Chapter 30 Key Terms McConnell and Brue 14th Edition
benefit-cost analysis
Comparing the marginal benefits of a government project or program with the marginal costs to decide whether or not to employ resources in that project or program and to what extent.
marginal benefit
The extra (additional) benefit of consuming one more unit of some good or service; the change in total benefit when one more unit is consumed.
Marginal Benefit = Marginal Cost Rule
The point at which the size or scope of production is optimized. The activity, scope, or output of a project should be increased until it reaches this point - or comes very close to it. This point will yield the maximum net benefit to society. If marginal benefit exceeds marginal cost, then the project is too modest, and could be increased thereby increasing the net benefit to society; however, if the marginal cost exceeds the marginal benefit, then the project will decrease the net benefit to society and should be decreased in scope. For example, if the cost of a proposed government program exceeds its benefits, then it would be unwise to undertake it, but if the benefits exceed the cost, then it would be uneconomical, or "wasteful" not to spend on that government program.
Coase theorem
The idea first stated by economist Ronald Coase that spillover problems may be resolved through private negotiations of the affected parties.
market for externality rights
A market in which firms can buy rights to pollute the environment; the price of such rights is determined by the demand for the right to pollute and a perfectly inelastic supply of such rights (the latter determined by the quantity of pollution which the environment can assimilate).
Optimal Reduction Of An Externality
The point at which society's marginal benefit and marginal cost of reducing an externality are equal (MB = MC). For example, if the MC of reducing air pollution is less than the MB, then it would be wise to use resources to reduce air pollution. However, if the MC is greater than the MB, although air pollution is not suddenly desireable it would reduce the net well-being of society to use resources to decrease air pollution. In this case, some level of air pollution may be economically efficient.
Law Of Conservation Of Matter And Energy
Matter can neither be created nor destroyed, but merely changed from one form to another. This is a particularly important concept to remember when thinking about externalities such as pollution. All inputs (fuels, raw materials, water, and so forth) that are used in production processes will ultimately result in an equivalent amount of waste. Fortunately, the ecosystem has a natural way to deal with this waste - within reason. Unfortunately, the volume of waste now tends to outrun the ecosystem's ability to absorb it.
Superfund law of 1980
Federal legislation of 1980 which taxes manufacturers of toxic products and uses the revenues to finance the cleanup of toxic-waste sites; assigns liability for improperly dumped waste to the firms producing transporting and dumping that waste.
Clean Air Act Of 1990
Direct controls in the form of uniform emission standards - i.e. limits on allowable pollution. The Clean Air Act 1) forces factories and businesses to install "maximum achievable control technology" to reduce emissions of 189 toxic chemicals by 90% by the year 2000; 2) requires a 30 to 60% reduction in tailpipe emissions from automobiles by 1998; 3) mandates a 50% reduction in the use of CFCs, which deplete the ozone layer; and, 4) forces coal-burning utilities to cut their sulfur dioxide emissions by about 50% thereby reducing acid-rain destruction of lakes and forests.
asymmetric information
A situation in which one party to a market transaction has much more information about a product or service than the other; the result may be an under or overallocation of resources.
moral hazard problem
The possibility that individuals or institutions will change their behavior as the result of a contract or agreement; for example a bank whose deposits are insured against loss may make riskier loans and investments.
adverse selection problem
A problem arising when information known to one party to a contract is not known to the other party causing the latter to incur major costs. Example: Individuals who have the poorest health are more likely to buy health insurance.