Externalities and public goods

Question 1

Welfare economics

Answer 1

Deals with normative issues.
The purpose is to assess how well the economy works, rather than describing how it works.

Question 2

Horizontal equity

Answer 2

The identical treatment of identical people

Question 3

Vertical equity

Answer 3

the different treatment of different people in order to reduce consequences of innate differences

Question 4

Pareto Efficiency

Answer 4

If I make A better off only at the expense of making B better off, that isn’t Pareto efficient.
No one can be made better off without making someone else worse off.

Question 5

Distortions

Answer 5

Exists when society’s marginal cost of producing a good does not equal society’s marginal benefit from consuming that good.
Results from the theory of second-best.

Question 6

Market failure

Answer 6

Occurs when equilibrium in free unregulated markets will fail to achieve an efficient allocation

Question 7

Externalities

Answer 7

Arises whenever an individual’s production/consumption decision directly impacts the production/consumption of others, other than through market prices

Question 8

Open Access Common Property

Answer 8

Resources to which everyone has free access and an equal right to exploit.
Inevitably these properties are overused.
e.g. parks and pools with free entry.

Question 9

How can the OACP issue be fixed?

Answer 9

Gov can apply a tax/fee for use to force people to internalise the externality.
Gov can restrict access to the common resource.
Gov can assign private property rights.

Question 10

The Coase theorem

Answer 10

Where there are no transaction costs and trading externalities are possible, the trading mechanism will lead to an efficient outcome independent of the initial allocation of the property rights

Question 11

Public goods

Answer 11

A commodity/service whose consumption by one person does not preclude others from also consuming it.
Produces a positive externality