Final Exam - Econ 318 (100% correct)

Externalities correct answers An externality occurs whenever actions taken by firms or consumers impose costs or confer benefits on others that are not involved in the transaction (third party effects) without any reimbursement for the cost or a charge for the benefit involved Examples of externalities correct answers Examples of Negative Externalities: a free market produces too much of a harmful good that is socially undesirable Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building Dangerous driving due to alcohol consumption Examples of Positive Externalities: a free market produces too little of a useful good that is socially desirable Immunizations Restored historic buildings Research into new technologies Education allocatively efficient outcome correct answers If the two sides to an externality — the one causing it and the one suffering it — can bargain together, they will produce the allocatively efficient outcome When transactions costs are excessive, we may - Accept the externality and learn to live with it, or -Governments may intervene on our behalf to deal with it Negative Externalities in Production correct answers The intersection of the demand curve and the social-cost curve determines the optimal output level. The socially optimal output level is less than the market equilibrium quantity. The social costs of production are higher than the private cost to producers and consumers. To internalize a negative externality: Impose a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity Positive Externalities in Production correct answers The intersection of the demand curve and the social-cost curve determines the optimal output level.