Week 6

Question 0

What is the public interest view of government

Answer 0

It’s role is to correct market failure and assist welfare of society by reducing rent seeking individuals and providing public goods

Question 1

What is market failure

Answer 1

Market failure is when the market does not result in an economically efficient outcome such as externalities or lack of public goods

Question 2

What is government failure

Answer 2

Government failure occurs when the government fails to correct adequately for market failure or takes actions that lead to a more inefficient outcome then the market

Question 3

What is the private interest view of government

Answer 3

Focuses on the activities and policies of government that bring about government failure such as rent seeking individuals

Question 4

What is rent seeking behaviour

Answer 4

An unproductive activity of an individual or firm in the pursuit of economic surplus above that which would result from a competitive market outcome

Question 5

What are examples of rent seeking behaviour

Answer 5

Monopolies overpricing
Trade unions
Families wanting government to pay for services

Question 6

What is an externality

Answer 6

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

Question 7

What is a positive externality

Answer 7

A positive impact on people who don’t consume the good

Question 8

What is a negative externality

Answer 8

A negative impact on people who don’t consume the good

Question 9

What are the 2 types of externalities

Answer 9

Consumption and production

Question 10

What is the effect of externalities

Answer 10

They interfere with the economic efficiency of a market equilibrium

Question 11

What does a negative externality cause

Answer 11

A difference between the private cost of production and the social cost

Question 12

What does a positive externality cause

Answer 12

A difference between the private benefit from consumption and the social benefit

Question 13

What is a private cost

Answer 13

The cost borne by the producer in the production of a good or service

Question 14

What is the social cost

Answer 14

It is the sum of the private cost and any external cost resulting from production of the good in other words it is the total cost because without externalities the private and social cost would be equal

Question 15

What is private benefit

Answer 15

The benefit received by the consumer of a good or service

Question 16

What is social benefit

Answer 16

The private benefit plus any external benefit. In other words the total benefit because without externalities the private and social benefit would be equal

Question 17

How does a negative externality reduce economic efficiency

Answer 17

Too much of a good or service will be produced at the market equilibrium resulting in a deadweight loss which is the cost of the externality.

Question 18

How does a positive externality affect economic efficiency

Answer 18

When there is a positive externality in consuming a good or service too little of the good or service will be consumed and produced at market equilibrium and there will be a deadweight loss which is the missed benefit of the externality

Question 19

Is externalities an example of market failure

Answer 19

Yes

Question 20

What causes externalities

Answer 20

Externalities and market failures result from incomplete property rights or from the difficulty of enforcing property rights in certain situations

Question 21

Is fully eliminating an externality economically efficient

Answer 21

No it is not because the optimal way to reduce an externality is up to the point where MB = MC

Question 22

What happens with MB if an externality if fully gotten rid of

Answer 22

Each additional removal of the externality results in a smaller and smaller increase in MB

Question 23

What happens to the MC if an externality is fully gotten rid of

Answer 23

The MC for each additional removal of the externality will increase further and further

Question 24

What is the net benefit to society in reducing an externality

Answer 24

It is equal to the difference between the benefit of reducing the externality and the cost

Question 25

How is the net benefit maximised

Answer 25

MB of removing an externality = MC

Question 26

What is the basis for private solutions to externalities

Answer 26

If the optimal level is reached the benefits will outweigh the costs so people can pay the cost to reduce the externality to the optimal level and still have a net benefit

Question 27

What is the problem with private solutions

Answer 27

The problem with private solutions are transaction costs which are the costs in time and other resources that private parties incur. Often the transaction costs are higher then the net benefit from reducing the externality making it not feasible.

Question 28

What is Coase's Theorm

Answer 28

The private solution to the problem of negative externalities is that if transaction costs are low private bargaining will result in an efficient solution to the problem of externalities if both parties have full info about the cost and benefits and are willing to accept an agreement.

Question 29

What did Pigou argue could be done to deal with negative externalities

Answer 29

Impose a tax that is equal to the social cost to society on the firm producing the negative externality internalising it and making it a private cost

Question 30

What did Pigou argue could be done with positive externalities

Answer 30

Give a subsidy equal to the value of the external benefit to internalise it

Question 31

What are Pigous ideas called

Answer 31

Pigovian Taxes and subsidies

Question 32

What is the command control approach

Answer 32

The government places quantitative limits on the amount of pollution firms and individuals are allowed to generate and firms install emission control devices

Question 33

What do economists prefer to the command control approach

Answer 33

Economists prefer the use of market based tools like Pigovian taxes or emissions trading schemes

Question 34

What needs to be known if goods in a market are likely to supply the efficient quantity of goods

Answer 34

Whether their consumption is excludable or rival

Question 35

What is a rival

Answer 35

The situation that occurs when one person consuming a unit of a good means no one else can

Question 36

What is excludability

Answer 36

The situation in which anyone who doesn't pay can't consume

Question 37

Can goods be both rival and excludable

Answer 37

Yes

Question 38

Can goods be non rival and non excludable or both

Answer 38

Yes

Question 39

What do the 4 categories of goods depend on

Answer 39

A goods rivalry and excludability

Question 40

What is a private good

Answer 40

A good both rival and excludable

Question 41

What is a public good

Answer 41

A good both non rival and non excludable

Question 42

What is a quasi-public good

Answer 42

A good that is excludable but not rival

Question 43

What are common resources

Answer 43

A good that is rival but non excludable

Question 44

How is the market demand for a public good determined

Answer 44

Adding up each price the consumer is willing to pay for the quantity of the good which is adding vertically

Question 45

How is this different from determining demand for a private good

Answer 45

Market demand for a private good is determined by adding horizontally the quantity of goods demanded at each price by consumers

Question 46

What is the optimal quantity of a public good

Answer 46

Where demand meets supply and economic surplus is maximised

Question 47

Is there a price mechanism in market for public goods

Answer 47

No

Question 48

Why is there no price mechanism in market for public goods

Answer 48

Because consumers can't be excluded from using the product there is no need to show price preference

Question 49

How do governments then often determine optimal quantity of public goods

Answer 49

Through cost benefit analysis