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environmental economics wmu
Western michigan university environmental econ (test 1)
22
Economics
Undergraduate 4
02/20/2012

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Term
Aerial spraying of pesticides on banana plantations reduces the number of insects eating the
corn grown in neighboring villages.

This situation is an example of what type of market failure?
Definition
positive externality
Term
A hurricane destroys most of the Central American banana crop, causing world banana prices
to rise.

This situation is an example of what type of market failure?
Definition
not a market failure
Term
Consumers are not aware that bananas have been sprayed with chemicals that are bad for
their health.

This situation is an example of what type of market failure?
Definition
imperfect information
Term
Aerial spraying of pesticides on banana plantations pollutes the drinking water of local
villages.

This situation is an example of what type of market failure?
Definition
negative externality
Term
One banana grower supplies 90% of the bananas sold in Canada.

this is an example of what type of market failure
Definition
imperfect competition
Term
imperfect competition
Definition
describes the situation when a single producer can affect the market price by varying the amount of product available in the market.
Term
imperfect information
Definition
information is missing or incomplete
Term
negative externality
Definition
an action of a product on consumers that imposes a negative side effect on a third party; it is "social cost".
Term
positive externality
Definition
when an individual or firm making a decision does not receive the full benefit of the decision. The benefit to the individual or firm is less than the benefit to society.
Term
a fish in a pond on your property would be considered a ___ good.

(excludable and rivalrous)
Definition
private
Term
Fish in the ocean are a type of ___ good.

(goods which are rivalrous and non-excludable)
Definition
commons
Term
the ocean itself would be best described as a __ good
(a good that is non-rivalrous and non-excludable.)
Definition
public
Term
rivalrous and exclusive are used to describe ___ goods
Definition
private
Term
collective good:
Definition
non rivalrous & excludable
Term
A village next to a lake has five residents, each of whom has a boat with which he can either fish
or take tourists out on the lake. Each villager can earns $100/day taking tourists out. The amount
of fish each villager catches depends on how many others are fishing.

Number of villagers
fishing
Earnings per day from
fishing per boat
1 $170
2 $150
3 $130
4 $110
5 $90

12. How many villagers will fish if they are making decisions individually?
Definition
4
Term
How many villagers should fish if they work together to maximize village income?
#villagers fishing Earnings per day from
fishing per boat
1 $170
2 $150
3 $130
4 $110
5 $90
Definition
2
Term
discount rate formula
Definition
amount of money/(1+discount rate)^amount of years

n/(1+r)^t
Term
Suppose there is a 5% chance in any given year that the current levy protecting Smallville will
fail. If it fails, it will cause $8 million dollars in damage. Improvements in the levy will reduce
the chance of failure to 1% per year. How much should Smallville be willing to pay for these
improvements? (Hint: compare the expected values.)
Definition
320000
Term
how much should a subsidy be
Definition
The correct subsidy amount is the
amount by which you would have to
shift the demand curve up in order
reach the socially efficient point
Term
how much should a tax be
Definition
The correct tax amount is the amount
by which you would have to shift the
supply curve up to reach the efficient
point. This is the vertical distance
between the socially efficient point and
the supply curve below it.
Term
Pigovian tax
Definition
tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. (equal to negative externality is wanted)
Term
tragedy of the commons
Definition
generally refers to the tendency to deplete a
resource when access to the resource is costless.
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