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Questions and Answers
An externality occurs when a person’s action affects a bystander without compensation.
An externality occurs when a person’s action affects a bystander without compensation.
True
A positive externality leads to a situation where the market quantity is greater than the socially optimal quantity.
A positive externality leads to a situation where the market quantity is greater than the socially optimal quantity.
False
Air pollution from a factory is an example of a negative externality because it causes harm to people not directly involved in the factory’s operations.
Air pollution from a factory is an example of a negative externality because it causes harm to people not directly involved in the factory’s operations.
True
A Pigovian tax is a tax designed to correct the effects of positive externalities.
A Pigovian tax is a tax designed to correct the effects of positive externalities.
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Tradable pollution permits provide a market-based approach to reducing pollution, allowing firms to buy and sell the right to pollute.
Tradable pollution permits provide a market-based approach to reducing pollution, allowing firms to buy and sell the right to pollute.
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he Coase Theorem suggests that if private parties can bargain without cost, they can solve the problem of externalities on their own, regardless of the initial distribution of property rights.
he Coase Theorem suggests that if private parties can bargain without cost, they can solve the problem of externalities on their own, regardless of the initial distribution of property rights.
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The socially optimal quantity in the presence of a negative externality is where the marginal private cost equals the marginal social benefit.
The socially optimal quantity in the presence of a negative externality is where the marginal private cost equals the marginal social benefit.
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Positive externalities result in a social value that is higher than the private value.
Positive externalities result in a social value that is higher than the private value.
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In cases where bargaining over externalities fails, it is typically due to high transaction costs, coordination issues, or large numbers of affected parties.
In cases where bargaining over externalities fails, it is typically due to high transaction costs, coordination issues, or large numbers of affected parties.
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Which of the following is an example of a positive externality?
Which of the following is an example of a positive externality?
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Study Notes
Externalities
- An externality occurs when a person's action affects a bystander without compensation.
- A positive externality leads to a market quantity exceeding the socially optimal quantity.
- Negative externalities cause harm to people not directly involved in the activity.
- Air pollution from a factory is an example of a negative externality.
Externality Solutions
- A Pigovian tax corrects positive externalities.
- Tradable pollution permits allow firms to buy and sell the right to pollute, providing a market-based approach to reducing pollution.
- The Coase Theorem suggests that private parties can resolve externalities through bargaining if transaction costs are minimal.
Social Optimality
- In the presence of a negative externality, the socially optimal quantity occurs where marginal private cost equals marginal social benefit.
- Positive externalities result in a social value exceeding the private value.
Bargaining Failures
- High transaction costs, coordination issues, or large numbers of affected parties can hinder bargaining over externalities.
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