Chapter 16- Externalities

What is another name for tradable emissions permits?

Cap and trade systems

According to this, the private sector can correct externalities and produce the efficient level of the good, provided that transaction costs are sufficiently low

Coase Theorem

This states that externalities need not lead to inefficiencies, since people have an incentive to make mutually beneficial transactions, which leads individuals to take externalities into account when making decisions, provided that transaction costs are not too great

Coase Theorem

Taxes that depend on the amount of pollution a firm produces

Emissions Taxes

Rules that protect the environment, by specifying what actions need to be taken by producers and consumers

Environmental Standards

An uncompensated benefit that an individual or firm confers on others; also known as positive externality

External Benefit

External Benefits and external costs

Externalities

True or False: It is likely that the market will generate the optimal amount of pollution

False (those who produce the pollution do not have to bear the costs of pollution)

When transaction costs prevent people from internalizing the externality, what must happen to correct the market and its failure to internalize the externality?

Government Intervention

This does not occur if the cost of communication between the affected parties is too high, if the cost of making a legally binding contract is too great, or if there are costly delays in the bargaining.

Internalization of an externality

Further reduction in pollution emissions will continue to increase total surplus until that level of pollution emissions is achieved where ____=____

MSC, MSB

The additional benefit to society from an additional unit of pollution

Marginal Social Benefit of pollution

The additional cost imposed on society of an additional unit of pollution

Marginal social cost of pollution

This occurs when the value of a good to a consumer increases as more people own or use the good; frequently occur in technology driven sectors of the economy

Network Externality

Do the companies and individuals who create pollution typically bear the cost of their negative externality?

No (borne by the entire society)

A payment designed to encourage activities that yield external benefits

Pigouvian Subsidy

To gain the socially optimum amount of a positive externality requires what?

Pigouvian Subsidy

The use of taxes to address the problem of negative externality, used to reduce external costs

Pigouvian Tax

Taxes that are designed to reduce external costs

Pigouvian Taxes

The quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for

Socially Optimal Quantity of Pollution

_____ can be used to reduce any kind of activity that generates a negative externality

Taxes

A term that describes the spread of knowledge among individuals and firms: it measures the external benefit that occurs when new knowledge is discovered in one application and then this knowledge is used in other applications

Technology Spillover

One of the problems with pollution is that it inflicts a cost on who?

The entire society

licenses granted by the government that give the holder of the license permission to emit limited quantities of the pollutant; can be bought and sold by the polluter

Tradable Emissions Permits

The costs to individuals of making a deal

Transaction Costs

True or False: Although effective as a policy, Pigouvian taxes are difficult to implement since government officials do not always know with certainty what level of tax is the efficient level of tax

True

True or False: An emissions tax is more efficient than an environmental standard, since the emissions tax ensures that the marginal benefit of pollution is equal for all sources of pollution, while environmental standard does not consider the marginal benefit of pollution when it is enforced

True

True or False: When externalities are present, the market fails to produce the optimal amount of the good

True

True or False: Environmental standards are inefficient

True (inflexible, and do not incorporate the costs of reducing pollution)

What is the optimum level of pollution for a society?

When marginal social cost (of pollution)= marginal social benefit (of pollution)

In the absence of government intervention, polluters will pollute up to the point where Marginal Social Benefit is equal to what?

Zero

When an externality cannot be directly observed, then the government must implement policies that do what?

aim at generating the right amount of the activity that produces the externality

From a producers prospective, the benefit from emitting one more unit of pollution is measured by the costs the producer saves from not having to do what?

buy and install expensive pollution-control equipment

Pollution generates what two things for society?

costs and benefits

When the level of pollution is limited by tradable emissions permits, this results in producers basing their decision about whether or not to pollute on the basis of what?

costs of reducing their pollution

A reduction in pollution emissions will result in a large _____ in the total social cost of pollution emissions, while causing ____ change in the total social benefits of pollution emissions

decrease, little

What is the government's greatest challenge when implementing tradable emissions permits?

determining the optimal number of permits for the economy

When an externality can be directly observed, then it can be regulated through what?

direct controls, taxation, subsidization

The Marginal social benefit of pollution is a (n) ________ sloping line; when pollution is negligible, an additional unit has a high benefit to society; when there is a lot of pollution, an additional unit brings little benefit to society

downward

Both _______ and _______ create an incentive for producers to create and use less-polluting technology

emissions taxes, tradable emissions permits

The government can reduce the amount of pollution by doing what?

enforcing environmental standards

When an activity generates an external benefit, or a benefit received by someone other than the people directly involved in the transaction, the market does not produce ______ of this good

enough

An uncompensated cost that an individual or firm imposes on others; also known as a negative externality

external cost

When the government implements an optimal Pigouvian tax, it shifts the supply curve up by the _________

external cost

A principal source of market failure occurs when the market fails to take into account side effects or _______ of consumption or production decisions

externalities

Cap and Trade systems are efficient with pollution that is dispersed, but is less effective with pollution that is ________ localized

geographically

The market level of pollution is ______ than the optimal level of pollution, and that market level of pollution is ______ since, at this level of pollution, the marginal social cost of pollution is ______ than the marginal social benefit of pollution

greater, inefficient, greater

One can measure the marginal social benefit of an additional unit of pollution by finding out what is the ___________ to pay for the right to emit this unit of pollution among all the polluters in the society

highest willingness

A reduction in pollution emissions, does what to total surplus?

increases it

When individuals take into account externalities when making decisions

internalizing the externality

In the case of a positive externality, the market produces too ____ of the good if it does not take into account the externality

little

Companies recognize the importance of network externalities and the positive feedback effect, and they sometimes offer a new product at a very ____ price in hopes of generating a strong network effect

low

An emissions tax creates efficiency in the sense that it will ensure that the __________ of pollution is equal for all sources of pollution.

marginal benefit

With network externality, the _________ to the individual is dependent on the number of other individuals who use the good

marginal benefit

In the case of a negative externality, the market produces too ____ of the good if it does not take into account the externality

much

A ______ externality is a side effect that imposes costs to others

negative

In the case of a positive externality, the government must target what, rather than the external benefit, because the external benefit can be difficult or impossible to measure

original activity

A ________ externality is a side effect that provides benefits to to others

positive

A good with a network externality exhibits __________: as more people use the good, even more people are inclined to use the good and if fewer people use the good, then fewer people are inclined to use the good

positive feedback

Cleaning up pollution requires the use of __________ that would otherwise be used to produce goods and services

scarce resources

Polluters know that avoiding pollution requires using ___________ and therefore reduction of pollution carries a cost

scarce resources

Suppose the local government decides to tax emission of sulfur dioxide. The optimal Pigouvian tax equals the marginal cost of Pollution at the __________ quantity of pollution

socially optimal

Economists believe that pollution can be reduced at a lower cost through the use of what?

taxes and tradable permits

The creation of _______ poses the greatest single source of external benefits in the modern economy

technology

The marginal cost of pollution is a(n) ______ sloping line, since each additional unit of pollution represents a greater cost to society as the environment deteriorates

upward