ECON-101 Lecture Notes - Lecture 14: Externality, Influenza Vaccine, Cost Curve

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18 Jan 2016

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Externalities: the impact of your action, unintentionally on another person. How can the government discourage negative externalities: impose taxes. Smc (social marginal costs) = pmc + ec. When dealing with negative externalities, have to take into account not only marginal costs but also external costs. Dwl arises because of the market in this case. If government imposes a tax they will reduce or resolve dwl by curving smoking and pollution. Therefore in these situations, taxes reduce dwl rather than produce them. How can the government encourage positive externalities: subsidies. Pmb = private marginal benefit (ex to decide whether to get flu shot compare pmb with mc) Smb (social marginal benefits) = pmb + eb (external benefits, aka. Without subsidy there would be a dwl, if government gives a subsidy, dwl would decrease. Policies: market based: does not tell you what to do, but you get taxed if you do it, command and control: tells you what to do.

Related Questions

Assume the demand for steel is P=1200 - 100 (QD) and steel is prodcued in a perfectly competitive market, where negative externalities exist. Firms perceive thier supply as P=100 (QS).

On the other hand, government agencies have found the marginal cost of pollution MC=50 (QS).

1. Determine the efficient level of output and price.

2. Calculate the deadweight loss due to this externality (market failure)

amaranthox522

Question 1

An externality

		enhances market efficiency.
		is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
		is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
		refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

		the high price of goods and services
		individuals; firms
		market prices; market incomes
		oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

		the level of output is too high, and the supply curve should shift to the left to account for the externality.
		the price of the product is too high, and production should be expanded to lower the price.
		the level of output is optimal, and there should be no change in the supply curve.
		the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

		MSC = MPC - MD
		MPC = MSC + MD
		MSC = MPC + MD
		MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

		the demand curve will shift to the left.
		the supply curve will shift to the right.
		the demand curve will shift to the right
		the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

		government intervention is always needed if externalities are present.
		assigning property rights is the only thing the government should do in a market economy.
		if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
		a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

		the use of private property rights on cattle and common property rights on buffalo.
		the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
		cattle existing in Europe also while buffalo were specific to North America.
		the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

		cause firms to generate less pollution than their allowed limits.
		raise the production costs of all firms.
		cause firms to generate more pollution than their allowed limits.
		lower the production costs of all firms.

5 points

Question 9

A cap-and-trade policy

		has a set number of permits.
		allows polluters to trade permits.
		caps the total level of pollution allowed.
		all of the above.

Question 10

A Pigouvian tax corrects for

		market congestion.
		market losses.
		inefficient sales.
		low market prices.

harlequingoldfish8

Using a minimum of 3 approved sources (articles from major news outlets, academic journal articles, textbooks), post an original 4-5 well-developed paragraph response to the questions below by June 5th at 11:00pm and respond to at least two classmates' responses by June 8th at 11:00pm. Source documentation should be parenthetical (e.g. Smith 2010) and a list of sources must be included at the end of the initial post.

Research a good or service that creates a positive or negative externality.

Explain the good or service and the corresponding externality that it creates.

Propose a form of government intervention to correct this externality or explain the form of government intervention that already exists.

If there is existing government intervention, does it correct the externality problem?

Propose a market-based solution that would fix for the problem rather than government intervention. Evaluate the expected effectiveness of your market-based solution compared to government intervention.

Based on your analysis, do you think it is appropriate for the government to make decisions on our behalf and reflect those decisions in their policies? In formulating your answer, consider the circumstances under which such intervention may or may not be appropriate.

ECON-101 Lecture Notes - Lecture 14: Externality, Influenza Vaccine, Cost Curve

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