ECO202 Chp5 Externalities, Environmental Policy, and Public Goods

According to the graph, what is the optimum level of pollution abatement?

-8 million tons **The optimal level of pollution occurs at the point where the marginal cost of pollution abatement is exactly equal to the marginal benefit of pollution abatement. That point occurs where the two lines intersect at 8 million tons or 1.1 million discharges.

Which of the following gives people an economic incentive to actively assist in repopulating an endangered species?

-Allowing people to own the endangered species and to charge the public to view them in nature displays, safaris, and other natural venues **gives people an economic incentive to actively assist in repopulating an endangered species. This would create a monetary incentive to breed the endangered species and help with repopulation. Allowing the trade in hides and other body parts would incentivize further depopulation of the endangered species. Making it illegal to hunt does not provide an economic incentive to assist in repopulation, although it does provide incentive to leave the existing population alone (i.e., disincentive if found hunting).

The 1990 Clean Air Act is administered by the __________.

-Environmental Protection Agency **This U.S. legislation attempts to establish and monitor pollution limits for the U.S. However, this process is hampered by the difficulty in setting individual limits and then the high cost of monitoring compliance. The Federal Reserve is the U.S. central bank and in charge of monetary policy.

Costs that are only borne by the individuals that incur those costs are known as:

-Private costs ***These costs are also called internal costs because they only involve the parties involved in the transaction. When transactions only involve private costs and benefits, there are no externalities. Social costs are the full costs to society that occur when a resource is used that includes both internal and external costs.

Which one of the following will not help to reduce the problem that exists when social costs exceed social benefits?

-Subsidize polluters **If the social costs exceed the social benefits, then that indicates there is a negative externality such as pollution. Subsidizing pollution would only result in more pollution. Taxing the polluters or subsidizing those parties that have been damaged will respectively lower pollution (reduce social costs) or increase the social benefits by paying those that have been harmed the most by the pollution.

According to the graph, how much is the gasoline tax and how much does the equilibrium price increase as a result of the tax?

-The tax is $0.68 per gallon, which causes an increase in equilibrium price of $0.40 **Consumers will now pay $2.00 a gallon for gas that was $1.60 before the tax and the quantity will fall from 100 million gallons of gasoline down to 80 million gallons of gasoline. However, the price received by the producer will be $0.28 less than it was prior to the tax.

Which of these best represents a tax equal to the value of the negative externality?

-The vertical distance between S1 and S2 **best represents a tax equal to the value of the negative externality. The tax is equal to the difference between the private cost and social cost. P1 is the equilibrium price prior to the tax. P2 represents the price consumers pay after the imposition of the tax.

According to the graph, what is the impact of a pollution tax on this market?

-a higher price and lower equilibrium quantity **The pollution tax increases the cost of producing electricity, and therefore, shifts the overall supply curve to the left. The equilibrium point moves from point i to point t which increases the price from $64.90 to $67.60 per megawatt hour and decreases the equilibrium quantity.

Social benefit is the total benefit from the consumption of a good or service that includes:

-both private and external benefits **Social benefits include the private benefits that accrue to the parties involved in a transaction but also the benefits to society overall, the external benefits. For example, one external benefit to your college education is the additional taxes you will pay over your lifetime to support public goods.

One idea often floated in the United States as a legislative response to global climate change is __________.

-cap-and-trade **Cap-and-trade legislation would set a maximum limit on the total carbon emissions in the U.S. and then issue tradable emissions permits that would be bought and sold on some type of exchange. Over time the limit could be reduced. Outsourcing manufacturing may reduce U.S. emissions but does not reduce global emissions. And, limiting auto ownership would never be floated as an option to reduce emissions in the U.S.

The idea of a pollution tax is the internalize the externality, which happens when the tax:

-equals the external cost **The tax shifts the cost back to the producer and consumer and away from the third parties currently bearing the cost. A tax that is lower than the external costs does not internalize all of the costs. And, a tax greater than the external cost reduces output even further and could result in an external benefit.

When a private cost is different than the social cost there is an:

-external cost being borne by someone else **Costs that are only borne by the individuals that incur those costs are known as private costs. These costs are also called internal costs because they only involve the parties involved in the transaction. When transactions only involve private costs and benefits, there are no externalities or costs borne by outside parties. Social costs are the full costs to society that occur when a resource is used that includes both internal and external costs.

A negative externality causes the social cost of production to be:

-greater than the private cost

A negative externality causes the social cost of production to be:

-greater than the private cost **Social costs are the full cost to society due to the use of a resource. For example, a heavy manufacturing process costs in terms of labor and raw materials, but also in lower air and water quality costs that are borne by third parties. Social costs include all those costs which, in the case of a polluting industry, exceed the private costs.

Public choice theory indicates that one of government's purposes is to __________.

