Electricity Production Costs and Externalities
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Questions and Answers

What does the supply curve S2 represent in the context of electricity production?

  • Fixed costs of production
  • Marginal social cost including pollution (correct)
  • Total benefit from electricity
  • Private cost of production

    • Negative externalities result in underproduction of goods relative to economic efficiency.

    False

    What is the optimal level of production for society in the context of electricity production?

    QEfficient

    The total benefit from consuming a good or service, including both private and external benefits, is called the _____ benefit.

    <p>social</p> Signup and view all the answers

    Match the types of externalities with their characteristics:

    <p>Negative externality = Costs to society exceed private costs Positive externality = Benefits to society exceed private benefits Private benefit = Benefit received by the consumer Social benefit = Total benefit from consumption</p> Signup and view all the answers

    What causes deadweight loss in the electricity market?

    <p>Too much production at market equilibrium</p> Signup and view all the answers

    Cigarette smoke is an example of a positive externality.

    <p>False</p> Signup and view all the answers

    What is an example of a good or service that has positive externalities?

    <p>college education</p> Signup and view all the answers

    What happens when there is a positive externality in consuming a good or service?

    <p>Too little of the good will be produced.</p> Signup and view all the answers

    Market equilibrium results in the efficient quantity being produced regardless of externalities.

    <p>False</p> Signup and view all the answers

    What does the Coase Theorem suggest regarding private solutions to externalities?

    <p>Private bargaining can lead to economic efficiency.</p> Signup and view all the answers

    Incomplete property rights can cause __________, leading to market failure.

    <p>externalities</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Externalities = Costs or benefits affecting third parties not involved in a transaction Property Rights = Rights to the exclusive use of property Market Failure = Inefficient allocation of resources Deadweight Loss = Loss of economic efficiency due to market distortions</p> Signup and view all the answers

    What is deadweight loss a result of?

    <p>Positive or negative externalities affecting production</p> Signup and view all the answers

    Property rights can prevent market failures caused by negative externalities.

    <p>True</p> Signup and view all the answers

    In terms of pollution reduction, what is considered 'too much'?

    <p>10 units of pollution reduction.</p> Signup and view all the answers

    What conditions are necessary for private parties to effectively solve the externality problem according to the Coase Theorem?

    <p>Property rights must be assigned and enforceable, and transaction costs must be low</p> Signup and view all the answers

    The Coase Theorem suggests that it matters who is assigned property rights in resolving externality problems.

    <p>False</p> Signup and view all the answers

    Define transaction costs in the context of the Coase Theorem.

    <p>Transaction costs are the costs in time and resources that parties incur in the process of agreeing and executing an exchange.</p> Signup and view all the answers

    According to the Coase Theorem, parties must have _____ information about the costs and benefits involved.

    <p>full</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Marginal Cost = The cost added by producing one additional unit Marginal Benefit = The additional satisfaction gained from consuming one more unit Coase Theorem = A theory on how private parties can bargain to resolve externality problems Externality = A cost or benefit that affects a party who did not choose to incur that cost or benefit</p> Signup and view all the answers

    What could a corrective tax achieve in relation to negative externalities?

    <p>Return the production level to an efficient level</p> Signup and view all the answers

    Mutual positive externalities in apple-growing and beekeeping suggest that both industries are efficiently provided.

    <p>False</p> Signup and view all the answers

    How do beekeepers support apple-growers according to their mutual positive externalities?

    <p>Beekeepers rent out their hives to orchardists in pollination contracts.</p> Signup and view all the answers

    What happens when the government imposes a tax equal to the cost of pollution?

    <p>The supply curve shifts up.</p> Signup and view all the answers

    Corrective taxes are effective for addressing positive externalities.

    <p>False</p> Signup and view all the answers

    What are corrective subsidies intended to achieve?

    <p>They encourage the production or consumption of a good with positive externalities.</p> Signup and view all the answers

    The price of electricity will rise from _________ to __________ after the implementation of the tax.

    <p>PMarket, PEfficient</p> Signup and view all the answers

    What is a common result of imposing a tax for a negative externality?

    <p>Reduction in total market output.</p> Signup and view all the answers

    Match the following terms with their correct descriptions:

    <p>Corrective Tax = A tax imposed to internalize a negative externality Subsidy = An amount paid to encourage production or consumption Negative Externality = A situation where more of a good is produced than is socially optimal Positive Externality = A situation where too little of a good is produced for societal benefit</p> Signup and view all the answers

    Subsidies are effective in addressing negative externalities.

    <p>False</p> Signup and view all the answers

    What effect does a subsidy have on the demand curve?

    <p>It shifts the demand curve upward.</p> Signup and view all the answers

    What is the main reason markets are effective at providing private goods?

    <p>They can exclude non-payers from consumption.</p> Signup and view all the answers

    Rivalry means that one person's consumption of a good does not affect another's ability to consume it.

    <p>False</p> Signup and view all the answers

    What is the term used to describe the over-consumption of common resources?

    <p>Tragedy of the commons</p> Signup and view all the answers

    Goods that are both rival and excludable are classified as __________ goods.

    <p>private</p> Signup and view all the answers

    Match the following goods with their characteristics:

    <p>Public Goods = Non-rival and non-excludable Private Goods = Rival and excludable Common Resources = Rival and non-excludable Quasi-Public Goods = Non-rival and excludable</p> Signup and view all the answers

    Which of the following best describes a challenge of public goods?

