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What is a corrective subsidy and provide an example?
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A corrective subsidy is a financial incentive designed to encourage activities that have positive externalities. Example: Subsidies for vaccinations to promote public health.
What is the Coase Theorem and its significance in addressing externalities?
The Coase Theorem states that if there are no costs to negotiations, and property rights are clearly defined, externalities can be efficiently resolved through private agreements without government intervention.
How do negative externalities affect the supply curve in a market?
Negative externalities cause the supply curve to shift upwards or to the left, indicating a higher cost of production that is not accounted for by the private market.
How do positive externalities affect the demand curve in a market?
Positive externalities cause the demand curve to shift upwards or to the right, reflecting the additional benefits to society that are not captured by the private market.
What is an externality in the context of economics?
An externality is a benefit or cost received by someone who is not directly involved in the production or consumption of a good.
What are positional externalities and give an example?
Positional externalities depend on relative performance and affect others through one's position or status. Example: The arms race where each country's security depends on the relative amount of arms.
Define a public good and provide two characteristics.
A public good is a good that is non-rival (one person's consumption does not reduce availability for others) and non-excludable (not easy to prevent non-payers from consuming).
What is a positive externality and provide an example?
A positive externality occurs when the production or consumption of a good causes a beneficial effect to a third party. Example: Bee pollination enhancing agricultural yields.
Define the common resource problem and provide an example.
The common resource problem occurs when the use of a resource by one person decreases its availability for others. Example: Overfishing in communal waters.
What is a negative externality and provide an example?
A negative externality occurs when the production or consumption of a good causes a harmful effect to a third party. Example: Second-hand smoke from smoking.
Explain the concept of social marginal cost.
Social marginal cost is the sum of private marginal costs and external marginal costs. It represents the total cost to society of producing an additional unit of a good.
What is the free rider problem and how does it relate to public goods?
The free rider problem occurs when individuals consume a good without paying for it, which is common with public goods because it is difficult to exclude non-payers.
What are intergenerational externalities and provide an example?
Intergenerational externalities affect future generations due to the actions taken today. Example: Depletion of the ozone layer.
What role do corrective taxes play in managing externalities?
Corrective taxes are designed to align private incentives with social costs, effectively internalizing the externality. Example: Carbon taxes to mitigate pollution.
How can the free rider problem be addressed?
The free rider problem can be addressed through government provision of the good or by developing technologies that control access, such as tolls.
Give an example of a public good and explain why it fits the criteria.
Fireworks are an example of a public good because they are non-rival (one person's enjoyment does not prevent others from enjoying) and non-excludable (difficult to exclude people from watching).
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