Chapter 10 FINAL

Question 1

equilibrium in a free market yields what results

Answer 1

1. goods must be produced at the lowest possible cost
2. goods must satisfy the highest valued demands
3. total surplus (consumer + producer surplus) is maximized

Question 2

externality

Answer 2

the uncompensated impact of one person’s actions on the well-being of a bystander

Question 3

externalities cause markets to be ____ & thus fail to ____

Answer 3

inefficient; maximize total surplus

Question 4

an externality arises when

Answer 4

a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect

Question 5

negative externality

Answer 5

when the impact on the bystander is adverse

Question 6

positive externality

Answer 6

when the impact on the bystander is beneficial

Question 7

examples of negative externalities

Answer 7

automobile exhaust, cigarette smoking, barking dogs, loud music in apartments

Question 8

examples of positive externalities

Answer 8

immunizations, restored historic buildings, research into new technologies

Question 9

negative externalities lead markets to

Answer 9

produce a larger quantity than is socially desirble

Question 10

positive externalities lead markets to

Answer 10

produce a larger quantity than is socially desirable

Question 11

private cost

Answer 11

a cost paid by the consumer or producer

Question 12

private benefit

Answer 12

a benefit received by the consumer or the producer

Question 13

external cost

Answer 13

a cost paid by people other than the consumers or the producers trading in the market

Question 14

external benefit

Answer 14

a benefit received by people other than the consumers or producers trading in the market

Question 15

social cost

Answer 15

the cost to everyone, the private cost + the external cost

Question 16

social benefit

Answer 16

the benefit to everyone, the private benefit plus the external benefit

Question 17

when making decisions, consumers & producers

Answer 17

typically focus on private costs and benefits while ignoring external costs and benefits

Question 18

when consumers and producers ignore externalities, the market equilibrium can be

Answer 18

less than optimal

Question 19

social surplus=

Answer 19

consumer surplus plus producer surplus plus everyone else’s surplus

Question 20

social surplus is not maximized when

Answer 20

externalities are present

Question 21

when consumers and producers ignore external costs, they base their decisions on

Answer 21

private costs only

costs are underestimated, and the market quantity is greater than the socially efficient level

Question 22

wehn external costs are ignored

Answer 22

the market quantity is greater than the socially efficient level, and social surplus is reduced

Question 23

reducing output below the market quantity increases social surplus when

Answer 23

the social cost exceeds buyers’ private benefit

Question 24

to maximize social surplus output should be

Answer 24

reduced to the socially efficient level

Question 25

when external costs are significant, output is

Answer 25

too high

Question 26

when consumers and producers ignore external benefits they base their decisions on

Answer 26

private benefits only | benefits are underestimated and the market quantity is less than the socially efficient level

Question 27

when external benefits are significant, market output is

Answer 27

too low

Question 28

when external benefits are ignored the market quantity is

Answer 28

less than the socially efficient level and social surplus is reduced

Question 29

increasing output above the market quantity increases social surplus when the

Answer 29

social value exceeds sellers private cost

Question 30

to maximize social surplus output should be

Answer 30

expanded to the socially efficient level

Question 31

when externalities are significant, the market equilibrium is no longer how can we solve that problem?

Answer 31

efficient 1. private solutions 2. government solutions

Question 32

coase theorem

Answer 32

if transaction costs are low and property rights are clearly defines, private bargins will ensure that the market equilibrium is efficient even when there are externalities

Question 33

transaction costs

Answer 33

all costs necessary to reach an agreement

Question 34

the coase theorem suggests bargaining, with the right conditions, ensures that

Answer 34

just the right amount of the externality is produced

Question 35

if there were either too little or too much of the externality, trading would

Answer 35

push the quantity to the optimal level, thus the free market equilibrium will maximize social surplus

Question 36

conditions of the coase theorm are unlikely to be met because

Answer 36

transaction costs for many externalities are high & property rights are often not clearly defined

Question 37

when private solutions are not able to emerge

Answer 37

the government can play a role in resolving externalities a. taxes & subsidies b. command & control c. tradeable allowences

Question 38

taxes & subsidies to resolve externalities

Answer 38

- when external costs are significant, governments impose taxes to reduce the market quantity to the efficient level where social costs=buyers benefit - when external benefits are significant, governments offer subsidies to increase the market quantity to the efficient level where social benefits = sellers costs

Question 39

pigouvian tax

Answer 39

a tax on a good with external costs

Question 40

pigovian subsidy

Answer 40

a subsidy on a good with external benefits

Question 41

pigouvian taxes/subsidies allow markets to

Answer 41

send proper signals when externalities are present thus maximizing social surplus

Question 42

a pigouvian tax

Answer 42

reduces output to the efficient quantity

Question 43

a pigouvian subsidy

Answer 43

increases output to the efficient quantity

Question 44

the most direct approach for government to resolve externalities is to

Answer 44

impose command and control regulation

Question 45

when external costs are significant, the government can

Answer 45

mandate a lower quantity than the market level

Question 46

when external benefits are significant, the government can

Answer 46

mandate a higher quantity than the market level

Question 47

command and control regulations do not always bring about an efficient solution. why?

Answer 47

gov'ts may not possess enough info to choose the least costly method to achieve the necessary reduction in quantity when external costs are present they also do not provide consumers and producers the flexibility to choose the least costly method of reducing quantity in these instances

Question 48

command & control can be effective under the following conditions

Answer 48

1. the best approach to the problem is well known | 2. success required very strong compliance

Question 49

the government can address external costs by establishing a market for tradeable allowances. how?

Answer 49

the government sets a maximum quantity and rations a portion of that level to the players in the market consumers and producers individually choose the best (least costly) approach to limit their quantity.

Question 50

tradeable allowances reduce external costs and avoid the problems of command and control regulation. why

Answer 50

consumers and producers have more flexibility in implementing cost control measures it also creates strong incentives for consumers and producers to reduce quantity since allowances are tradeable.

Question 51

when external costs are ignored

Answer 51

the market quantity is greater than the socially efficient level, social surplus is reduced

Question 52

when external benefits are ignored

Answer 52

the market quantity is less than the socially efficient level and social surplus is reduced