Externalities

Question 1

What is external cost?

Answer 1

A third party spillover effect that reduces the utility of someone who is not directly involved in the direction or consumption of the good

Question 2

How many externalities are there?

Answer 2

2: Positive and negative

Question 3

what is a positive externality?

Answer 3

A beneficial third-party spill over effect that increases utility of someone who is not involved directly in the consumption or the direction of the good.

Question 4

What is a negative externality?

Answer 4

A worsening third-party spill over that decreases the utility of someone who is not directly involved in the consumption or the direction of the good.

Question 5

What is market failure?

Answer 5

When the price mechanism fails to allocate resources in the most efficient way.

Question 6

What is the formula for social cost?

Answer 6

Social cost = Private cost + External cost

Example:
- Private cost is what someone buys for themselves such as a cigarette.
- External cost is someone passively smoking by inhaling the unhealthy smoke

Question 7

List some examples of positive externality

Answer 7

Vaccinations or someone playing loud music you like.

Question 8

List some examples of negative externality

Answer 8

Cigarettes or air pollution.

Question 9

Define the free rider problem.

Answer 9

The free rider problem occurs when individuals benefit from resources, goods, or services without paying for them, leading to under provision of those goods.

Question 10

What do most individuals not consider with externalities?

Answer 10

-They do not consider the full social costs or benefits when making a decision

Question 11

What is a subsidy?

Answer 11

A grant paid by the government to firms, for the production of goods, designed to decrease the costs of production.

Question 12

Define a merit good.

Answer 12

A good which is beneficial to society when consumed.

Question 13

What is the price mechanism?

Answer 13

-the interaction of demand and supply in a free market
-determines prices
-how scarce resources are allocated between wants and needs

Question 14

List some solutions to negative externalities.

Answer 14

Negative advertising, Indirect Tax, Government regulation

Question 15

What is a public good?

Answer 15

A good with non-rivalry and non-excludability.