ECON 010 Chapter Notes - Chapter 5: Demand Curve, Sneakers, Deadweight Loss

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31 May 2018

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Econ010 Chapter 5: Externalities

Externality: benefit or cost that affects someone who is not directly involved in production

or consumption of good/service

Private cost: cost borne by producer of a good or service

Social cost: total cost of producing a good or service including both private cost and any

external cost

Private benefit: benefit received by a consumer of a good/service

Social benefit: total benefit from consuming a good/service, including both private benefit

and any external benefit

Market failure: situation in which market fails to produce efficient level of output

Property rights: rights individuals or businesses have to exclusive use of their property,

including right to buy or sell it

Transaction costs: costs in time and other resources that parties incur in process of

agreeing to and carrying out an exchange of goods/services

Coase theorem: the argument of economist Ronald Coase that if transactions costs are low,

private bargaining will result in an efficient solution to the problem of externalities

Pigovian taxes and subsidies: gov taxes and subsidies intended to bring about an efficient

level of output in presence of externalities

Command and control approach: involves government imposing quantitative limits on

amount of pollution firms are allowed to emit or requiring firms to install specific pollution

control devices

Tragedy of the commons: tendency for a common resource to be overused

-negative externality: surplus

-positive externality: deficit

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Document Summary

Externality: benefit or cost that affects someone who is not directly involved in production or consumption of good/service. Private cost: cost borne by producer of a good or service. Social cost: total cost of producing a good or service including both private cost and any external cost. Private benefit: benefit received by a consumer of a good/service. Social benefit: total benefit from consuming a good/service, including both private benefit and any external benefit. Market failure: situation in which market fails to produce efficient level of output. Property rights: rights individuals or businesses have to exclusive use of their property, including right to buy or sell it. Transaction costs: costs in time and other resources that parties incur in process of agreeing to and carrying out an exchange of goods/services. Coase theorem: the argument of economist ronald coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

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

In an article in the agriculture magazine Choices, Oregon State University economist JunJie Wu made the following observation about the conversion of farmland to urban development:

Land use provides many economic and social benefits but often comes at a substantial cost to the environment. Although most economic costs are figured into land-use decisions, most environmental externalities are not. These environmental 'externalities" cause a divergence between private and social costs for some land uses, leading to an inefficient land allocation. For example, developers may not bear all the environmental and infrastructural costs generated by their projects. Such market failures provide a justification for private conservation efforts and public land use planning and regulation.

Source: JunJie Wu, "Land Use Changes: Economic, Social, and Environmental Impacts," Choices, Vol. 23, No. 4, Fourth Quarter 2008, pp. 6-10.

By market failure, the author means:

(i) benefiting from a good without paying for it.

(ii) a situation that occurs when one person's consumption of a unit of a good means no one else can consume it.

(iii) a situation in which the market fails to produce an efficient level of output.

(iv) a situation in which a benefit is present that affects someone who is not directly involved in the consumption of a good or service.

(v) the tendency for a common resource to be underused.

cyanhound711

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 010 Chapter Notes - Chapter 5: Demand Curve, Sneakers, Deadweight Loss

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