Chapter 5 Externalities, Environmental Policy, and Public Goods

Put each of these goods and services into one of the boxes in the figure to the right. That​ is, categorize them as private goods, public goods, quasi-public goods, or common resources. 1. A television broadcast of the World​ Series: 2. Mail​ delivery: 3. Education in a public school​ (Grades K through​ 12): 4. Education in a private school​ (Grades K through​ 12): 5. Hiking in a large park​ (no congestion) surrounded by a​ fence: 6. Hiking in a large park​ (no congestion) not surrounded by a​ fence: 7. A private good

1. A public good 2. A private good 3. A common resource 4. A private good 5. A​ quasi-public good 6. A public good 7. A private good

The fumes from dry cleaners can contribute to air pollution. Suppose the following diagram illustrates the situation in the dry cleaning market. 1. Explain how a government can use a tax on dry cleaning to bring about the efficient level of production. 2. What should the value of the tax​ be? The tax should be $_______ per unit. 3. How large is the deadweight loss ​(in dollars​) from excessive dry​ cleaning, according to the​ figure? The deadweight loss is $_____ thousand.

1. The government can use a tax to increase the marginal private cost of producing dry cleaning to equal the marginal social cost. 2. $6.00 3. $900 (area of triangle = [0.5 x (900-300) x (10-7)] = 900

Every year at the beginning of flu​ season, many​ people, including the​ elderly, get a flu shot to reduce their chances of contracting the flu. One result is that people who do not get a flu shot are less likely to contract the flu. 1. Getting a flu shot results in a ______ externality. On the graph at​ right, show the effects of this externality. ​1.) Use the line drawing tool to draw and label a new line showing the marginal social benefit​ (MSB). ​2.) Use the point drawing tool to identify and label the efficient equilibrium level of flu shots.

1. people Draw New Demand Curve Shifted Right = MSB Curve. Efficient EQ is on MSB curve.

Tom and Jacob are college students. Both of them will probably get married later and have two or three children. Each knows that if he studies more in​ college, he'll get a better job and earn more than if he​ doesn't study. Earning more means the ability to spend more on their future families—things like​ orthodontia, nice​ clothes, admission to an expensive​ college, and travel. Tom thinks about the potential benefits to his potential children when he decides how much studying to do. Jacob​ doesn't. 1. Studying generates a _____ externality in _____. 2. Use the line drawing tool to add the marginal private benefit from studying and the marginal social benefit from studying. Properly label the lines. 3. Who studies​ more? 4. Who acts more​ efficiently?

1. positive, consumption 2. Draw both lines as Demand Curves, but Social Benefit is Higher = More to the Right than Private Benefit. 3. Tom 4. Tom

William Easterly in The White​ Man's Burden shares the following account by New York University Professor Leonard Wantchekon of how Professor​ Wantchekon's village in​ Benin, Africa, managed the local fishing pond when he was growing​ up: To open the fishing​ season, elders performed ritual tests at​ Amlé, a lake fifteen kilometers from the village. If the fish were large​ enough, fishing was allowed for two or three days. If they were too​ small, all fishing was​ forbidden, and anyone who secretly fished the lake at this time was​ outcast, excluded from the formal and informal groups that formed the​ village's social structure. Those who committed this breach of trust were often shunned by the whole​ community; no one would speak to the​ offender, or even acknowledge his existence for a year or more. 1. The village elders were trying to prevent the economic problem of 2.The solution of the village elders to outcast those who committed the breach of trust by fishing in the pond when it was forbidden is an example of

1. the tragedy of the commons. 2. using community norms to solve the problem. The solution would most likely be effective because it was used in a small community.

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

8 million tons

What is an​ externality?

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Which of the following is an example of a good or service having the effects of a negative​ externality? A. Cigarette smoking. B. A fireworks display. C. Technological research. D. An ice cream. E. Both a and b.

