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Private markets fail to account for externalities because

a. externalities don't occur in private markets.

b. sellers include costs associated with externalities in the price of their product.

c. decision makers in the market fail to include the costs/benefits of their behavior to third parties.

d. the government cannot easily estimate the optimal quantity of pollution. 

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Yusra Anees
Yusra AneesLv10
15 Jan 2021

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Related questions

How would an economist likely respond to the statement There is no such thing as an acceptable level of pollution?

A. An economist would agree with this statement because western countries have sufficient monetary resources to invest in pollution-reducing equipment. Further, people can change their consumer choices to eliminate pollution.

B. An economist would disagree with this statement because although reducing pollution has benefits, doing so also has costs. The optimal level of pollution is where the marginal benefit of reducing pollution just equals the marginal cost.

C. An economist would disagree with this statement because the market is able to allocate sufficient resources to reducing pollution to an acceptable level. Externalities are taken into account by those making market choices.

D. An economist would agree with this statement because the word "acceptable" reflects individual preferences, which are not easily accounted for in a market with externalities such as pollution.

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.
NOTE: I am just trying to wrap my head around these concepts so what I would like to know is of these 6 available options, which three, would be the simplest in terms of theory to explain? _______________________________________________________________________ Thevast majority of economists are classically trained, which means we tend to see the free and unencumbered functioning of the marketplace as yielding the best economic outcomes. Where policy is needed is when the market fails to produce socially acceptable results. A prime example of market failure has to do with pollution: unless polluters are forced to incorporate into their financial calculations the costs of the pollution they cause, they will overproduce and continue to destroy the environment. The following list describes situations where the government may want to step in: ____________________________________________________________________________________________________________________________ 1. Monopoly power: Markets may fail to control the abuses of monopoly power.---------- 2. Missing markets: Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defense, street lighting, and highways. ------3. Incomplete markets: Markets may fail to produce enough merit goods, such as education and healthcare.------- 4. De-merit goods: Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive. --------5. Property rights: Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.-------- 6. Information failure: Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party. ______________________________________________________________________________________________________________________________________Pick three from this list and explain what types of policies might be proposed to offset the market’s failure. Explain why your proposals might work but also if the policies themselves might have negative side effects.

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