ECONOM 1014 Lecture Notes - Lecture 15: Sulfur, Pigovian Tax, Coase Theorem

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fuchsiaeagle209

1 Mar 2017

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Document Summary

Market failure is when the market does not produce the efficient level of an output. Market failure is not the same as a business failure. If the market is working well, we expect inefficient businesses to fail. Externalities: costs or benefits to third parties in a transaction. Private cost: paid by the consumer or producer (two parties to a transaction) External cost: imposed on a third party as a result of the transaction. Externalities refer to external costs or benefits to a transaction. Operate like a subsidy; third party is paying part of the cost of production. Social surplus = total surplus (consumer, producer, third parties) Some production costs are being shifted to third parties. Someone else will pay to clean it up, humans will suffer climate effects. The more antibiotics used, the more resistant strains of bacteria; imposing a future cost on people who might catch a disease. Most of the time, the car is not being stolen.

Related Questions

QUESTION 16

Positive externalities exist because:

	a.	internal benefits are greater than external benefits.
	b.	internal benefits are greater than social benefits.
	c.	internal benefits are less than external benefits.
	d.	external benefits are greater than social benefits.
	e.	internal benefits are less than social benefits.

QUESTION 17

What is a black market?

	a.	It is an illegal market that emerges when binding price ceilings are in place.
	b.	It is an illegal market that emerges when only binding price ceilings and binding price floors are in place.
	c.	It is an illegal market that emerges when no price controls are present.
	d.	It is an illegal market that emerges when binding and nonbinding price controls are in place.
	e.	It is an illegal market that emerges when binding price floors are in place.

QUESTION 18

The personal decisions of consumers and firms are based on:

	a.	external costs.
	b.	public-good costs.
	c.	third-party costs.
	d.	internal costs.
	e.	social cost.

QUESTION 19

When the price is _________ the equilibrium price, we would expect there to be a _________, causing the market to put _________ pressure on the price until it went back to the equilibrium price.

	a.	below; shortage; downward
	b.	above; shortage; downward
	c.	above; surplus; upward
	d.	above; surplus; downward
	e.	below; surplus; upward

rosewhale311

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.