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| QUICK REVIEW 30-1 |
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- The demand (marginal-benefit) curve for a public
good is found by vertically adding the prices all members of the society are willing to
pay for the last unit of output at various output levels.
- The socially optimal amount of a public good is
the amount at which the marginal benefit and marginal cost of the good are equal.
- Benefit-cost analysis is the method of evaluating
alternative projects or sizes of projects by comparing marginal benefits and marginal cost
and applying the MB 5 MC rule.
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| QUICK REVIEW 30-2 |
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- Policies for coping with the overallocation of
resources caused by spillover costs are (a) private bargaining
(b) liability rules and
lawsuits
(c) direct controls
(d) specific taxes
and (e) markets for externality rights.
- Policies for correcting the underallocation of
resources associated with spillover benefits are (a) private bargaining
(b) subsidies to
producers
(c) subsidies to consumers
and (d) government provision.
- The optimal amount of negative-externality
reduction occurs where society's marginal cost and marginal benefit of reducing the
externality are equal.
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| QUICK REVIEW 30-3 |
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- The ultimate reason for pollution is the law of
conservation of matter and energy
which holds that matter can be transformed into other
matter or into energy but cannot vanish.
- Society's pollution problem has largely resulted
from increasing population
rising per capita consumption
certain changes in technology
and the so-called tragedy of the commons.
- The Superfund law of 1980 set up the financing
of
and procedure for
cleaning up toxic-waste sites; the Clean Air Act of 1990
established tougher air pollution standards and broadened the market for pollution rights.
- Government can encourage recycling through demand
and supply incentives; its task is to determine the optimal amount of recycling.
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| QUICK REVIEW 30-4 |
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- Asymmetric information is a source of potential
market failure
causing society's scarce resources to be allocated inefficiently.
- Inadequate information about sellers and their
products may lead to an underallocation of resources to those products.
- The moral hazard problem is the tendency of one
party to a contract to alter its behavior in ways that are costly to the other party; for
example
a person who buys insurance may willingly incur added risk.
- The adverse selection problem arises when one
party to a contract has less information than the other party and incurs a cost because of
that asymmetrical information. For example
an insurance company offering
"no-medical-exam-required" life insurance policies may attract customers who
have life-threatening diseases.
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