Lecture 1 - Externalities and Public Goods

Question 1

Negative Externalities

Answer 1

Occurs when consumption or production choices of one economic agent enter the utility or production function of another agent, without permission from the latter or the latter receiving compensation.

Question 2

Social Inefficiency

Answer 2

Caused by the fact that agents producing externalities do not have any incentive to consider implications of their choices on other agents.

Question 3

Externality

Answer 3

An external or indirect cost or benefit to an uninvolved third party

Question 4

Asymmetric Externality

Answer 4

A single direction; one agent is impacted by the other and that’s the only influence

Question 5

Symmetric Exteranlities

Answer 5

Both agents are affected equally

Question 6

Positive Externalities

Answer 6

Increase the welfare of those affected

Question 7

Negative Externalities

Answer 7

Decreases the welfare of those affected

Question 8

Production Externalities

Answer 8

Impact the production function of those being affected. Impact can occur through increased cost of production or reduced productivity of inputs.

Question 9

Consumption Externalities

Answer 9

Impact the utility functions of those being affected. Increased levels of negative externalities imply increased consumption of goods if utility is to remain constant.

Question 10

Examples of Negative Production Externalities

Answer 10

-Air pollution from fossil fuels damages crops, materials, buildings
-Water pollution from industry can harm plants, animals, humans

Question 11

Examples of Positive Production Externalities

Answer 11

Beekeeper keeping bees for honey has externality of pollination of crops around by bees, allows to harvest more honey

Question 12

Examples of Negative Consumption Externalities

Answer 12

Noise pollution causes sleep deprivation due to neighbor listening to loud music at night
- Traffic congestion: more people use public roads

Question 13

Examples of Positive Consumption Externalities

Answer 13

A pretty house is good for neighbors to look at

Question 14

Total Social Welfare Equation

Answer 14

= PS + CS - EC + Tax Revenue
(Tax revenue part is optional)

Question 15

Externality affect on efficiency

Answer 15

Divergence between social and private cost (or social and private benefit)

Question 16

Static Externalities

Answer 16

Immediate impact on welfare of those affected

Question 17

Dynamic Externalities

Answer 17

Impact over time

Question 18

Modest Externalities

Answer 18

Limited impact on welfare of those affected

Question 19

Strong Externalities

Answer 19

Considerable impact on welfare

Question 20

Externalities impact on Production Possibilities Frontier

Answer 20

No externality = flat line; externality = curved line

Question 21

Pareto-Relevant Externalities

Answer 21

Externalities occurring at a level such that social welfare is not maximized
- Elimination of Pareto-relevant externalities improves welfare, does not imply total elimination of externalities and related interaction between agents, just maximizes social welfare.

Question 22

When Externalities are Pareto Irrelevant

Answer 22

When occurring at a level maximizing social welfare, so no Pareto-improving actions can be taken

Question 23

Tragedy of the Commons

Answer 23

Non-existing, poorly deifned or non-enforceable property rights leads to over-exploitation of resources (Tragedy of the Commons)

Question 24

When tragedy of the commons occurs

Answer 24

1. Open-access settings (property rights lacking)
2. Common-access settings (resource jointly owned by a number of agents)

Question 25

Excludability

Answer 25

It is feasible and practical to selectively allow consumers to consume goods or avoid consumption of bads (am I able?)

Question 26

Rivalry

Answer 26

If one party's consumption reduces amount availlable for consumption by others (is it worth?)

Question 27

When a good (bad) is excludable

Answer 27

If it is feasible and practical to selectively allow consumers to consume it (to avoid its consumption). Goods: Food, Park with access control Bads: Pollution in a lake, gargage today

Question 28

When a good (bad) is rivalrous

Answer 28

If the consumption of a unit diminishes the amount available for others to consume. There is a social opportunity cost (benefit) - Goods: Food, Fishery - Bads: Garbage today, garbage middle age

Question 29

Rival and Excludable Goods

Answer 29

Private goods - Goods: Food - Bads: Garbage today

Question 30

Rival and Non-Excludable Goods

Answer 30

Common Goods - Goods: Fishery - Bads: Garbage middle age

Question 31

Excludable and Non-Rival Goods

Answer 31

Club Goods - Goods: Park with access control - Bads: pollution in a lake

Question 32

Non-Excludale and Non-Rival Goods

Answer 32

Public Goods - Goods: National Defence - Bads: GHGs

Question 33

Private v. Public Goods Market Demand Curve

Answer 33

Private = Horizontal Summation (because consumption is rival) Public = Vertical Summation (because consumption is non-rival so maximum quantity possible)

Question 34

Profit Maximization

Answer 34

Take derivative or 'First Order of Conditions' of the profit function (Revenue-Costs = P*Q - Costs) and equate to 0 to get the output for profit max. Then take 'Second Order of Conditions' (second derivative) so confirm it's a maximum)

Question 35

Joint Profit Maximisation

Answer 35

Sum both profit functions then take partial derivative of profit function with respect to each variable then plug in one solution for the other to solve for each variable