Environmental Economics chapter 3: Theory, Policy, and
Applications
What is Market failure? - (correct Answer) - Is the result of an inefficient market condition
What is modeled as a market failure & how? - (correct Answer) - Environmental problems, using either
the theory of public goods or the theory of externalities
Whats the source of a market failure if the market is defined as an "environmental quality"? - (correct
Answer) - That environmental quality is called a public good
If market is the good whose production/consumption generates environmental damage,what caused the
market failure? - (correct Answer) - The market failure is due to an externality
What is a Public good? - (correct Answer) - A commodity that is non-rival in consumption & yields non-
excludable benefits
Non-rivalness - (correct Answer) - Characteristic of indivisible benefits of consumption such that one
person's consumption doesn't prelude that of another
Non-excludability - (correct Answer) - Characteristic that makes it impossible to prevent others from
sharing in the benefits of consumption
What is the relevant market definition? - (correct Answer) - The public good- environmental quality,
which possesses these characteristics
Why does public goods generate market failure? - (correct Answer) - B/c the nonrivalness &
nonexcludability characteristics prevent market incentives from achieving allocative efficiency
What does achieving allocative efficiency in public goods depend on? - (correct Answer) - On the
existence of well-defined supply & demand functions
What does the public goods definition disallow? - (correct Answer) - Disallows the conventional
derivation of market demand
What founds the market D (demand) for a public good? - (correct Answer) - Vertically summing
individual demands founds it
What do we usually ask to costumers for vertical sum? - (correct Answer) - "What price would you be
willing to pay for each quantity of the public good?"
Why are consumers unwilling to reveal their WTP? - (correct Answer) - Consumers can share in
consuming the public good even when purchased by someone else (due to nonrvial and nonexcludability
characteristics)
WTP: - (correct Answer) - Willingness to pay
Applications
What is Market failure? - (correct Answer) - Is the result of an inefficient market condition
What is modeled as a market failure & how? - (correct Answer) - Environmental problems, using either
the theory of public goods or the theory of externalities
Whats the source of a market failure if the market is defined as an "environmental quality"? - (correct
Answer) - That environmental quality is called a public good
If market is the good whose production/consumption generates environmental damage,what caused the
market failure? - (correct Answer) - The market failure is due to an externality
What is a Public good? - (correct Answer) - A commodity that is non-rival in consumption & yields non-
excludable benefits
Non-rivalness - (correct Answer) - Characteristic of indivisible benefits of consumption such that one
person's consumption doesn't prelude that of another
Non-excludability - (correct Answer) - Characteristic that makes it impossible to prevent others from
sharing in the benefits of consumption
What is the relevant market definition? - (correct Answer) - The public good- environmental quality,
which possesses these characteristics
Why does public goods generate market failure? - (correct Answer) - B/c the nonrivalness &
nonexcludability characteristics prevent market incentives from achieving allocative efficiency
What does achieving allocative efficiency in public goods depend on? - (correct Answer) - On the
existence of well-defined supply & demand functions
What does the public goods definition disallow? - (correct Answer) - Disallows the conventional
derivation of market demand
What founds the market D (demand) for a public good? - (correct Answer) - Vertically summing
individual demands founds it
What do we usually ask to costumers for vertical sum? - (correct Answer) - "What price would you be
willing to pay for each quantity of the public good?"
Why are consumers unwilling to reveal their WTP? - (correct Answer) - Consumers can share in
consuming the public good even when purchased by someone else (due to nonrvial and nonexcludability
characteristics)
WTP: - (correct Answer) - Willingness to pay
