Economics: Externalities and Public Goods

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Questions and Answers

What characterizes a public good?

It is produced by private suppliers for profit.

It leads to negative externalities only.

It can be easily withheld from non-payers.

It is non-exclusionary and non-rival in consumption. (correct)

Why do private businesses typically not supply public goods?

They can easily charge high prices for them.

They are not interested in government regulations.

They produce only private goods.

They cannot exclude non-payers from using them. (correct)

What is a characteristic of private goods?

They are non-rival in consumption.

They are exchanged voluntarily in the market. (correct)

They are provided free of charge by the government.

They are unable to generate positive externalities.

What defines a negative externality?

A cost that affects third parties adversely. Signup and view all the answers

What is a common reason for market failure?

Firms restrict competition, harming consumer welfare. Signup and view all the answers

How do governments generally respond to positive externalities?

By providing subsidies or financing. Signup and view all the answers

Which of the following is an example of a public good?

Streetlights. Signup and view all the answers

What is meant by a good being non-rival in consumption?

One person’s use does not diminish others' access to it. Signup and view all the answers

What is the government's response to positive externalities?

Paying some of the transaction cost Signup and view all the answers

What is a consequence of negative externalities?

Additional costs imposed on sellers Signup and view all the answers

What role does imperfect information play in market failure?

Causes poor decision-making by buyers and sellers Signup and view all the answers

What is meant by 'full employment' in an economy?

At least 95% of the workforce is employed Signup and view all the answers

Why does the government try to promote price stability?

To prevent rapid increases in prices Signup and view all the answers

Which of the following is a cause of economic growth?

Population growth Signup and view all the answers

What is the significance of well-defined property rights in an economy?

They foster economic health and trade. Signup and view all the answers

What impact does high transaction cost have on trade?

It can prevent trades from occurring. Signup and view all the answers

Signup and view all the answers

Study Notes

Externalities and Public Goods

Externalities: Third-party benefits (positive externalities) and costs (negative externalities) occur when a transaction affects those not directly involved. Governments often intervene to manage these effects.
Positive Externalities: Governments may subsidize or provide goods with positive externalities to encourage greater consumption, as these goods/services have benefits greater than those for the buyer.
Negative Externalities: Governments might impose taxes or regulations to reduce negative externalities, as these goods/services impose costs on society exceeding the seller's costs.
Private Goods: Produced by private suppliers, consumers pay for them and access is limited to those who can afford it.
Public Goods: Provided by the government (e.g., national defense, lighthouses, streetlights), and characterized by non-exclusion (anyone can use them) and non-rivalry (one person's use doesn't diminish another's).

Market Failure

Market Failure: Occurs when the unrestrained market produces a socially undesirable outcome – the cost to society outweighs the benefit. Externalities and public goods are examples.
Reasons for Market Failure:
- Restrictions on Competition: Governments may intervene if firms significantly limit competition to the detriment of consumers.
- Public Goods: The market alone won't provide public goods like streetlights or flood control, as companies can't profit from supplying them.
- Externalities: Positive and negative externalities, necessitating government intervention to align private and social benefits/costs.
- Imperfect Information: Buyers and sellers lack perfect information, leading to suboptimal decisions. Gathering information is costly, and the future is uncertain.

Government's Role in the Economy

Defining Laws and Contracts: A crucial economic function is creating and enforcing rules and regulations (e.g., property rights), essential for trade and economic well-being.
High Transaction Costs: In cases with high transaction costs, trade may not occur, even if the value to all parties is high.
Promoting Economic Goals: The government promotes a strong economy through various policies:
- Full Employment: Maintaining a state where approximately 95% of the workforce is employed is considered full employment.
- Price Stability: Preventing rapid increases in prices (inflation).
- Economic Growth: Increasing the overall output and quality of goods and services produced. Factors like population growth and technological advancements drive economic growth.

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Description

This quiz explores the concepts of externalities and public goods in economics. You'll learn how positive and negative externalities affect third parties and the government's role in managing these effects. Additionally, the distinctions between private and public goods will be examined.