocation of resources without any need for government intervention to control the externality? Answer for each case separately, and explain the reasons for your answer.

b) What are transaction costs? How might they enter the picture in each case? How could they affect the outcome of Coasian bargaining?

blushtiger882

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

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ECON 1010 Lecture Notes - Lecture 16: Marginal Cost, Demand Curve, Externality

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