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Questions and Answers
What is one public policy approach to manage externalities mentioned?
What is one public policy approach to manage externalities mentioned?
- Issuing pollution permits (correct)
- Enhancing consumer protection laws
- Implementing price ceilings
- Subsidizing affected businesses
What can businesses do when one imposes an externality on another?
What can businesses do when one imposes an externality on another?
- Ignore the externality
- Increase their production without changes
- Rely on government intervention
- Internalize the externality by merging (correct)
According to the Coase theorem, what is necessary for private parties to effectively bargain?
According to the Coase theorem, what is necessary for private parties to effectively bargain?
- Free access to legal resources
- Government oversight
- No transaction costs (correct)
- Financial incentives
What outcome does the Coase theorem suggest can be achieved through bargaining among parties?
What outcome does the Coase theorem suggest can be achieved through bargaining among parties?
What limitation exists when using the Coase theorem in practice?
What limitation exists when using the Coase theorem in practice?
Which option best describes the role of corrective taxes in managing externalities?
Which option best describes the role of corrective taxes in managing externalities?
How can issuing a limited number of pollution permits impact polluters?
How can issuing a limited number of pollution permits impact polluters?
What is a common misconception about the Coase theorem?
What is a common misconception about the Coase theorem?
What is a price ceiling?
What is a price ceiling?
What happens when a price ceiling is binding?
What happens when a price ceiling is binding?
Which of the following is an example of a price floor?
Which of the following is an example of a price floor?
What is a common outcome of a price floor that is binding?
What is a common outcome of a price floor that is binding?
In the context of tax incidence, what does it refer to?
In the context of tax incidence, what does it refer to?
Which of the following is not a characteristic of a price ceiling?
Which of the following is not a characteristic of a price ceiling?
Which situation illustrates the effect of a price ceiling?
Which situation illustrates the effect of a price ceiling?
If a price floor is not binding, what is the likely result?
If a price floor is not binding, what is the likely result?
What is primarily seen as a benefit of education for the individual?
What is primarily seen as a benefit of education for the individual?
What characteristic distinguishes public goods from private goods?
What characteristic distinguishes public goods from private goods?
What type of taxes are enacted to address negative externalities?
What type of taxes are enacted to address negative externalities?
Which of the following is an example of a public good?
Which of the following is an example of a public good?
What happens in markets due to negative externalities?
What happens in markets due to negative externalities?
Which statement accurately defines 'excludability'?
Which statement accurately defines 'excludability'?
What is an ideal corrective subsidy meant to achieve?
What is an ideal corrective subsidy meant to achieve?
What does 'rivalry in consumption' mean?
What does 'rivalry in consumption' mean?
Why do economists generally prefer corrective taxes over regulations for pollution control?
Why do economists generally prefer corrective taxes over regulations for pollution control?
Which of the following statements is true regarding common resources?
Which of the following statements is true regarding common resources?
How can the government address positive externalities?
How can the government address positive externalities?
What is a common method used by the government to support education?
What is a common method used by the government to support education?
How does basic research knowledge differ from specific technological knowledge?
How does basic research knowledge differ from specific technological knowledge?
What type of analysis is used to evaluate the provision of public goods?
What type of analysis is used to evaluate the provision of public goods?
What is the term for a tax designed to encourage private decision makers to consider social costs?
What is the term for a tax designed to encourage private decision makers to consider social costs?
Which of the following is NOT a characteristic of public goods?
Which of the following is NOT a characteristic of public goods?
What does producer surplus measure?
What does producer surplus measure?
How is producer surplus computed?
How is producer surplus computed?
What characterizes an efficient allocation of resources?
What characterizes an efficient allocation of resources?
What type of externality occurs when an activity negatively affects bystanders?
What type of externality occurs when an activity negatively affects bystanders?
What is the effect of market failures on resource allocation?
What is the effect of market failures on resource allocation?
What does internalizing an externality aim to accomplish?
What does internalizing an externality aim to accomplish?
Which of the following instruments can the government use to address externalities?
Which of the following instruments can the government use to address externalities?
What is an example of a positive externality?
What is an example of a positive externality?
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Study Notes
Supply, Demand, and Government Policies
- Price Ceiling: A legal maximum on the price at which a good can be sold.
- Price Floor: A legal minimum on the price at which a good can be sold.
- A Binding Price Ceiling: Leads to a shortage
- A Binding Price Floor: Leads to a surplus
- Rent Control: One common example of a price ceiling
- Minimum Wage: An important example of a price floor
- Tax Incidence: The distribution of a tax burden between buyers and sellers
Public Goods
- Public goods are neither excludable nor rival in consumption
- Excludability: Preventing individuals from consuming a good
- Rivalry in Consumption: One person's use of the good decreasing the ability of others to use it
- National Defense: A classic example of a public good
Common Resources
- Common resources are not excludable but are rival in consumption
- Example: Fisheries
Externalities
- Externality: An action that influences the well-being of a bystander without payment or compensation.
- Negative Externality: Adverse impact on the bystander
- Positive Externality: Beneficial impact on the bystander
- Market Failure: Externalities cause markets to be inefficient
- Internalizing the Externality: Altering incentives to account for external effects
- Corrective Taxes: A tax designed to internalize the external cost of a negative externality
- Corrective Subsidies: A subsidy designed to internalize the external benefit of a positive externality
- Tradable Pollution Permits: A market-based approach to pollution control
- Coase Theorem: Private parties can potentially solve the problem of externalities amongst themselves, assuming costless bargaining.
Basic Research Knowledge
- Created through research
- Public goods are often involved in funding basic research as it can be difficult to exclude individuals from benefiting from research
Fighting Poverty
- Cost-benefit analysis can be used to evaluate public policies when addressing poverty.
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