econ chap 10

Scenario 1: What is the size of the externality?

-10,000

Scenario 2: What is the size of the externality?

99,000,000

The proposition that private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the:

Coase Theorem

My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes an external cost on him and on his property value.

Coase theorem

In theory, one reason why tradable pollution allowances are preferable to pollution regulation is because they:

Encourage lowest-cost pollution reduction.

Fruit farmers pay beekeepers for their honeybees' pollination services. Honeybees provide an external benefit to fruit farmers. However, fruits provide an external benefit to the beekeepers because their honeybees need fruits. Which external benefit is larger: honeybees' external benefit to fruit farmers and fruits' external benefit to beekeepers?

Honeybees' external benefit to fruit farmers is larger

Market solutions to externality problems work when: I. property rights are easily identifiable. II. transaction costs are relatively low. III. the market quantity is above the efficient quantity.

I and II only

Government solutions to externality problems include: I. Pigouvian taxes II. Tradable allowances. III. command and control.

I, II, and III

Given what you've learned about externalities, should human-caused global warming be completely stopped?

No

A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing the naturally occurring fish. Thousands of homes line the banks of the lake.

No to coase theorem

My neighbors all would love for me to get that broken-down Willies Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6-foot deep ditch in the front yard? The whole neighborhood is just annoyed.

No to coase theorem

If the permits were not tradeable, how would this affect the efficiency of the program?

Program would resemble other command-and-control programs and Program would no longer be as efficient.

A government is torn between selling annual pollution allowances and setting an annual pollution tax. Unlike in the messy real world, this government is quite certain that it can achieve the same price and quantity either way. It wants to choose the method that will pull in more government tax revenue. Which method is better from a revenue-raising perspective?

Revenues will be the same.

Maxicon is opening a new coal-fired power plant, but the government wants to keep pollution down using tradable pollution permits. If a corrupt government just grants Maxicon all of the pollution permits in the entire nation (even though there are many energy companies), what do we predict will happen to pollution production?

The firms polluting will likely be those with the highest costs of reducing pollution.

A private cost is:

a cost paid by the consumer or the producer trading in the market.

Suppose that whales are threatened with extinction because a large number of people like to eat whale meat. Governments are torn between banning all whaling except for certain religious ceremonies, and heavily taxing all whale meat. Assume there are only a few countries in the world who consume whale meat, and that they have fairly efficient governments.

a. Ban the eating of whale meat.

Suppose that the family clearly possesses the right to a pleasant-smelling environment. What could happen? a. The factory stops producing the bad smell. b. The factory pays the family for the right to continue the bad smell. c. The factory pays the family to move. e. All of the above.

all of the above

Which action would likely reduce the undersupply of people who get flu shots? a. Pay people to get a flu shot b. Offer the flu shot in more locations c. Publicly recognize people for getting a flu shot

all of the above

LoJack is an example of a vehicle tracking system designed to help police recover stolen vehicles. Steve Levitt found evidence that Lojack and other vehicle tracking devices create a positive externality of decreasing all car thefts because car thieves do not know which cars have Lojack installed, making them more hesitant to break into any car.

b. Subsidize purchase of vehicle tracking devices.

A coal-fired electricity plant dumps its leftover hot water into the nearby river, killing the naturally occurring fish downstream. There is one large fishery one-mile downstream affected by this. After that, the water cools enough so it's not a problem.

coase theorem

An increase in the number of pollution allowances does which of the following:

decreases the cost of polluting

Cultural influences often create externalities, for good and ill. A happy movie might make people smile more, which improves the lives of people who don't see the movie. A new fashion trend for tight-fitting clothing might hurt the body image of people who think they won't look good in the new trendy clothing. Let's consider the market for one cultural good that unrealistically raises expectations about the opposite sex: the romance novel. In romance novels, men are dangerous yet safe, wealthy yet never at work, they ride high-speed motorcycles yet never get in terrible accidents, they look fantastic even though they never waste endless hours at the gym, and so on. (Of course, advertising that focuses on sexy female models may also unrealistically raise expectations about the opposite sex so feel free to change our example as you see best.) Romance novels impose an external cost on men, who have to try to live up to these unrealistic expectations. Suppose the government taxed the romance novel to reduce the externality. How should the government spend the money?

efficiency

Scenario 2: In the market for really good ideas, ideas that will dramatically change the world for the better, the private benefit of one more good idea is $1M. The marginal social benefit is $100M. Is this an external cost or an external benefit?

external benefit

The benefit your neighbor receives from hearing you play your pleasant music

external benefit

The extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms

external benefit

Scenario 1: In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000. Is this an external cost or an external benefit?

external cost

The annoyance of your neighbor because she doesn't like your achingly conventional music

external cost

The crime that is more likely to occur to your neighbor once a criminal sees a "Protected by alarm" sticker on your window.

external cost

Costs or benefits that fall on bystanders, not consumers or producers trading in the market are known as:

externalities

Which of the following jobs is attempting to correct for an externality?

homeowner association

An external cost:

is a cost paid by people other than the consumer or the producer trading in the market

Economists have found that increasing the proportion of girls in primary and secondary school leads to significant improvement in students' cognitive outcomes (Victor Lavy and Analia Schlosser. 2007. "Mechanisms and Impacts of Gender Peer Effects at School," NBER Working Paper 13292). One key channel seems to be that on average boys create more trouble in class, which makes it harder for everyone to learn. In newspaper English, we'd say that "boys are a tax on every child's education." Do girls in a classroom provide external costs or benefits?

neither

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, what type of externality is produced?

none of the above

The pleasure you receive from listening to your iTunes download

private benefit

The safety you enjoy as a result of having the security system

private benefit

The price you pay for a security system for your home

private cost

The price you pay for an iTunes download

private cost

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

regulation

Which is an example of an external cost?

secondhand smoke

Scenario 2: Would a tax or a subsidy be more appropriate for this externality?

subsidy

Scenario 1: Would a tax or a subsidy be more appropriate for this externality?

tax

Suppose that a family moves in next door to this smelly factory. Who is causing the externalities problem?

the factory and the family

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?

the injured demanding compensation through a class-action law suit

Command and control methods do not always produce the most efficient outcomes because:

they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior.