Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define an externality and classify one as positive or negative, in production or in consumption. (Guide: “What an externality is”; Practice Q1)
- I can explain why rational buyers and sellers ignore external costs and benefits. (Guide: “Why markets ignore external effects”; Practice Q5)
- I can explain how poorly defined property rights and high transaction costs cause externalities. (Guide: “Why markets ignore external effects”; Practice Q6)
- I can explain why people free ride when a benefit is non-excludable. (Guide: Worked example 3(d); Practice Q6)
Calculation and graphing
- I can find the market and socially optimal quantities from equations, using MSC = MPC + MEC or MSB = MPB + MEB. (Guide: Worked examples 1 and 2; Practice Q4, Q7)
- I can calculate the DWL of a negative or positive externality. (Guide: Worked examples 1 and 2; Practice Q4, Q7)
- I can draw labelled graphs of all four types of externality and shade the DWL on the correct side. (Guide: types table and Figures 1 and 2; Practice Q4, Q5)
- I can calculate a corrective tax or subsidy, its effect on prices and its revenue or cost. (Guide: Worked examples 1(d) and 2(c); Practice Q3, Q4)
Reasoning
- I can explain why the corrective tax equals the MEC at the optimal quantity, not at the market quantity. (Practice Q7)
- I can compare taxes, subsidies, regulation, public provision and property rights as ways to correct an externality. (Guide: “Policies that correct externalities”)
- I can explain why private bargaining reaches the efficient outcome when transaction costs are low, whoever holds the right. (Guide: Worked example 3; Practice Q6)
All ticked? Move on to Topic 6.3, Public and Private Goods, or return to the course roadmap.