Module 11

Question 1

What kind of good is both excludable and rival?

Answer 1

Private good

Question 2

what kind of good is non-excludable but rival?

Answer 2

Common good

Question 3

What kind of good is non-rival, but excludable?

Answer 3

Quasi-public good

Question 4

What kind of good is non-excludable and non-rival?

Answer 4

Public good

Question 5

What does it mean when we say a good is rival?

Answer 5

One person’s consumption of that good excludes someone else from consuming it.

Question 6

What does it mean when we say a good is excludable?

Answer 6

It’s possible to make people pay for it, with no free-rider problem.

Question 7

What kind of good is national defence?

Answer 7

Public

Question 8

What kind of good is a lighthouse?

Answer 8

Public

Question 9

What kind of good is a cinema?

Answer 9

Quasi-public

Question 10

What kind of good is a haircut?

Answer 10

Private

Question 11

What kind of good is cable-TV?

Answer 11

Quasi-public

Question 12

What kind of good is public education?

Answer 12

Common good

Question 13

How do we calculate the demand curve for a public good?

Answer 13

Q: the individual units
P: added across consumers
So if 2 people would each pay $1 for 1 unit, Q=1, P=$2

Question 14

Why is it hard to figure out the true demand for a public good?

Answer 14

Because no one has incentive to reveal their preferences.

Question 15

What kind of good is a toll road?

Answer 15

Quasi-public (unless massive congestion occurs)

Question 16

What is the “tragedy of the commons”?

Answer 16

The “tragedy of the commons”:
- stems from lack of enforceable property rights
- the tendency for a common resource to become overused to the point where it’s no longer useful.

Question 17

How do we correct for the tragedy of the commons?

Answer 17

Taxes, quotas.

Question 18

What is an externality?

Answer 18

A cost or benefit that is not borne solely by the buyer or seller.

Question 19

What is a private cost?

Answer 19

A cost borne solely by the producer.

Question 20

What is a social cost?

Answer 20

The sum of private cost plus any externality.

Question 21

What is a private benefit?

Answer 21

The benefit received by the consumer.

Question 22

What is a social benefit?

Answer 22

= private benefit plus any externalities

Question 23

Where do we find the DWL for a negative externality?

Answer 23

On the right side of the demand curve, between the old and new supply curves.

Question 24

Where do we find the DWL for a positive externality?

Answer 24

Between the old and new demand curves on the left hand side of the intersection between them and supply.

Question 25

When showing the correction for a positive externality, does the supply or the demand curve change?

Answer 25

Demand curve changes with a correction for a positive externality.

Question 26

When showing the correction for a negative externality, does the supply or demand curve change?

Answer 26

The supply curve changes when we correct for a negative externality.

Question 27

With a negative externality, is there a shortage or a surplus of the good?

Answer 27

Surplus

Question 28

With a positive externality, is there a shortage or a surplus of the good?

Answer 28

Shortage

Question 29

What is a market failure?

Answer 29

When the market fails to produce the efficient level of output.

Question 30

What do externalities and market failures arise from?

Answer 30

The inability to enforce property rights, or the incompleteness of property rights.

Question 31

Is there an efficient level of an externality? Why or why not?

Answer 31

Yes - rule of decreasing marginal benefit applies to fighting the externality as well.

Question 32

What is area B?

Answer 32

Area B is the total cost of increasing the reduction of pollution from 7.0 to 8.5.

Question 33

What is area A?

Answer 33

Area A is the net benefit to society for increasing the pollution reduction from 7.0 to 8.5.

Question 34

What is the total benefit from increasing the reduction in pollution levels from 7.0 to 8.5?

Answer 34

The total benefit from increasing pollution reduction levels from 7.0 to 8.5 is the sum of areas A + B.

Question 35

How does the cost of fighting an externality change based on who's paying?

Answer 35

The cost does not change at all. It still costs the same amount to fight externalities no matter who's paying.

Question 36

What is a transaction cost?

Answer 36

Transaction costs are the costs in time and resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

Question 37

What must be true about transaction costs in order for there to be a private solution to externalities?

Answer 37

They must be low.

Question 38

What is the Coase Theorem?

Answer 38

If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.

Question 39

What are the caveats to the Coase Theorem?

Answer 39

All parties to the agreement must have full information about all costs and benefits. All parties must be willing to accept a reasonable agreement.

Question 40

How do we find the value of the tax when correcting for a negative externality?

Answer 40

The value of the tax is from P*efficient* to P*received by producers*, found from the natural Q when S has been corrected.

Question 41

How do we find the value of a subsidy when looking at a correction for a positive externality?

Answer 41

The value of the subsidy is from P*paid by consumers* to P*efficient*

Question 42

How do we find the price paid by consumers on a graph showing a subsidy that corrects for a positive externality?

Answer 42

Where the original D is intersected by Q*efficient*.

Question 43

Who was Pigou?

Answer 43

A British economist who argued that taxes and subsidies could be used to correct for externalities.

Question 44

What is a Pigouvian tax or subsidy?

Answer 44

A tax or subsidy used to correct for externalities, and in the same amount as the externality.

Question 45

What is "command and control"?

Answer 45

"Command and control" refers to using rules to combat externalities, such as quantitative limits on pollution, rules about processes, etc.