    <p>They are inefficiently allocated because of free-riding.</p> Signup and view all the answers

    People are incentivized to conserve common resources due to their rival nature.

    <p>False</p> Signup and view all the answers

    What economic tool is suggested to help manage the consumption of common resources?

    <p>Pigovian taxes</p> Signup and view all the answers

    Study Notes

    Cost of Electricity Production

    • Firms consider private costs when deciding how much electricity to produce, such as building costs, equipment costs, fuel costs, and labor costs.
    • Social costs are higher than private costs and include the private costs plus the external cost of pollution.

    Externalities in the Electricity Production Market

    • Supply curve S1 represents the marginal private cost that electricity producers incur.
    • Supply curve S2 represents the marginal social cost, which includes the costs to those affected by pollution.
    • The optimal level of production for society is QEfficient where marginal cost to society is equal to the marginal benefit.

    Inefficiency Due To Negative Externalities

    • The market equilibrium is determined by producers considering only the marginal private costs represented by S1.
    • The market price is “too low” and the market quantity is “too high”.
    • The cost to society exceeds its benefit to society, leading to deadweight loss.

    Externalities

    • Pollution is an example of a negative externality in production.
    • Negative externalities can also occur in consumption, such as cigarette smoke.
    • Positive externalities occur when social benefits exceed private benefits, such as college education.
    • Private benefit refers to the benefit received by the consumer of a good or service.
    • Social benefit includes the private benefit plus any external benefit.
    • Positive externalities lead to underproduction relative to efficiency.

    Externalities in the College Education Market

    • College education has positive externalities as the marginal social benefit exceeds the marginal private benefit.
    • The market equilibrium is QMarket and is too low as the market demand curve D1 represents only the marginal private benefit.

    Externalities and Market Failure

    • Market equilibrium does not result in the efficient quantity being produced in the presence of negative or positive externalities.
    • Market failure occurs when the market fails to produce the efficient level of output.
    • The size of the deadweight loss increases with the size of the externality.

    What Causes Externalities?

    • Incomplete property rights or difficulty in enforcing property rights cause externalities.
    • For example, a paper mill discharging waste into a shared stream without ownership creates an externality.
    • Property rights enable exclusive use, purchase, and sale.

    Private Solutions to Externalities: The Coase Theorem

    • The Coase Theorem suggests that private parties can resolve externalities through private bargaining, provided property rights are assigned and enforceable, and transaction costs are low.
    • Transaction costs refer to costs incurred in negotiating and carrying out an exchange.
    • Full information about costs and benefits is necessary for the Coase Theorem to hold.

    An Efficient Amount Of Pollution

    • Pollution reduction has both costs and benefits.
    • The efficient level of pollution reduction occurs when the marginal cost equals the marginal benefit.

    The Coase Theorem and Property Rights

    • The Coase Theorem emphasizes that the assignment of property rights does not affect the outcome.
    • Resolving externalities through private bargaining is possible regardless of who owns the property.

    Making the Connection: The Birds Apples, and the Bees

    • Apple-growing and beekeeping have mutual positive externalities.
    • Private solutions have emerged, such as pollination contracts, where beekeepers rent their hives to orchardists.

    Government Policies to Deal with Externalities

    • Taxes can be used to correct for negative externalities by internalizing the externality.
    • Corrective taxes shift the supply curve upwards, leading to a reduction in market quantity and an increase in market price.
    • Subsidies can be used to address positive externalities, leading to an increase in market quantity.

    Corrective Taxes for Negative Externalities

    • Corrective taxes make producers internalize the external cost of pollution.
    • The supply curve shifts from S1 to S2, leading to a reduction in market quantity to the economically efficient level.
    • Producers receive a price P, which is equal to PEfficient minus the amount of the tax.

    Can Taxes “Solve” Positive Externalities Too?

    • Taxes are not effective in addressing positive externalities.
    • Subsidies can be used to increase the production of goods with positive externalities.

    Corrective Subsidies for Positive Externalities

    • Subsidies can help incentivize the consumption of goods with positive externalities.
    • The demand curve shifts from D1 to D2, increasing the market quantity to the economically efficient level.

    Four Categories of Goods

    • Goods can be categorized based on rivalry and excludability.
    • Rivalry occurs when one person's consumption prevents others from consuming the same good.
    • Excludability refers to the ability to prevent non-paying consumers from consuming the good.

    Efficient Provision of the Categories of Goods

    • Private goods are typically best provided by markets as they are rival and excludable.
    • Public goods are non-rival and non-excludable, making it difficult for markets to provide them efficiently.
    • Common resources are rival but not excludable, leading to overuse.
    • Quasi-public goods are excludable but often have large external benefits.

    Efficient consumption of a Public Resource

    • Common resources are over-consumed as they are rival but not excludable.
    • Pigovian taxes can be used to address this problem, but they are often impractical.
    • Tragedy of the commons refers to the overuse of common resources due to lack of proper management.

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    Description

    This quiz covers the concepts of private and social costs in electricity production, along with the implications of externalities. It explores how marginal costs affect market equilibrium and societal efficiency. Delve into the nuances of production decisions and their impact on both producers and society.

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