Chapter 18

Question 1

Private benefit and cost of activity x

Answer 1

The maximum monetary amount a person would be willing to pay to do activity x and the COST to that person of doing activity x

Question 2

Social benefi

Answer 2

The combined monetary amount people would be willing to pay FOR activity x

(Private benefit + any external benefit)

Question 3

Social cost

Answer 3

The combined cost of activity x
(Private cost + any external cost)

Question 4

Negative externality

Answer 4

If an activity imposes costs on others or creates benefits for others that are not captured in private costs and benefits
For example listening to loud music and annoying the neighbours

Question 5

Positive externality

Answer 5

If an activity imposes costs on others or creates benefits for others that are NOT captured in private costs and benefits
For example turning down the volume to please the neighbours

Question 6

Recall that in a perfectly competitive market the supply curve is the summation

Answer 6

Of marginal costs cross firms

Question 7

Where does a monopolist produce

Answer 7

A monopolist produces where MR = MC

Question 8

The Coase Theorem

Answer 8

When the parties affected by externalities can negotiate costlessly with each other,
An efficient outcome results no matter how the law assigns responsibility to damages

Question 9

The laws governing private property are the means by which we determine …

Answer 9

…Who is responsible for damage

Question 10

Who should be given property rights

Answer 10

Given to those for whom it is most Costly to adjust

Question 11

tragedy of commons is a situation where individuals, acting independently and rationally according to their self-interest…

Answer 11

…deplete a shared resource, even though it is in everyone’s best interest to conserve it.

Question 12

the marginal social cost, is equal to…

Answer 12

𝑀𝑆𝐶 = 𝑀𝐶 + 𝑀𝐸𝐶

Question 13

how to Determine the socially efficient price and output

Answer 13

find marginal social cost then equate it to demand function

Question 14

A good is nonexcludable if…

Answer 14

…people who don’t pay cannot easily be prevented from using the good (e.g. public roads, national defence)

Question 15

a good is nonrival if…

Answer 15

…one person’s use of the
good does not reduce the ability of another person to use the same good (e.g. digital music, asteroid deflection).

Question 16

Efficiency occurs when

Answer 16

𝑀𝐵 = 𝑀𝐶1 = 𝑀𝐶2 = 𝑀𝐶𝑇, where 𝑀𝐶𝑇