A. Cigarette smoking.

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

Examples of transaction costs include (check all that apply): A. the difference between the private costs and social costs of production. B. the cost of drafting a contract or agreement. C. the cost of monitoring an agreement. D. the time required to negotiate an agreement. E. the cost of the externality.​

B. the cost of drafting a contract or agreement. Your answer is correct. C. the cost of monitoring an agreement. Your answer is correct. D. the time required to negotiate an agreement. Transaction costs are the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

A columnist for the Wall Street Journal argues that​ high-speed Internet connections are now a public​ good: ​"We're going to have to transition to the building of public infrastructure and away from the revolution being the domain of private enterprise.​ It's not enough for Google to roll out​ high-speed fiber to a handful of​ cities..." In what ways is the infrastructure for​ high-speed Internet connections like automobile​ highways? In what ways is it different from​ highways?

Both goods are​ rival, but only​ high-speed Internet is excludable.

What are the sources of externalities and market​ failure? A. the difficulty of enforcing property rights in certain countries B. incomplete property rights C. a lack of understanding of the market system D. Both​ (a) and​ (b).

D. Both​ (a) and​ (b).

Which of the following is an example of a good or service having the effects of a positive​ externality? A. Medical research. B. Education. C. A Big Mac. D. Pollution. E. Both a and b.

E. Both a and b.

When are we likely to see private solutions to the problem of​ externalities? A. When transaction costs are low. B. When the parties involved have information about the externality. C. When the number of parties involved is small. D. both a and b. E. all of the above.

E. all of the above.

The 1990 Clean Air Act is administered by the __________.

Environmental Protection Agency

What is free​ riding?

Free riding is benefiting from a good without paying for it.

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

As of​ 2017, private firms have constructed most of the infrastructure for​ high-speed Internet connections while governments have constructed most highways. Is it still possible that the infrastructure for​ high-speed Internet connections is a public good despite this​ fact? Briefly explain.

No, the infrastructure for​ high-speed Internet is not a public good when congestion diminishes other​ users' enjoyment of it.

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

Private costs

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

Subsidize polluters

Refer to the graphs above. What procedure does this series of graphs​ show?

The construction of market demand for a public good. B/c it is adding up the highest willingness to pay.

What is the focus of a​ command-and-control approach to reducing​ pollution?

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

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

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

The vertical distance between S1 and S2

Why do most economists favor tradable emissions allowances to the​ command-and-control approach to​ pollution?

Tradable emissions allowances eliminate pollution at lower cost than the​ command-and-control approach.

Do you agree with the columnist that we should think of the infrastructure for​ high-speed Internet connections as being like a public​ good? Is there any information you would need to know before​ deciding?

You would need to know whether congestion was low enough to leave Internet speed unaffected.

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

a higher price and lower equilibrium quantity

The parties involved in an externality have an incentive to reach an efficient solution because

both parties become better off when an efficient solution is reached.

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

both private and external benefits

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

cap-and-trade

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

equals the external cost

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

external cost being borne by someone else

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

greater than the private cost

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

help people make collective decisions

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

high cost to monitor compliance

The Coase Theorem states that

if transaction costs are​ low, private bargaining will result in an efficient solution to the problem of externalities.

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

If polluters are charged to pollute, then:

less pollution is a probable result

When no one owns a specific resource, there is:

no incentive to consider negative externalities that impact that resource

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

property rights, overuse

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

A marketable pollution permit is a permit:

that allows a firm to sell the right to pollute

How is free riding related to the tendency of a public good to create market​ failure? Free riding results in

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

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

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

transaction costs

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

transaction costs are low

Consider the market for a public good such as dams along a river​, illustrated in the figure to the right where S1 represents marginal private costs and D1 represents marginal private benefits. The dashed green line represents the corresponding marginal social benefit. 1. The private market tends to _____ public goods. Use the triangle drawing tool to shade in the amount of deadweight loss created by the private market. Properly label this shaded area.

under-provide