Chapter 11: Greed, Competition and Externalities

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Questions and Answers

What is meant by negative externalities in the context of market failures?

Benefits derived from competition in a monopoly

Absence of competition leading to resource allocation efficiency

Increased costs experienced by firms due to external actions (correct)

Positive impacts of industries on community welfare

Which industries are most likely to face difficulties in promoting public interest according to the discussion?

Industries using privately owned resources to maximize profits

Industries using non-privately appropriated natural resources (correct)

Technology industries benefiting from private property

High-tech industries with established ownership

What contributes to the market failures regarding social goods?

Absence of independent sources of greed in certain industries (correct)

Decreased demand for public goods leading to underproduction

Excessive competition lowering consumer costs

High consumer surplus leading to increased government regulation

How does pollution exemplify a negative externality?

It forces individuals to incur additional costs in their activities Signup and view all the answers

What is a challenge associated with government intervention in markets with negative externalities?

It is often impossible to quantify the social costs accurately Signup and view all the answers

What is a likely effect of free riders on social goods?

Underproduction or depletion of these goods Signup and view all the answers

In the context of marginal social benefits, what happens when negative externalities are present?

Marginal social benefits may be reduced due to increased social costs Signup and view all the answers

What aspect does competition usually address in perfect markets?

Creating mechanisms that align private interest with public welfare Signup and view all the answers

What does the Marginal Social Benefit curve represent in the context of resource ownership?

The difference between consumers' willingness to pay and external costs. Signup and view all the answers

How does the Marginal Social Cost curve differ from the Marginal Private Cost curve?

It includes external costs that affect society as a whole. Signup and view all the answers

What indicates a potential efficiency loss in resource allocation?

The equilibrium point being below the efficient output. Signup and view all the answers

What is a consequence of free riders in the context of natural resources?

They lead to overconsumption and depletion of resources. Signup and view all the answers

What challenge does government intervention face in managing natural resources?

Determining the optimal level of resource extraction. Signup and view all the answers

Which of the following represents a potential gain in consumer surplus?

Reductions in prices due to efficient resource allocation. Signup and view all the answers

Which outcome is expected when consumers own the natural resources according to the Marginal Social Cost curve?

External costs will generally be disregarded in pricing. Signup and view all the answers

How might substituting a government for consumers as the owner of natural resources impact efficiency?

It could improve efficiency if managed correctly and with foresight. Signup and view all the answers

What is the main purpose of government intervention in the economy?

To represent the interests of all members of society Signup and view all the answers

How does a per unit sales tax of $4 impact the Marginal Social Cost?

It increases Marginal Social Cost by $4 Signup and view all the answers

What is likely to result from the presence of negative externalities in a perfectly competitive market?

Inefficient allocation of resources Signup and view all the answers

Which of the following challenges arises from government intervention in addressing negative externalities?

Ensuring moral hazard and adverse selection are prevented Signup and view all the answers

What concept explains the loss of consumer surplus when negative externalities are present?

Deadweight loss Signup and view all the answers

Which area of economic theory explains the problem of free riders affecting the provision of public goods?

Public choice theory Signup and view all the answers

In a scenario involving government intervention, which stakeholder is primarily affected by the Marginal Social Benefit?

Society as a whole Signup and view all the answers

What effect does a $4 per unit tax have on the supply curve?

It shifts the supply curve to the left Signup and view all the answers

What occurs when individuals do not bear the full cost of their actions in the context of negative externalities?

Overconsumption of resources may happen Signup and view all the answers

Why is it necessary for the government to intervene in situations where negative externalities are present?

To ensure the social cost is accounted for in production Signup and view all the answers

Study Notes

Perfect competition in markets controls greed, transforming private interest into public interest.
Many industries, however, lack sufficient sources of greed to regulate overall greed within the economy.
This is not due to a lack of competition but rather a deficiency of independent sources of greed.
Industries facing this problem often utilize publicly accessible natural resources (e.g., air, water) or involve services where ownership is difficult to define (e.g., roads, healthcare). These generate negative externalities.

Externalities and Efficient Allocation of Resources

Negative externality: A firm's actions increase the cost or decrease the quality of life for others (e.g., pollution).
Fisherman example: Increased pollution forces fishermen further out to sea, increasing their costs for the same catch.
The chemical industry's pollution adds to the fisherman's average total cost but the chemical industry does not bear that cost.
Nature's ability to recycle pollutants takes considerable time. The cleanup effort is not zero cost.

Possible Solutions

Consumers as owners of natural resources: The government bestows ownership of resources on consumers to encourage appropriate costs for their usage. Consumers compensate producers for externalities.
Governments as owners of natural resources: Governments function as social institutions representing all members of society, regulating and allocating resources to minimize social harm. The cost of damage to resources is assessed as a tax equal to the marginal external cost.
The difficulty of determining costs: Marginal social benefit is hard to determine; individual preferences and interests influence environmental decisions.

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Description

Explore the intricate relationship between competition and greed in markets as discussed in Chapter 11. Understand how certain industries create negative externalities and the impact on resource allocation. Learn about the challenges posed by inadequate competition in regulating greed effectively.