CH 18 Review

Joan loves turning up her electric guitar amp all the way, but her next-door neighbor hates listening to her. Which of the following private solution to their problem is most likely to be sustainable in the long run?

Joan's neighbor pays Joan at the end of each month as long as Joan has kept the noise down all month.

Suppose the government is considering two policies to limit factory air pollution: taxing all producers, or providing each producer with an allotment of tradable permits. If both policies lead to the same amount of pollution reduction, who of the following is least likely to benefit from the tradable-permit option?

The government

Suppose an environmental impact study shows that the coral reef near Port Douglas, Australia, can sustain 18 scuba diving tours per week. Using a quota of 18 dive tours per week will have the following advantage over a tax:

The quota will better ensure that the sustainable amount of dives will occur.

Which of the following is an example of a private cost, a private benefit, an external cost, and an external benefit that may result from smoking cigarettes? Second-hand smoke is Any desirable effect of nicotine is The price of the cigarettes is If smokers paid the social cost of cigarettes, smoking would

external cost private benefit private cost decrease

When economists propose taxes or tradable allowances as a way to tackle externalities, they generally strive to propose the tax be based on the:

externality

A Pigovian tax is: Even with a Pigovian tax, a market with a negative externality may still be inefficient because:

intended to counterbalance a negative externality; the tax may be set too high or too low.

The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. This type of quota policy is <blank> efficient way of reducing waste than charging a set price per can because:

less; the marginal benefit of having a can of garbage collected varies among households.

If there is a negative externality, but economic agents can make enforceable contracts and there are no transactions costs, it would be expected that: This idea is known as:

private bargaining will achieve the optimal output; the Coase Theorem.

A tradable allowance is a production or consumption:

quota that can be bought and sold.

One problem with Pigovian taxes is:

setting the tax at the right level.

If a positive externality cannot be remedied through private bargaining, one solution could be a <blank>. The primary problem with implementing this solution is which of the following?

subsidy; it may be difficult to quantify the external benefit.

One method of dealing with a negative externality would be to set quotas on the consumption of the good. However, quotas will only be as efficient as an equivalent Pigovian tax if:

the willingess to pay of each consumer is identical.

When the addition of another user changes the value of the good or service to all users, there is a(n): Although many of these externalities are positive, a problem is that:

network externality; they may create natural monopolies.

State whether each of the following primarily causes an external cost or an external benefit. Fishing at a popular lakeside vacation spot: Buying a fax machine: Conducting research to find an AIDS vaccine: Occupying a seat on a bench in a crowded park: Littering: Spaying or neutering your pet:

external cost external benefit external benefit external cost external cost external benefit

A tax will make a market less efficient if <blank> but more efficient if <blank>

no externalities exist; negative externalities exist

Economists generally believe that the best way to target a negative externality is to: In practice, governments often try to correct externalities by regulating or taxing the production of the good that generates the externality, such as setting emission standards for cars. A problem with this approach is that:

tax the externality directly, such as taxing greenhouse gas emissions; it creates incentives to avoid the tax, and thus external costs may not fall.

The city of Seattle limits each household to one can of free garbage collection per week. There are fees for any extra garbage collected from the curb. Suppose that a neighborhood group in Seattle organizes a group of families so that those who plan to go over their one-can garbage quota can find households that are under their quota and pay them to put out the extra trash. This policy will do what with efficiency?

Increase

Consider the case of a good with external benefits. If you plant trees in front of your house, the neighborhood is more attractive, and trees create shade, provide oxygen, and a home for birds and squirrels. Thus, the benefits to society are greater than the benefits to you. If the planting of trees is a private choice, you will plant too few relative to the socially optimal quantity, because the private value to you is less than the social value. Which of the following would help to correct this problem?

Subsidize the planting of trees.

Your neighbor never mows his lawn. You don't have any legal right to force him to mow, but the mess in his front yard is making your neighborhood unsightly and reducing the value of your house. The reduction in the value of your house is $5,000, and the value of his time to mow the lawn once a week is $1,000. Suppose you offer him a deal in which you pay him $3,000 to mow. How does this deal affect surplus?

The deal increases both your surplus and your neighbor's.

If education has private benefits to an individual as well as external benefits to society, which of the following explains why a less-than-optimal amount of education occurs?

The decision makers usually only consider private benefits and private costs.

Suppose that a paper mill is located on a river. Making paper also produces waste, which runs off into the river and pollutes the downstream area. The people who live in the downstream area are not consumers of the paper that the plant produces. The production of paper involves an external cost of $2 per ream of paper produced. If neither the firm nor consumers include the external cost in their consumption or production decisions, which of the following is true about the resulting equilibrium, relative to the quantity that would maximize social surplus? One way to correct the negative externality would be to impose <blank>, which would <blank>

The quantity will be too high; a tax of $2 on unit of paper produced on consumers; decrease demand and cause market quantity to drop

Suppose that legally, people own the right to clean air. That is, it is illegal for factories to emit toxic gases into the atmosphere. (Or, in other words, the right to clean air has been assigned to citizens rather than factories.) Thus, legally, factories would need to either abate pollution or pay people for the damage to the air. Either case would be expected to internalize the cost of pollution and reach an optimal level of output. Which of the following is the most likely reason that private markets may not reach this optimal solution?

Transaction costs may be too high

When U.S. farmers in the Southwest irrigate their land, salt in the ground soil leaks into the Colorado River. The Colorado River has become so salty that Mexican farmers further down the river cannot irrigate their own land and Mexican crops have been devastated. This situation constitutes a negative externality because: If U.S. farmers were to internalize this externality, U.S. farmers would irrigate <blank>

U.S. farmers consider only their private costs in their decision making; less because the private cost would increase

Having a loud party in an apartment building will create <blank> to neighbors who are not invited to the party and therefore the person who hosts the party is the People who recycle most of their waste generate <blank> because the people who recycle <blank>

a negative externality; economic decision-maker. positive externalities; are not the only ones who benefit

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is:

a tax equal to the external cost.

In considering the decision to adopt a dog, indicate which of the following is an example of a private cost, a private benefit, an external cost, and an external benefit that may result from the decision: The food for the dog is: The dog discouraging intruders and trespassers from the neighborhood: The enjoyment from a new companion: Barking disturbing the neighbors sleep:

private cost external benefit Private benefit External cost

A <blank> is inefficient but a Pigovian <blank> is efficient.

quota; tax