Module 4

Question 1

What is an externality?

Answer 1

An externality is when the full cost or benefit of a good is not borne by the producers and consumers of that good. It represents spillover effects on third parties​

Question 2

What is a negative externality?

Answer 2

A negative externality occurs when a third party suffers from a market transaction, such as pollution from manufacturing​

Question 3

What is a positive externality?

Answer 3

A positive externality occurs when a third party benefits from a market transaction, such as the increase in property values due to well-kept gardens in a neighborhood​

Question 4

What are private costs?

Answer 4

Private costs are the costs that producers or consumers directly bear when producing or consuming a good​

Question 5

What are social costs?

Answer 5

Social costs include both private costs and additional costs incurred by third parties, such as pollution affecting human health​

Question 6

What is market failure?

Answer 6

Market failure occurs when the market does not allocate resources efficiently, often due to externalities

Question 7

What is command-and-control regulation?

Answer 7

A policy that sets specific limits on the amount of pollution or requires specific technologies to be used for pollution control​

Question 8

What are market-oriented environmental tools?

Answer 8

Policies that create incentives for firms to reduce pollution, such as pollution charges, marketable permits, and better-defined property rights​

Question 9

How do external costs affect the supply curve?

Answer 9

External costs cause the supply curve to shift left, resulting in a higher price and lower quantity of production at the new equilibrium​

Question 10

How do pollution charges impact firm decisions?

Answer 10

Firms will reduce pollution if the cost of abatement is lower than the cost of the pollution charge, leading to more cost-effective pollution reduction

Question 11

hat is a marketable permit?

Answer 11

A permit that allows a firm to emit a specified amount of pollution, which can be bought and sold between firms

Question 12

How do property rights help address externalities?

Answer 12

Clearly defined property rights ensure that firms compensate for any damage caused, providing an incentive to minimize pollution

Question 13

What are marginal costs of reducing pollution?

Answer 13

Marginal costs are the additional costs of reducing one more unit of pollution, typically increasing as pollution levels decrease​

Question 14

What are marginal benefits of reducing pollution?

Answer 14

Marginal benefits are the additional benefits of reducing one more unit of pollution, usually decreasing as the amount of pollution decreases

Question 15

What is the optimal level of pollution reduction?

Answer 15

It is the level where marginal benefits of reducing pollution equal marginal costs, maximizing net benefits to society

Question 16

How does a pollution tax differ from command-and-control regulation?

Answer 16

A pollution tax allows firms to choose how to reduce pollution based on cost-effectiveness, while command-and-control specifies methods and limits​

Question 17

What is the Coase Theorem?

Answer 17

It suggests that if parties can bargain without cost, they can reach an agreement to solve externalities on their own, regardless of initial property rights distribution​

Question 18

What are international externalities?

Answer 18

These are externalities that cross national borders, such as climate change, which cannot be resolved by a single nation acting alone

Question 19

Why do marginal costs of environmental protection rise as more protection is provided?

Answer 19

Initial pollution reductions are usually cheaper and more effective, but later reductions require more expensive measures, increasing marginal costs​

Question 20

How do low-income countries view global environmental protection?

Answer 20

Low-income countries often prioritize economic development over environmental protection, viewing the latter as a luxury​

Question 21

What is a public good?

Answer 21

A public good is a good that is non-excludable and non-rival, making it difficult for markets to produce and sell to individual consumers

Question 22

What does non-excludable mean?

Answer 22

Non-excludable means it is costly or impossible to exclude someone from using the good, making it hard to charge for it

Question 23

What does non-rival mean?

Answer 23

Non-rival means that when one person uses the good, it does not prevent others from using it​

Question 24

What are social benefits?

Answer 24

Social benefits are the sum of private benefits and external benefits of a good or service, accounting for the overall impact on society

Question 25

What is a free rider?

Answer 25

A free rider is someone who wants others to pay for a public good and then plans to use the good themselves, leading to potential underproduction

Question 26

Why do private firms underinvest in new technology?

Answer 26

Private firms underinvest because they cannot capture all of the social benefits, making the private rate of return lower than the social rate of return

Question 27

How do positive externalities affect demand for financial capital?

Answer 27

Positive externalities increase social demand for financial capital beyond private demand, as the benefits spill over to others​

Question 28

What is the socially optimal level of investment in innovation?

Answer 28

It is the level where the social rate of return equals the cost of capital, typically higher than the private rate of return due to spillover benefits​

Question 29

What is the role of intellectual property rights in innovation?

Answer 29

Intellectual property rights, like patents and copyrights, provide legal protection to inventors, allowing them to capture more of the social benefits of their innovations​

Question 30

How can government spending encourage innovation?

Answer 30

Government can directly fund research and development (R&D) in areas where private investment is insufficient due to high social benefits​

Question 31

What are tax breaks for R&D?

Answer 31

Tax breaks reduce taxes for firms based on the amount of R&D they conduct, incentivizing private investment in new technologies​

Question 32

What are cooperative research ventures?

Answer 32

Cooperative research involves partnerships between universities, the private sector, and government, pooling resources to spur innovation

Question 33

Why do markets struggle to produce public goods?

Answer 33

Markets struggle because public goods are non-excludable and non-rival, allowing free riders to use the good without paying, reducing private incentives for production​

Question 34

What is the solution to the free rider problem?

Answer 34

The solution involves government intervention, such as funding public goods through taxation or social pressures that ensure contributions

Question 35

Give an example of a quasi-public good.

Answer 35

A quasi-public good has both private and public characteristics, like subscription-based radio, which is excludable but non-rival once paid for

Question 36

What is the "tragedy of the commons"?

Answer 36

It is the overuse of a common resource because individuals acting in self-interest do not bear the full cost of depletion, often requiring regulation

Question 37

How does government intervention help public health programs?

Answer 37

Governments provide subsidies or mandates for vaccination to address positive externalities, aligning individual behavior with social benefits

Question 38

Why is national defense considered a public good?

Answer 38

It is non-excludable and non-rival, as protection covers everyone regardless of payment, making it necessary for government funding

Question 39

What are private vs. social rates of return?

Answer 39

Private rates of return go to the investor, while social rates include spillover benefits to society, making the latter generally higher​

Question 40

How does the free rider problem relate to public television?

Answer 40

Public TV overcomes the free rider problem through memberships, special perks, and partial government funding, encouraging voluntary contributions​