Chapter 10 - Externalities

Question 1

Externalities

Answer 1

• the uncompensated impact of one person’s action on the well-being of a bystander
• can be negative or positive depending on effect to the bystander

Question 2

External Cost

Answer 2

• the value of the negative impact on bystanders

Question 3

Social Cost

Answer 3

= private cost + external cost

• displayed as a function parallel to the Supply Curve
• results is a ‘new equilibrium’ point, the Social Optimum

Question 4

Supply/Demand & Externalities

Answer 4

Private Cost

• the supply curve
• the cost directly incurred by the sellers

Private Value

• the demand curve
• the value to buyers (WTP)

Question 5

Internalizing Externalities

Answer 5

• altering incentives so that people take account of the external effects of their actions

Question 6

Positive Externalities

Answer 6

• social optimum Q maximizes welfare

Question 7

External Benefit

Answer 7

= private + external benefit
- the value of the positive impact on others

• displayed as a function parallel to the demand curve

Question 8

Command and Control Policies

Answer 8

• Externality Public Policy

- directly regulates behaviour

Question 9

Market-Based Policies

Answer 9

• Externality Public Policy

- provide incentives so that private decision-makers will choose to solve the problem on their own

Question 10

Corrective Tax

Answer 10

• a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality

Question 11

The Coase Theorum

Answer 11

• if private parties can bargain over the allocation of resources without cost, they can solve the externalities problem on their own