market failure and socially undesirable outcomes

Question 1

What are common pool resources?

Answer 1

resources that are rivalrous but non-excludable; resources are not owned by anyone and are free to use

Question 2

What are private goods?

Answer 2

rivalrous but non-excludable (electronics)

Question 3

What are collective goods?

Answer 3

non-rivalrous but excludable (cinema)

Question 4

What is the tragedy of the commons?

Answer 4

common pool resources can be over-exploited due to a lack of pricing mechanisms and restrictions

Question 5

sustainability

Answer 5

production of goods that meed the needs of the present without depleting resources and limiting future generations to meet their needs and wants

Question 6

unsustainable production

Answer 6

production of goods or services that depletes or degrades the resources

Question 7

market failure

Answer 7

inability of the market to allocate resources efficiently and results in allocative inefficiency

Question 8

allocative inefficiency

Answer 8

too much or too little of a good or service is produced than what is socially desirable

Question 9

What is collective self-governance?

Answer 9

when users take control of resources and use it in a sustainable way to tackle market failure without help of the government

Question 10

What is self-governing institutions?

Answer 10

when rules are provided and enforced by people closes to the problem this rule is meant to address

Question 11

What are public goods?

Answer 11

non-rivalrous and non-excludable goods (national defense)

Question 12

What are the conditions for collective self-governance?

Answer 12

• community based approach
• community has to acknowledge the tragedy of the commons
• community has to have a good way of communicating with each other
• cost of self-organizing must be prohibitively high
• rules of sanctions must be efficient

Question 13

What are solutions to the tragedy of the commons? What are the issues?

Answer 13

-property right extensions, carbon taxes, tradable permits
- enforcement, lack of international co-operation

Question 14

What are the advantages and disadvantages of collective self-governance?

Answer 14

advantages - access to local knowledge, no need to assign property rights, centrally planned decisions
disadvantages - slow and unclear decision making, dependent on ability to communicate well, may not be morally appropriate, discrimination, taxes still need to be paid by the government

Question 15

What is polycenticity?

Answer 15

institutional settings in which public entrepreneurship can arise and no single organization has excessive control and they don’t require permission from a central authority

Question 16

What is an externality?

Answer 16

actions of consumers that cause an effect on economic activity on a third party

Question 17

What is a third party?

Answer 17

someone who is not part of the transaction (neither producer or consumer)

Question 18

What is a positive externality?

Answer 18

side effects on third parties involve benefits

Question 19

What is a negative externality?

Answer 19

side effects on third parties involve costs

Question 20

What is welfare loss?

Answer 20

difference of marginal cost and benefit over socially optimum and actual output

Question 21

What is a consumption externality?

Answer 21

under/over consumption of a good or service

Question 22

What is supply equal to?

Answer 22

MPC or MSC

Question 23

What is demand equal to?

Answer 23

MPB or MSB

Question 24

What is a production externality?

Answer 24

over/under production of goods or services

Question 25

What is a negative production externality?

Answer 25

external costs produced by producers such as pollution as a side-effect of industrial production
- too much of a good is produced
- MSC > MSB

Question 26

what type of resources are negative production externalities linked to?

Answer 26

common pool resources

Question 27

What is MPC, MSC, MPB, MPC?

Answer 27

MPC - cost to producers of producing an extra unit of a good
MSC - cost to society of producing an extra unit of a good
MPB - benefit to consumers of consuming one more unit of a good
MSB - benefit to society of consuming one more unit of a good

Question 28

What is pigouvian tax and how can it eliminate a negative production externality?

Answer 28

indirect tax on the firm per unit of output produced
- optimum would be to impose a tax equal to the external cost to shift MPC towards MSC

Question 29

What are the three market solutions to a negative production externality to prevent overuse of common pool resources?

Answer 29

• pigouvian tax
• tradable permits
• carbon tax

Question 30

What are the three government solutions to a negative production externality to prevent overuse of common pool resources?

Answer 30

• education and awareness
• legislation and regulation
• international agreements

Question 31

What is a carbon tax and how can it be used to eliminate a negative production externality?

Answer 31

tax per unit of carbon emission from fossil fuels in order to incentivize producers to reduce pollution levels

Question 32

What are tradable permits and how can it be used to eliminate a negative production externality?

Answer 32

policies issued by governments to give companies permission to pollute which can be traded or bought

Question 33

What are the advantages and disadvantages of market-based policies?

Answer 33

taxes:
advantages - internalize internal cost, clear signals, flexible, economic efficiency
disadvantages - high cost, hard, regressive, requires regulation, equity concern
permits:
advantages - introduces a market mechanism, flexible, economic efficiency, incentives
disadvantages - unequal, risk of bribes, equity concerns, needs regulation

Question 34

What are the advantages and disadvantages of legislation?

Answer 34

reduce the effect of production externality and limit environmental damage
- simple and effective
- no incentives so less encouragement
- involves shifting MPC upwards towards MSC using policies

Question 35

What is a negative consumption externality and how can it be seen on a graph?

Answer 35

external costs created by consumers consuming de-merit goods such as smokers having health problems as well as affecting other people
- too much is consumed
- MPB > MSB

Question 36

What is a market failure?

Answer 36

failure of the market to allocate resources efficiently, resulting in too much or too little of a good than desirable

Question 37

What are de-merit goods?

Answer 37

goods that are undesirable but are over provided by the market

Question 38

How can indirect taxes correct negative production externalities?

Answer 38

decreases supply and shifts the supply curve upwards, resulting in higher price and lower quantity so allocative efficiency can be achieved
- reduces consumption
- hard to measure external cost

Question 39

How can regulation and advertising correct negative consumption externalities?

Answer 39

prevents or limits consumer activities that impose costs on third parties to shift the demand curve so it overlaps to eliminate the externality
- effective
- hard to regulate

Question 40

What are the advantages and disadvantages of education and awareness?

Answer 40

using campaigns to encourage fewer purchases
- simple and can reach more people
- high costs

Question 41

What are the advantages and disadvantages of nudges?

Answer 41

using choice architecture to influence decision making
- simple and effective
- ethical concerns

Question 42

what are advantages and disadvantages of international agreements?

Answer 42

pros - can make changes more effective, deal world issues
cons - requires co-operation, not all countries may do as expected