Theme 1 Economics

• What is a negative externality?

  A third party cost from production or consumption
• What is a negative production externality?

  A cost from production with no compensation
• What is a negative consumption externality?

  A cost from consumption with no compensation
• Give an example of a negative production externality.

  Pollution
• Give an example of a negative consumption externality.

  Tobacco consumption causing passive smoking
• What are the important externality terms?

  • Social benefit = private benefit + external benefit
  • Social cost = private cost + external cost
  • MPC = marginal private cost
  • MSC = marginal social cost
  • MPB = marginal private benefit
  • MSB = marginal social benefit

  
• When is allocative efficiency achieved in a perfect market?

  When P = MC
• When is the social optimum achieved in the presence of externalities?

  When MSC = MSB
• What are the policies to address negative externalities?

  • Banning/restricting output
  • Legislation/regulations
  • 'Nudge' policies
  • Indirect tax
  • Pollution permit trading schemes
• What is the purpose of indirect tax in addressing negative externalities?

  To shift MPC towards the MSC curve
• What does the polluter pays principle aim to achieve?

  To internalize externalities
• What does it mean if MSC > MPC?

  There is a negative production externality
• What does it mean if MSB < MPB?

  There is a negative consumption externality
• What are examples of negative externalities?

  • Negative production: air, noise, water pollution
  • Negative consumption: tobacco, alcohol, gambling, obesity, congestion
• What is a positive consumption externality?

  A benefit from consumption with no compensation
• Give an example of a positive consumption externality.

  Vaccination
• What is a positive production externality?

  A benefit from production with no compensation
• Give an example of a positive production externality.

  Research and development
• What are the policies to address positive externalities?

  • Government provision free at the point of use
  • Legislation/regulations
  • Subsidy
  • 'Nudge' policies
• What does a subsidy do in the context of positive externalities?

  Shifts the MPC to the right
• What does it mean if MSC < MPC?

  There is a positive production externality

  
• What are the evaluation criteria for government policies to reduce externalities?

  • Size of externality
  • Extent of measurement
  • Unintended consequences
  • Government failure
  • Opportunity cost
  • Distribution of income
• What are the characteristics of private goods?

  Excludable, rival, rejectable
• What is the free rider problem?

  Consuming without paying for a good
• What are the characteristics of public goods?

  • Non-excludable
  • Non-rival
  • Non-rejectable
• Why does the free market fail to provide pure public goods?

  Due to the free rider problem
• What is a pure public good?

  A good that is non-excludable and non-rival
• What is a quasi-public good?

  A good with some public good characteristics
• What are examples of public goods?

  • National defense
  • Security
  • Mass vaccination
• What are public bads?

  Non-excludable and non-rival goods causing dissatisfaction
• What are the advantages of government provision of public goods?

  • Equity in access
  • Efficiency through economies of scale
  • Overcomes free rider problem
  • Higher public sector investment
• What are the disadvantages of government provision of public goods?

  • Lack of information
  • Possible diseconomies of scale
  • Costly and wasteful funding
  • Government corruption issues
• What is information failure?

  Inaccurate or misunderstood data leading to wrong choices
• What is asymmetric information?

  Different information levels between buyers and sellers
• What is adverse selection?

  High-risk individuals taking out insurance
• What is moral hazard?

  Carelessness due to being insured
• What is the principal-agent problem?

  Different goals between principals and agents
• What are examples of information failure?

  • Risks from tanning salons
  • Addiction to painkillers
  • Complexity of pension schemes
  • Uncertain quality of second-hand goods
• What are policies to address information failure?

  • Compulsory labelling
  • Improved nutritional information
  • Anti-speeding advertising
  • Consumer protection laws
• How can government policies improve information for consumers?

  By providing accurate costs and benefits