ECON 110 ZIRLOTT FINAL EXAM QUESTIONS &
ANSWERS
Externality - answer -the uncompensated impact of one person's actions on the well-
being of a bystander (fancy term for side effect)
What type of externalities are these?
-being vaccinated against contagious diseases protects not only you, but people who sit
next to you in class
-vaccinating your pets
-r&d creates knowledge others can use
-people going to college raise the population's education level, which reduces crime and
improves government - answer -positive
What type of externalities are these?
-air pollution from a factory -> most common
-the neighbor's barking dog
-late-night stereo blasting from the dorm room next to yours
-noise pollution from construction projects
-health risk to others from second-hand smoke
-texting on cell phones while driving makes the roads less safe for others - answer -
negative
Private costs - answer -supply curve, cost directly incurred by sellers
Private value - answer -demand curve, the value to buyers (the prices they are willing
to pay)
Social cost - answer -private + external cost
External cost - answer -value of the negative impact on bystanders
In the presence of a positive externality, the social value of a good includes.. - answer -
private value and external benefit
External benefit - answer -the value of the positive impact on bystanders
Internalizing the externality - answer -altering incentives so that people take account of
the external effects of their actions
Command and control policies - answer --regulate behavior directly
-examples: limits on quantity of pollution emitted; requirements that firms adopt a
particular technology to reduce emissions
, Market based policies - answer --provide incentives so that private decision-makers will
choose to solve the problem of their own.
-examples:corrective taxes and subsidies; tradable pollution permits
Corrective tax - answer -a tax designed to induce private decision-makers to take
account of the social costs that arise from a negative externality (also called a pigouvian
tax after arthur pigou)
Tradable pollution permits system - answer -reduces pollution at lower cost than
regulation
Private solutions to externalities (4) - answer --moral codes and social sanctions, e.g.
The "golden rule"
-charities, e.g. The sierra club
-contracts between market participants and the affected bystanders
-the coase thereom
Coase theorem - answer -if private parties can costlessly bargain over the allocation of
resources, they can solve the externalities problem on their own
Why do private solutions not always work? (3) - answer -transaction costs,
stubbornness, and coordination problems
Excludable - answer -a person can be prevented from using it
Starbucks, wireless internet acces, your u of a education - answer -excludable
Not excludable - answer -a person cannot be prevented from using it
Fm radio signals, national defense - answer -not excludable
Rival - answer -if one person's use diminishes others' use
Starbucks, tacos, apple ipad - answer -rival
Not rival - answer -one person's use has no effect on others' use
An mp3 file or youth video - answer -not rival
Private goods - answer -excludable, rival
-food, suv you drive your friends around in
Public goods - answer -not excludable, not rival
-national defense, large clock or statue in park
Common resources - answer -not excludable, rival
ANSWERS
Externality - answer -the uncompensated impact of one person's actions on the well-
being of a bystander (fancy term for side effect)
What type of externalities are these?
-being vaccinated against contagious diseases protects not only you, but people who sit
next to you in class
-vaccinating your pets
-r&d creates knowledge others can use
-people going to college raise the population's education level, which reduces crime and
improves government - answer -positive
What type of externalities are these?
-air pollution from a factory -> most common
-the neighbor's barking dog
-late-night stereo blasting from the dorm room next to yours
-noise pollution from construction projects
-health risk to others from second-hand smoke
-texting on cell phones while driving makes the roads less safe for others - answer -
negative
Private costs - answer -supply curve, cost directly incurred by sellers
Private value - answer -demand curve, the value to buyers (the prices they are willing
to pay)
Social cost - answer -private + external cost
External cost - answer -value of the negative impact on bystanders
In the presence of a positive externality, the social value of a good includes.. - answer -
private value and external benefit
External benefit - answer -the value of the positive impact on bystanders
Internalizing the externality - answer -altering incentives so that people take account of
the external effects of their actions
Command and control policies - answer --regulate behavior directly
-examples: limits on quantity of pollution emitted; requirements that firms adopt a
particular technology to reduce emissions
, Market based policies - answer --provide incentives so that private decision-makers will
choose to solve the problem of their own.
-examples:corrective taxes and subsidies; tradable pollution permits
Corrective tax - answer -a tax designed to induce private decision-makers to take
account of the social costs that arise from a negative externality (also called a pigouvian
tax after arthur pigou)
Tradable pollution permits system - answer -reduces pollution at lower cost than
regulation
Private solutions to externalities (4) - answer --moral codes and social sanctions, e.g.
The "golden rule"
-charities, e.g. The sierra club
-contracts between market participants and the affected bystanders
-the coase thereom
Coase theorem - answer -if private parties can costlessly bargain over the allocation of
resources, they can solve the externalities problem on their own
Why do private solutions not always work? (3) - answer -transaction costs,
stubbornness, and coordination problems
Excludable - answer -a person can be prevented from using it
Starbucks, wireless internet acces, your u of a education - answer -excludable
Not excludable - answer -a person cannot be prevented from using it
Fm radio signals, national defense - answer -not excludable
Rival - answer -if one person's use diminishes others' use
Starbucks, tacos, apple ipad - answer -rival
Not rival - answer -one person's use has no effect on others' use
An mp3 file or youth video - answer -not rival
Private goods - answer -excludable, rival
-food, suv you drive your friends around in
Public goods - answer -not excludable, not rival
-national defense, large clock or statue in park
Common resources - answer -not excludable, rival
