Podcast
Questions and Answers
The costs of a market activity paid for by an individual NOT engaged in the market activity are ____ costs.
The costs of a market activity paid for by an individual NOT engaged in the market activity are ____ costs.
- internal
- common
- free-rider
- social
- external (correct)
Which of the following is true of a negative externality?
Which of the following is true of a negative externality?
- Some costs are borne by a third party; this is not always required. (correct)
- Some benefits accrue to a third party; this is not always required.
- Its existence always requires corrective measures by the government.
- The government must take over the production of this good so that the externality can be internalized.
- The government can use subsidies to encourage firms to internalize the externality.
The Coase theorem suggests that private parties ____.
The Coase theorem suggests that private parties ____.
- will never be able to negotiate to correct a negative externality.
- can always negotiate to correct a negative externality.
- can negotiate to correct a negative externality if the government passes a law allowing them to do so.
- can negotiate to correct a negative externality if there are no barriers to negotiation. (correct)
- can never negotiate to correct a negative externality if there are more than two clearly defined parties involved.
Implicit costs are ____.
Implicit costs are ____.
In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?
In an experiment, children were given a marshmallow and were promised a second marshmallow if they could wait 15 minutes to eat the first one. Only about one-third of the children earned the second marshmallow. What does this experiment illustrate about children's rationality?
If 12 consecutive tosses of a fair coin have all been tails, some individuals tend to think that the next one “must be heads.” This is an example of the ____ fallacy.
If 12 consecutive tosses of a fair coin have all been tails, some individuals tend to think that the next one “must be heads.” This is an example of the ____ fallacy.
A risk-neutral consumer ____.
A risk-neutral consumer ____.
Write an example of a common-resource good.
Write an example of a common-resource good.
Flashcards
External Costs
External Costs
Costs of a market activity paid by someone not involved in the activity.
Negative Externality
Negative Externality
A situation where some costs are borne by a third party not involved in the transaction.
Coase Theorem
Coase Theorem
Private parties can solve externality problems through negotiation if there are no barriers.
Implicit Costs
Implicit Costs
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Intertemporal Decision-Making
Intertemporal Decision-Making
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Gambler's Fallacy
Gambler's Fallacy
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Risk-Neutral Consumer
Risk-Neutral Consumer
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Common-Resource Good
Common-Resource Good
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Study Notes
Exam 2 - Instructions
- Calculator permitted, but no outside notes.
- Points earned require a logical explanation of answers.
- Clearly label graphs.
- Practice questions focus on Chapter 16 and behavioral economics.
Question 1 - Costs of Market Activity
- External costs: Costs incurred by parties not directly involved in the market activity. (e.g., pollution affecting nearby residents)
Question 2 - Negative Externalities
- Externality: Actions of individuals or firms imposing costs on others.
- Government Solutions: Can involve taxes or regulations to internalize the externality.
- Coase Theorem: Private negotiations can lead to efficient outcomes, especially with clear property rights and low transaction costs.
Question 3 - Coase Theorem
- Correcting Negative Externalities: Private parties can negotiate solutions in the absence of high transaction costs and clear property rights.
- Government Intervention: Not always necessary, but a solution if negotiation is not possible.
Question 4 - Implicit Costs
- Definition: Foregone opportunities of using resources in other alternatives.
- Calculation: Not always expressed in dollar amounts.
- Relationship to Explicit Costs: Can be less than or greater than explicit costs. Explicit costs are directly paid out in dollars.
Question 5 - Marshmallow Experiment
- Rationality of Children: The experiment illustrates difficulties with balancing present rewards with future rewards (intertemporal decision-making).
Question 6 - Gambler's Fallacy
- Definition: The mistaken belief that past independent events affect the probability of future events. (E.g., assuming a coin flip result influences future tosses).
Question 7 - Risk-Neutral Consumer
- Definition: A consumer who values only the expected value of a gamble and is indifferent to risk.
Question 8 - Common Resource Goods
- Example: Fisheries, grazing lands
- Characteristics: Rivalrous (one person's use reduces availability for others) and non-excludable (difficult to prevent others from using the resource).
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