Econ 120 Chapter 10

"We cannot give anyone the option of polluting for a fee." - late Senator EdmundMuskie

Objections to the economic analysis of pollution

Which of the following is NOT a way of internalizing technology spillovers?

Taxes

Social value curve

Above the demand curve

Initial allocation of pollution permits doesn't matter If firms can reduce pollution at a low cost: Sell whatever permits they get If firms can reduce pollution only at a high cost: buy whatever permits they need Efficient final allocation

Advantage of free market for pollution permits

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

At the current output level, the marginal social benefit exceeds the marginal private benefit

Positive income elasticity Clean air and clean water - law of demand

Clean environment is a normal good

True or False: In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole

False

Pigovian taxes

Corrective taxes

value to consumers

Demand curve

Firm's willingness to pay

Depend on its cost of reducing pollution

Environmental Protection Agency (EPA)

Develop and enforce regulations. Dictates maximum level of pollution. Requires that firms adopt a particular technology to reduce emissions.

True or False: Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently

False

Congestion, accidents, pollution

Negative externalities associated with driving

Industrial policy

Government intervention in the economy that aims to promote technology-enhancing industries

The Coase theorem

If private parties can bargain without cost over the allocation of resources They can solve the problem of externalitieson their own

Negative externality

Impact on the bystander is adverse

Positive externality

Impact on the bystander is beneficial

Corrective taxes

Induce private decision makers to take account of the social costs that arise from a negative externality

Whatever the initial distribution of rights

Interested parties can reach a bargain

Corrective taxes and subsidies Tradable pollution permits

Market-based policies

Equilibrium quantity and price

Maximizes the sum of producer and consumer surplus

Exhaust from automobiles Barking dogs

Negative externalities

Larger than the cost to the good producers

Negative externalities

Markets produce a larger quantity than issocially desirable

Negative externalities

smaller than market equilibrium quantity

Negative externalities

Eliminating all pollution is impossible Clean water and clean air — opportunity cost: lower standard of living

People face trade-offs

Markets produce a smaller quantity than is socially desirable

Positive externalities

Restored historic buildings Research into new technologies

Positive externalities

Social value is greater than private value

Positive externalities

Social cost

Private costs of the producers (supply). Plus the costs to those bystanders affected adversely by the negative externality

Patent law

Protect the rights of inventors by giving them exclusive use of their inventions fora period of time

Market-based policies

Provide incentives so that private decision makers will choose to solve the problem on their own

Firms pay for their pollution Internalize the externality of pollution

Reducing pollution using pollution permits or corrective taxes

Command-and-control policies

Regulate behavior directly

Regulation

Regulate behavior directly: making certain behaviors either required or forbidden

cost to suppliers

Supply curve

Suppose that cookie producers create a positive externality equal to $2 per dozen. What is therelationship between the equilibrium quantity and the socially optimal quantity of cookies to beproduced?

The equilibrium quantity is less than the socially optimal quantity.

Moral codes and social sanctions Charities Self-interest of the relevant parties Interested parties can enter into a contract

The types of private solutions

Externality

The uncompensated impact of oneperson's actions on the well-being of abystander

True or False: The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities

True

True or False: When a driver enters a crowded highway he increases the travel times of all other drivers onthe highway. This is an example of a negative externality.

True

Tradable pollution permits

Voluntary transfer of the right to pollute from one firm to another

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

a transaction cost

High transaction costs Bargaining simply breaks down Large number of interested parties

Why private solutions do not always work

Which of the following is an example of a positive externality?

Your neighbor plants a nice garden in front of his house

The gas tax

corrective tax

Negative externalities lead markets to produce

greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution

is less costly to society

Socially optimal quantity is greater than

market equilibrium quantity

Technology spillover

positive externality

According to the Coase theorem, private parties can solve the problem of externalities if

property rights are clearly defined.

Clear property rights information transaction cost lower number of parties involved

requirements to find a private solution

Dioxin emission that results from the production of paper is a good example of a negative externality because

self-interested paper producers will not consider the full cost of the dioxin pollution they create.

If a sawmill creates too much noise for local residents,

the government can raise economic well-being through noise-control regulations

The lower the transaction cost

the higher the probability to reaching a solution to the private externality

Social cost curve is above

the supply curve

Pollutants can put toxins in the air/water because

there is no clear owner