Chapter 11

A payoff matrix that illustrates the outcomes faced by professional athletes' decisions to either take or not take anabolic steroids tells us that ______.

(1) the rewards athletes receive depend on how they perform in absolute terms (2) the rewards athletes receive depend on how they perform relative to their closest rivals

negative externality graph

Social MC is greater than Private MC, this good generates a negative externality.

Consider the phrase, "once people have to pay for their emissions, they quickly find ingenious ways of reducing them." This refers to which of the following?

Tradable pollution permits work.

external benefit (or positive externality)

a benefit of an activity received by people other than those who pursue the activity

external costs (negative externality)

a cost of an activity that falls on people other than those who pursue the activity

One criticism of carbon taxes suggests that they are worthless unless other countries also tax carbon accordingly. What is one solution to this reasonable argument against taxes?

a tax on imported goods from countries that fail to enact carbon taxes at home

The Coase theorem states that if people can at no cost negotiate the purchase and sale of the right to perform activities that cause externalities, then they can ____ arrive at efficient solutions to the problems created by externalities.

always

externality

an external cost or benefit of an activity

Antibiotic use generates a positive externality to the extent that

antibiotic use by one person can prevent others from contracting contagious bacterial infections.

Positional externalities occur when

any improvement in one person's relative standing necessarily worsens the relative standing of others.

If a commonly held resource can be successfully placed under private ownership, the tragedy of the commons

can be avoided.

Suppose Global Inc can emit either 3 or 4 tons of pollution per day depending on which of two production processes they use. Currently they emit 4 tons of pollution per day, and it would cost them $95 per day to cut their emissions to 3 tons per day. If the government imposes a tax of $100 per day on pollution, Global Inc will _____.

cut their emissions to 3 tons per day

The government is more likely to develop laws and regulations concerning activities that generate externalities when it is _____ for people to negotiate the purchase and sale of the right to perform those activities.

difficult

Taxes _____ lead to a loss in total economic surplus.

do not always

In a market for a good whose production involves no externalities, ______.

equilibrium price and quantity are socially optimal

The market equilibrium quantity will be higher than the socially optimal quantity for a good whose production generates:

external costs

True or false: The Coase theorem implies that there is no need for laws and regulations concerning activities that generate externalities because people should be able to arrive at efficient solutions to the problems caused by externalities.

false

If the cost of pollution abatement differs across firms, then the most efficient system of pollution abatement is one in which

firms with the lowest marginal cost of pollution abatement reduce pollution the most.

At the market equilibrium, the marginal social cost of an additional unit will exceed the marginal benefit of an additional unit if production of the good:

generates external costs

If people's consumption of cigarettes imposes a cost on others because of second-hand smoke, then we would expect the equilibrium quantity of cigarettes in an unregulated market to be

greater than the socially optimal quantity.

If the production of thneeds (the fictitious garment in Dr. Seuss's The Lorax) entails environmental damage, then we would expect the equilibrium quantity of thneeds to be

greater than the socially optimal quantity.

If a good generates a negative externality, then at the market equilibrium, the marginal social cost of an additional unit _____ the marginal benefit of an additional unit.

is greater than

One advantage of auctioning pollution permits over taxing pollution is that

it's easier to set a target level of pollution with pollution permits than taxes.

Suppose World Energy can either emit 9 or 10 tons of pollution per day depending on which of two production processes they choose. Currently they emit 10 tons of pollution per day, and it would cost them an additional $200 per day to reduce their emissions to 9 tons per day. If the government imposes a tax of $190 per day on each ton of pollution, then World Energy will

keep their emissions at 10 tons per day.

If a good generates a positive externality, then the equilibrium quantity of that good will be ______.

less than the socially optimal quantity

Positional arms control agreements attempt to

limit mutually offsetting investments in performance enhancement

If a good generates a negative externality, then the private equilibrium quantity will be

more than the socially optimal quantity.

Identify which of the following are social norms that act as positional arms agreements.

nerd norms norms of taste norms against vanity fashion norms

The private ownership of natural resources is _____ solution to the tragedy of the commons.

not always a practical

One solution to the tragedy of the commons is to

place the commonly held resource under private ownership.

It's generally easier to set target levels of pollution with

pollution trading permits.

Nerd norms and norms against vanity both tend to operate as ______.

positional arms control agreements

Collective measures to limit mutually offsetting investments are known as

positional arms control agreements.

If competitors engage in an escalating series of mutually offsetting investments, they are engaged in a _____.

positional arms race

Situations in which people's rewards depend on how well they perform in relation to their rivals give rise to

positional externalities.

If an activity generates a benefit that is enjoyed by people other than those who pursue the activity, then the activity generates a

positive externality.

If your neighbor plants a beautiful flower garden that you enjoy looking at, then their flower garden generates a

positive externality.

social MC=

private MC+XC

If the government auctions off pollution permits, then generally speaking firms with the highest marginal cost of pollution abatement will

purchase the most permits.

If the government imposes a tax on pollution, then firms with the highest marginal cost of pollution abatement will

reduce pollution the least.

The Coase theorem

says that people should be able to arrive at efficient solutions to the problems caused by externalities if they can negotiate at no cost the purchase and sale of the right to perform activities that cause externalities. If negotiation is infeasible, however, government intervention may be necessary.

Taxes _____ improve economic efficiency.

sometimes

One solution to negative externalities is to _____ activities that generate negative externalities.

tax

If the cost of reducing air pollution by one ton is higher for Stark Industries than it is for Wayne Enterprises, then the most efficient way to reduce pollution is to require

the Wayne Enterprises to reduce pollution by one ton.

The socially optimal level of pollution is

the level at which the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.

The socially optimal level of a negative externality is

the level at which the marginal cost of reducing the externality equals the marginal benefit of reducing the externality.

The tendency for a resource that has no price to be used until its marginal benefit falls to zero is known as

the tragedy of the commons.

In the presence of a negative externality, ______.

the true cost of producing the last unit exceeds the value to consumers

The tragedy of the commons is the tendency for a resource that has no price

to be used until its marginal benefit falls to zero.