-help people make collective decisions **Some public goods are so costly that they would never be adopted or initiated unless government made a collective decision to undertake the project and developed a mechanism to pay for it. Building an aircraft carrier and developing a missile defense shield are both potential examples of this type of good. While the benefits may exceed the costs, everyone will not voluntarily remit their pro rata payment, so the government needs to make these collective decisions for the overall benefit of society. While the government may structure incentives to encourage certain careers, it is certainly not a main purpose of government. And, the production of goods with external costs would result in oversupply, which is not an efficient use of government resources.

One reason pollution limits are difficult to implement is due to the __________.

-high cost to monitor compliance **Pollution limits are difficult to implement because it is difficult to assign individual limits and then very costly to monitor compliance afterwards. Implementing limits would be more likely to result in job loss since production would typically fall as a result of the limits.

The marginal cost of eliminating the first 20% of pollution is much __________ than the marginal cost of eliminating the last 20% of pollution.

-less expensive **Pollution abatement experiences diminishing marginal returns just like other activities. For this reason, society has to determine the optimal level of pollution which occurs at the point where the marginal benefit of one more unit of pollution abatement equals the marginal cost of that abatement. It is easier to justify expending resources on eliminating the first 20% of pollution since the cost per unit reduction is cheaper.

If polluters are charged to pollute, then:

-less pollution is a probable result **When polluters are charged, the process shifts at least a portion of the external costs back to the producer. As producer costs increase, there will be less production and less pollution. In many cases, the higher pollution cost may make the marginal benefit of adopting pollution abatement technologies exceed the marginal cost of those technologies. Pollution will never disappear unless all productive activity ceases. Charging polluters to pollute should reduce the damage to the environment assuming they are currently producing and polluting without being charged.

When no one owns a specific resource, there is:

-no incentive to consider negative externalities that impact that resource. **The existence of property rights are at the source of the externality problem. For example, since no one owns the air, and the impact of one individual is minimal, there is no real reason to not pollute if it increases a person's marginal benefit. However, if all behave that way then the issue is magnified. Negative externalities are most often associated with resources that do not have defined private property rights.

The lack of clearly assigned __________ contributes to __________ of common resources.

-property rights, overuse **When no one clearly owns a resource, some individuals tend to gain far more benefit from use than it costs them individually. Society at large bears the remainder of the external costs. When enough individuals behave in this manner, it leads to overuse of common resources.

Under a policy strategy in which a government imposes an emissions cap and issues tradable emissions-allowance permits to firms, the government:

-seeks to cap nationwide emissions and then distributes emission-allowance permits across firms. **Under this strategy, the government will set the maximum allowable emissions below current levels and gradually reduce them over time. Firms that cannot immediately meet the lower emissions can buy permits from other firms. Over time this should incentivize lower overall emissions and a gradual transition to production processes that are more environmentally friendly. Limiting the amount an individual firm could buy or sell would not have the macro impact desired and unlimited permits would do little to reduce emissions unless the permits were costly to procure.

A marketable pollution permit is a permit:

-that allows a firm to sell the right to pollute **A firm can then exercise its right to pollute and use the permit or sell it on the open market. In this system, low polluting firms are rewarded with extra income from the permit sale and high polluters are punished by having to pay to pollute. If the total emissions allowed by all permits are lower than current levels, this system can function to lower overall emissions. Governments do not need permits to tax their own industry or citizens. And, under a global permit system one country could have a surplus of permits that were sold to other countries, but that is not the definition of a marketable pollution permit.

The lack of private ownership of certain resources like public lands or water can contribute to overuse. This is known as:

-the tragedy of the commons **Overuse occurs when the individual marginal benefit from some activity involving a common resource exceeds the individual marginal cost. The other phrases are fictitious, and therefore, meaningless.

The costs associated with engaging in a process to solve a particular pollution problem are referred to as:

-transaction costs **These costs include the time and money spent negotiating a solution, legal fees, monitoring costs, etc. The greater the number of parties involved in a particular issue the higher the transaction costs are likely to be. Implicit costs are costs that do not require payment but instead represent opportunity costs. Social costs include the entire cost to society, both private and external, due to a particular transaction.

The Coase theorem postulates that private solutions to the problem of negative externalities are possible if:

-transaction costs are low **The costs associated with engaging in a process to solve a particular pollution problem are referred to as transaction costs. If the transaction costs are low in terms of time and money spent, then a private solution may emerge. However, the more parties involved in a transaction, the higher the transaction costs, and the more unlikely it is a private solution will be found. Legislating a solution is not a private solution.

Which of these is the preferred method to reduce the external cost (pollution) of traffic congestion according to an economist?

Levy a tax that varies with the level of congestion **The tax would internalize the cost of traffic congestion and lessen or remove the burden on third parties. Drivers would be taxed according to the number of miles they drive during peak congestion times. This tax would incentivize some drivers to identify other means of transportation (i.e., carpool, take public transportation, bike, etc.). The other two means are too costly to police and not as efficient.