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Economic Policy Lecture 6: Externalities

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Economic Policy Lecture 6: Externalities

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Questions and Answers

What is the main topic of the lecture 6 in the economic policy course?

Mergers and social conventions

Externalities and market failure (correct)

Pigouvian taxes and subsidies

Bargaining and the Coase theorem

In the context of externalities, what are private remedies primarily concerned with?

Promoting social conventions for economic stability

Facilitating mergers and acquisitions

Addressing external effects to prevent market failure (correct)

Implementing Pigouvian taxes and subsidies

Which policy instrument involves imposing charges on activities that cause negative externalities?

Command-and-control regulation

Pigouvian taxes (correct)

Permits

Mergers

According to the compulsory reading, which book and chapter discusses externalities in public economics?

Intermediate Public Economics, Chapter 8 Signup and view all the answers

What is the definition of an externality in economics?

An externality is present when an economic agent’s welfare is directly affected by the action of another agent in the economy. Signup and view all the answers

What are the two categories of externalities in economics?

Production and consumption Signup and view all the answers

In which type of externality does the externality affect profit?

Production externality Signup and view all the answers

Which of the following is an example of a negative consumption externality?

Consumers polluting a river, harming a fishery Signup and view all the answers

What may result if economic agents do not consider all the effects of their actions when making decisions?

Underproduction of goods generating negative externalities Signup and view all the answers

What does the utility function 𝑈1 = 𝑥1 + 𝑢1 (𝑧1) + 𝑣1 (𝑧2) represent?

Consumer 1’s utility function with positive external effect Signup and view all the answers

In competitive equilibrium conditions, what does 𝑢ℎ′ 𝑧 ℎ = 1 represent?

Private marginal cost equals private marginal benefit Signup and view all the answers

What is the key presumption on which the efficiency of the competitive market is based?

Each consumer’s welfare depends only on his/her own consumption decision. Signup and view all the answers

What kind of market failure may occur if economic agents do not consider all the effects of their actions when making decisions?

Underproduction due to positive externalities Signup and view all the answers

In an efficient allocation, what does 1 + 𝑈2 represent?

Consumer 2’s utility function without any external effect Signup and view all the answers

What happens to equilibrium prices if external effects are considered in the determination?

Equilibrium prices do not change. Signup and view all the answers

What does the equation 𝑥1 + 𝑧1 + 𝑥2 + 𝑧2 = 𝜔1 + 𝜔2 represent?

The sum of private marginal costs and benefits. Signup and view all the answers