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ECON 2010 Chapter Notes - Chapter 10: Social Cost, Externality, Coase Theorem

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School
CU-Boulder
Department
Economics
Course
ECON 2010
Professor
Gourley

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ECON 2010 Full Course Notes
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ECON 2010 Full Course Notes
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Document Summary

Chapter 10 externalities: an externality is when the decisions of an individual impact the well-being of an uninvolved bystander. If the impact on the bystander is costly, it is a negative externality. If the impact on the bystander is beneficial, it is a positive externality: externalities can cause market failures, externalities and market inefficiency. Government may attempt to account for the social cost through a tax known as internalizing the externality because it alters incentives to bring awareness to the external effects of action. If production of a good or service has a positive externality to society, then it is said to have a social value which is greater than the private value of the good or service from the producer. Relying on the self-interest of other parties.

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Related Questions

If the social cost of producing a good or service exceeds the private cost

A. a negative externality exists.

B. the market achieves economic efficiency.

C. the sum of consumer surplus and producer surplus is maximized.

D. a positive externality exists.

If the social cost of producing a good or service exceeds the private cost
 
A. A negative externality exists.
B. The market achiever's economic efficiency.
C. The sum of consumer surplus and producer surplus is maximized.
D. A positive externality exists.

Suppose that the Private Cost of producing a good is given by the equation Q = 3.1P - 14.6, but the Social Cost of producing the good is given by Q = 3.1P - 29.5. The government would like to correct this externality by imposing either a tax or subsidy for each unit produced. 

How much should the government tax/subsidize the production of this good to correct the externality?

Important Note: If you find that a subsidy would correct the externality, then you should enter in a positive answer. If you find that a tax would correct the externality, then you should enter in a negative answer. As always, round your answer to two decimal places.