Econ 101 Week 6 [Questions with correct answers]
Externality - Answers-When a market exchange affects a third party who is outside or "external" to the
exchange. (Spillover)
Spillover - Answers-When a market exchange affects a third party who is outside or "external" to the
exchange. (Externality)
Negative Externality - Answers-A situation where a third party, outside of the transaction, suffers from a
market transaction by others. (Ex. Pollution)
Positive Externality - Answers-A situation where a third party, outside the transaction, benefits from a
market transaction by others. (ex. Flu shots and herd immunity)
Social Costs - Answers-Costs that include both the private costs incurred by firms and also costs incurred
by third parties outside the production process, like costs of pollution. (not exactly known)
Market Failure - Answers-A situation in which the market on its own fails to allocate resources efficiently
in a way that balances social costs and benefits. Externalities are an example of a market failure.
Public Good - Answers-A good that is nonexcludable and nonrivalous and thus is difficult for market
producers to sell individual consumers.
Nonexcludable - Answers-When it is costly or impossible to exclude someone from using the good, and
thus it is hard to charge for it.
Nonrivalous - Answers-A good where, when one person uses the good, others can also use it.
Free Rider - Answers-Those who want others to pay for the public good and then plan to use the good
for themselves. If many people act as free riders, the public good may never be provided.
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Externality - Answers-When a market exchange affects a third party who is outside or "external" to the
exchange. (Spillover)
Spillover - Answers-When a market exchange affects a third party who is outside or "external" to the
exchange. (Externality)
Negative Externality - Answers-A situation where a third party, outside of the transaction, suffers from a
market transaction by others. (Ex. Pollution)
Positive Externality - Answers-A situation where a third party, outside the transaction, benefits from a
market transaction by others. (ex. Flu shots and herd immunity)
Social Costs - Answers-Costs that include both the private costs incurred by firms and also costs incurred
by third parties outside the production process, like costs of pollution. (not exactly known)
Market Failure - Answers-A situation in which the market on its own fails to allocate resources efficiently
in a way that balances social costs and benefits. Externalities are an example of a market failure.
Public Good - Answers-A good that is nonexcludable and nonrivalous and thus is difficult for market
producers to sell individual consumers.
Nonexcludable - Answers-When it is costly or impossible to exclude someone from using the good, and
thus it is hard to charge for it.
Nonrivalous - Answers-A good where, when one person uses the good, others can also use it.
Free Rider - Answers-Those who want others to pay for the public good and then plan to use the good
for themselves. If many people act as free riders, the public good may never be provided.
1
