Explain what is meant by "internalizing an externality," and describe three methods by which this can be done.
What will be an ideal response?
An externality occurs when the actions of one agent affect other agents. In the case of a negative externality, the action adversely affects other agents, and so the agent taking the action faces artificially low costs. For example, when a firm creates pollution as a by-product of its production process, this adversely affects others. Internalizing the externality involves making the firm face the true cost to society of its production process, including the damages inflicted on other parties. This can be done by levying a pollution tax equal to the value of the damages done to others, or by controlling the output of the firm through either command-and-control methods or by issuing pollution permits. All of these will increase the cost of production to the firm, with the goal of bringing the cost that the firm actually faces closer to the actual cost to all agents (including the firm) in the economy.
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Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. You may find it helpful to fill in the payoff matrix below. src="https://sciemce.com/media/4/ppg__rrr0818190951__f1q383g1.jpg" alt="" style="vertical-align: 0.0px;" height="203" width="377" />Which of the following statements is correct?
A. OPEC's dominant strategy is to cheat on the agreement.
B. OPEC's dominated strategy is to cheat on the agreement.
C. OPEC's dominant strategy is to abide by the agreement.
D. OPEC does not have dominant strategy.
The steps in the transmission of monetary policy are
A) Congress increases government expenditures on goods and services, leading to an increase in aggregate demand. B) Congress increases the money supply, which lowers the interest rate, and leads to an increase in aggregate demand. C) the Federal Reserve increases government expenditures on goods and services, leading to an increase in aggregate demand. D) the Federal Reserve lowers the federal funds rate, which lowers the real interest rate and leads to an increase in aggregate demand. E) Congress increases the budget deficit, which increases the money supply, which increases aggregate supply.
Which of the following is not a coincident indicator of the business cycle?
a. Unemployment claims b. Payroll employment c. Industrial production d. Personal income e. Manufacturing and trade sales
Answer the following statements true (T) or false (F)
1. The labor supply curve(s) will shift left if there is a decrease in wages. 2. An increase in the price of a product signals consumers that there is an overage and the product should perhaps be economized on. 3. The market price system provides a highly efficient mechanism for disseminating information about relative scarcities of goods, services, labor, and financial capital. 4. It is a common mistake to confuse the slope of the supply curve with its elasticity. 5. Zero elasticity in either a supply or demand curve occurs when a price change of one percent results in a quantity change of one percent.