Chapter 5 Flashcards
(38 cards)
What is the major advantage of the price system?
It allows all resources to move from lower-valued uses to higher-valued uses via a voluntary exchange, by which mutually advantageous trades take place.
In the price system, consumers are _____.
Sovereign.
Give the definition of a “market failure.”
A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity.
How do market failures affect the price system?
They prevent the price system from maximizing efficiency and don’t allow economic freedom among consumers.
In a pure market system, competition generates economic efficiency only when ___________.
Individuals must know and bear the true opportunity cost of their actions.
What is an externality?
A consequence of an economic activity that spills over to affect third parties.
Example: A coal-burning steel plant causing respiratory illness in surrounding communities.
What is the general definition of “property rights?”
The rights of an owner to use and to exchange property.
A negative externality on a producer would shift the supply curve _____.
Left
Positive externalities can shift demand curves to the ______.
Right
When there are external costs, the market will tend to ______ resources to the production of the good or service in question, for those goods and services are implicitly priced deceptively low.
Give an example.
Overallocate
For the dirty steel mill, the owners are not taking into account the cost of pollution to the community. Therefore the price of steel will be lower. More steel will be produced and sold than if the sellers were forced to bear the external costs.
When there are external benefits, the price is too ____ to induce suppliers to allocate resources to the production of that good or service. Explain why.
Low
Because the demand, which fails to reflect the external benefits is too low.
For a positive externality, the market tends to _____resources.
Underallocate
Summarize the relationship between externalities, and what a free market will generate on their behalf.
In a market system, too many of the goods that generate external costs are produced, and too few of the goods that generate external benefits are produced.
What are the two avenues available to a government to correct negative externalities?
- Special taxes
2. Legislative regulation/prohibition
In the example of the steel mill, the externality arises because ____________.
Using the air for waste disposal is costless to the firm but not to society.
What is an effluent fee?
A charge to a polluter that gives them the right to discharge into the air or water a certain amount of pollution.
What is the effect of an effluent fee on the supply and price of a given product?
Since the firm now has added costs the supply curve with shift left causing an increase in the equilibrium price and a decrease in the equilibrium quantity.
What are some ways that government can correct positive externalities?
- Government financing and production
- Regulation
- Subsidies
Property rights can be described as the “_____” for a free market system.
Rules of the game
True or False
Providing a sound legal system is part of the government’s economic function.
True
What is “anti-trust” legislation?
Laws that restrict the formation of monopolies and regulate certain anti-competitive business practices.
What is a “monopoly?”
A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.
What is the definition of a “private good?”
Goods that can be consumed by only one individual at a time.
Private goods are subject to the principle of ______.
Rival consumption.
