ch 5 homework

externality
a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
efficient equilibrium
where the social cost and social benefit curve intersect
positive externality in consumption
too little of the good or service will be produced at the market equilibrium- creating a deadweight loss between the social benefit curve and the social cost curve for the units produced at the efficient equilibrium but not at the market equilibrium
private cost
the cost borne by the production of a good or service, and social cost is the total cost of production a good or service, including both the private cost and any external cost
negative externality
private cost and social cost will not be equal
if a negative externality in production is present in a market then
the private cost of production will be different than the social cost of production
market failure
a situation in which the market fails to produce the efficient level of output
externalities result in market failure
which is a situation where the market fails to produce the efficient level of output
because of externalities , the market for college education will
provide insufficient college eductions
efficient equilibrium will be on top
of market equilibrium
property rights
rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
How do property rights affect externalities and market failure?
externalities and market failure will result from the difficulty of enforcing property rights
the Coase theorem
the argument of economist Ronald Coase that if transaction costs are low, private bargaining will result in an efficient solution to problem of externalities
for the Coase Theorem to hold
parties to the agreement must have full info about the cost and benefits associated with the externality, and all parties must be willing to accept a reasonable solution
if the electric company utility and the people suffering the effects of the utility pollution can bargain, then making the utility legal liable for the damages from its pollution will
not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change
How might society solve problems associated with externalizes and market failure?
private solutions may reduce or correct market failure
transaction cost
the cost in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services
example of transaction cost
the time required to negotiate an agreement to reduce a negative externality
how might transaction cost affect private solutions to externality problems?
may make private solutions to reduce negative externalities no longer feasible
command and control
approach that involves the gov imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices
command and control is not efficient because
different firms have different cost of reducing pollution
A.C Pigou argued that
negative externalities should be tax
private good
a good that is both rival and excludable
public good
good that is both nonrivalrous and nonexcludable
quasi public good
a good that is excludable but not rival
common resource
good that is rival but not excludable
rivary
situation that occurs when one person consuming a unit of a good means no one else can consume it
excludability
the situation in which anyone who does not pay for a good cannot sume it
national defense is a
public good
trees are
common resourses
dams are
public goods
private markets tend to
underprovide public goods
access to commons can be restricted through
community norms and laws (limited enforced by social pressure)
A Lacoste shirt is
rival and excludable