- •Determine the arguments people use to advocate trade restrictions.
- •Describe what happens to the gains from trade when a tax is imposed.
- •The meaning of externality. Describe the types of externalities.
- •Describe why externalities can make market outcomes inefficient. Use the graphs to explain.
- •The types of private solutions to externality. Define the Coase theorem.
- •44. Determine why private solutions to externalities sometimes do not work
- •45. Identify the various government policies aimed at solving the problem of externalities
- •46. Describe the different kinds of goods, and give an example of each
- •47. The importance of free-rider problem. Explain why private markets fail to provide public goods.
- •Explicit Costs
- •Implicit Costs
- •53.Explain the various measures of cost. Give the meaning of average total cost and marginal cost and explain how they are related. Fixed Costs
- •Variable Costs
- •54. Describe the relationship between short-run and long-run costs
- •55. Explain how competitive firms decide when to shut down production temporarily and how competitive firms decide whether to exit and enter a market?
- •56. Explain why some markets have only one seller. Describe how a monopoly determines the quantity to produce and the price to charge.
The types of private solutions to externality. Define the Coase theorem.
Types of private solutions:
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 theorem states that private parties can find efficient solutions to externalities without government intervention. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining
The CoaseTheorem: An Example
Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor.
The socially efficient outcome maximizes Dick’s + Jane’s well-being. •If Dick values having Spot more than Jane values peace & quiet, the dog should stay.
Coase theorem: The private market will reach the efficient outcome on its own…
The CoaseTheorem: An Example
•CASE 1: Dick has the right to keep Spot. Benefit to Dick of having Spot = $500 Cost to Jane of Spot’s barking = $800
•Socially efficient outcome: Spot goes bye-bye.
•Private outcome: Jane pays Dick $600 to get rid of Spot, both Jane and Dick are better off.
•Private outcome = efficient outcome.
The CoaseTheorem: An Example
•CASE 2: Dick has the right to keep Spot. Benefit to Dick of having Spot = $1000 Cost to Jane of Spot’s barking = $800
•Socially efficient outcome: See Spot stay.
•Private outcome: Jane not willing to pay more than $800, Dick not willing to accept less than $1000, so Spot stays.
•Private outcome = efficient outcome.
The CoaseTheorem: An Example
•CASE 3: Benefit to Dick of having Spot = $500 Cost to Jane of Spot’s barking = $800 But Jane has the legal right to peace & quiet.
•Socially efficient outcome: Dick keeps Spot. •Private outcome: Dick pays Jane $600 to put up with Spot’s barking. •Private outcome = efficient outcome.
The private market achieves the efficient outcome The private market achieves the efficient outcome regardless of the initial distribution of rights.