ECON 213 TEST 3 QUESTIONS AND
VERIFIED ANSWERS
Externalities - ANSWER-Definition: are the costs or benefits of a market activity that affect a third party
Example: BP oil spoil spill benefited BP and customers from production of oil, other along the Gulf coast
had lives disrupted where tourism and fishing were hit hard with costs
External cost and benefits - ANSWER-Definition: are the costs of a market activity paid by people who
are not participants
Examples: when driving, external costs are congestion and pollution your car creates
negative externality - ANSWER-Definition: if third party is harmfully affected
Example: when volume of vehicles on the roads causes air pollution
Other Examples: oil refining creates air pollution, traffic congestion causes all motorists to spend more
time on the road waiting, and airports create noise pollution
Customer and producers do not take responsibility for full costs of action so intensives to stop problem
positive externality - ANSWER-Definition: creates good benefits for third party
Example: Education can create a more productive workforce
Other examples: flu shots prevent the spread of disease, education creates a more productive workforce
and enables citizens to make more informed decisions for the betterment of society, and restored
historic building enable people to enjoy beautiful architectural details
negative externality without and with internalizing the external cost - ANSWER-internalize the externality
meaning that the firm must take into account the external costs (or benefits) to society that occur as a
results of its actions
Without internalizing external costs:
change in supply -->> overproduction
quality and price -->>
With internalizing external costs:
change in supply -->> shifts to left and willingness to sell declines
quality and price -->> lower quantity and price increases
coase theorem - ANSWER-Definition: that if there no barriers to negotiations, and if property rights all
fully specified, interested parties will bargain to correct any externalities that exist
Example :If the cattle rancher is liable to damages the cows cause, he would compare the cost of building
the fence and the cost of paying the damages however the fence will keep the cattle away from the
wheat, remove the externality and prevent the destruction of property
free-rider problem - ANSWER-occurs whenever someone receives a benefit without having to pay for it
Example: street performer like musician
VERIFIED ANSWERS
Externalities - ANSWER-Definition: are the costs or benefits of a market activity that affect a third party
Example: BP oil spoil spill benefited BP and customers from production of oil, other along the Gulf coast
had lives disrupted where tourism and fishing were hit hard with costs
External cost and benefits - ANSWER-Definition: are the costs of a market activity paid by people who
are not participants
Examples: when driving, external costs are congestion and pollution your car creates
negative externality - ANSWER-Definition: if third party is harmfully affected
Example: when volume of vehicles on the roads causes air pollution
Other Examples: oil refining creates air pollution, traffic congestion causes all motorists to spend more
time on the road waiting, and airports create noise pollution
Customer and producers do not take responsibility for full costs of action so intensives to stop problem
positive externality - ANSWER-Definition: creates good benefits for third party
Example: Education can create a more productive workforce
Other examples: flu shots prevent the spread of disease, education creates a more productive workforce
and enables citizens to make more informed decisions for the betterment of society, and restored
historic building enable people to enjoy beautiful architectural details
negative externality without and with internalizing the external cost - ANSWER-internalize the externality
meaning that the firm must take into account the external costs (or benefits) to society that occur as a
results of its actions
Without internalizing external costs:
change in supply -->> overproduction
quality and price -->>
With internalizing external costs:
change in supply -->> shifts to left and willingness to sell declines
quality and price -->> lower quantity and price increases
coase theorem - ANSWER-Definition: that if there no barriers to negotiations, and if property rights all
fully specified, interested parties will bargain to correct any externalities that exist
Example :If the cattle rancher is liable to damages the cows cause, he would compare the cost of building
the fence and the cost of paying the damages however the fence will keep the cattle away from the
wheat, remove the externality and prevent the destruction of property
free-rider problem - ANSWER-occurs whenever someone receives a benefit without having to pay for it
Example: street performer like musician
