Negative Externalities and Common Pool Resources

Society achieves allocative efficiency when

• marginal social benefits > marginal social costs

• marginal social benefits < marginal social costs 

• marginal social benefits = marginal social costs

• marginal private benefits = marginal private costs 

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allocative efficiency

An externality is present when

• there is an efficient allocation of resources

• the economy reaches an equilibrium where MSB = MSC 

• activities of producers and consumers prevent the economy from reaching an equilibrium 

• activities of producers and consumers affect the well-being of third parties whose interests are not taken into account 

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externalities

A negative externality arising from the production of good Z leads to

• an overallocation of resources to the production and consumption of good Z 

• an underallocation of resources to the production and consumption of good Z

• higher costs of production for good Z 

• lower demand for good Z 

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negative externalities

externalities

Negative production externalities due to the use of fossil fuels arise because

• the private costs of production are greater than the social costs 

• environmental regulations are strongly enforced 

• firms are not aware of environmental regulations 

• firms ignore the costs they impose on bystanders 

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negative externalities

negative production externalities

externalities

Market-based policies to reduce the external costs arising from the use of fossil fuels do not include

• tradable permits

• carbon taxes

• direct taxes

• collective self-governance

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negative externalities

intervention

The use of cars usually leads to _____________________ because _____________________.

• negative production externalities / MSC < MPC

• negative consumption externalities / MSC > MPC 

• positive consumption externalities / MSB > MPB 

• negative consumption externalities / MPB > MSB 

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negative externalities

negative consumption externalities

Demerit goods are often _____________________ due to _____________________.

• non-excludable / their high prices 

• underprovided by the market / positive consumption externalities

• overprovided by the market / negative consumption externalities 

• underprovided by the market / negative production externalities 

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negative externalities

Negative consumption externalities are unlikely to be dealt with through the use of 

• indirect taxes

• legislation

• advertising

• tradable permits

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intervention

negative consumption externalities

Common pool resources are resources that

• having no ownership, are not sold in markets

• are subject to overuse therefore leading to unsustainable development 

• are non-excludable therefore freely available for anyone to use

• all of the above

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common pool resources

Sustainability refers to the idea that

• economic activity is not subject to ups and downs 

• future generations will have fewer resources with which to satisfy their needs

• future generations will not have fewer resources with which to satisfy their needs

• resources are used at a rate that leads to their depletion 

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sustainability

common pool resources