second test

• What is an externality?

  Cost or benefit to a third party
• What are the two types of externalities?

  Positive and negative externalities
• Why is it hard to determine the monetary value of an externality?

  Value judgement varies by individual experience
• What are private costs?

  Costs to economic agents in a transaction
• What are examples of private costs for producers?

  Rent, machinery, labor, insurance
• How do private costs affect supply?

  They determine how much the producer will supply
• How is social cost calculated?

  Private costs plus external costs
• What do external costs represent on a diagram?

  Vertical distance between MSC and MPC curves
• What happens to external costs as output increases?

  They increase disproportionately
• What do consumers focus on regarding private benefit?

  Benefit derived from consumption of a good
• How are social benefits calculated?

  Private benefits plus external benefits
• What is the social optimum position?

  Where MSC equals MSB for maximum welfare
• What do external costs of production include?

  Costs like pollution during production
• What does the market equilibrium ignore regarding negative externalities?

  Negative externalities lead to over-provision
• What is the area of deadweight welfare loss?

  Output where social costs exceed private benefits
• What is an example of an external benefit of consumption?

  Healthier lives through vaccination programs
• What happens in the free market regarding merit goods?

  They are under-consumed due to MSB > MPB
• How do indirect taxes affect demerit goods?

  They increase the price and reduce consumption
• What is the purpose of subsidies?

  Encourage consumption of merit goods
• What is a regulation example to reduce consumption?

  Minimum school leaving age
• What is a challenge of enforcing bans on harmful goods?

  High administrative costs and black market issues
• When are bans useful in terms of MSC and MPB?

  When MSC is greater than MPB
• How can the government provide public goods?

  By supplying goods underprovided in the market
• What is the purpose of providing information in economics?

  To eliminate information failure for informed decisions
• How do property rights encourage innovation?

  They protect new ideas and allow profit
• What are personal carbon allowances?

  Tradeable limits on pollution for firms and consumers