econ chapter 14

All of the following are negative externalities in production:

-Acid rain produced by power plants. -Carbon dioxide emissions from the production of steel. -Thermal pollution into a river from an electric plant. (Secondhand smoke flows from the smoker or consumer of cigarettes. Hence it is a negative externality in consumption, not production.)

The costs of pollution control will:

-Be distributed between the producer and the consumer. Rather than absorb all the costs of pollution controls themselves in the form of reduced profits, producers will pass some of this burden on to their customers in the form of higher prices. The elasticity of demand determines how the costs are distributed.

A market for power plant pollution rights will:

-Lower pollution control costs. Tradable pollution permits lower pollution control costs because the firms with low abatement costs will reduce their pollution by more than what is required and will then sell their permits to the firms with high abatement costs at a price between the costs of abatement of each of the firms.

A chemical-producing firm is located just upstream from an electric power plant. Instead of the more expensive procedure of burying its wastes, the chemical-producing firm begins dumping its waste into the stream. This causes increased variable costs for the power plant, which uses water from the stream to cool its turbines. From society's viewpoint, the chemical producer's pollution causes an:

-Overproduction of chemicals and an underproduction of electric power. -Because the chemical company's private costs are less than the social costs, it will have incentives to produce more than is socially optimal. However, the downstream power plant will incur costs greater than the social costs and will produce less than the socially optimal amount of electricity.

When external costs are present:

-There is market failure -the price signal confronting producers is flawed because it does not convey the full (social) cost of scarce resources; therefore the market encourages excessive production and pollution.

The major aim of government regulation is to:

Alter industry behavior

When external costs exist:

Market prices do not convey the full costs of production When external costs are present, the price signal confronting producers is flawed because it does not convey the full (social) cost of scarce resources; therefore the market encourages excessive production and pollution

If firms were charged the full social opportunity cost of the resources they used, there would be:

No external costs Social costs include both private and external costs; therefore, if there is no difference between social costs and costs incurred by business (private costs), external costs would not exist.

External costs are the difference between:

Social costs and private costs

If a natural monopoly was broken into several smaller competing firms:

Society would be worse off because the economies of scale would be destroyed. Dismantling a natural monopoly would destroy the cost advantage. Hence regulation, not antitrust, is the more sensible intervention.

A natural monopoly occurs because of

The existence of economies of scale

An In the News article is titled "Air Pollution Kills." From a social perspective, this suggests that

Too much output is being produced by the polluting firms. When external costs are present, the price signal confronting producers is flawed because it does not convey the full (social) cost of scarce resources; therefore the market encourages excessive production and pollution.

Social costs include:

both private and external costs; therefore the difference between social costs and private costs is equal to external costs.

If pollution costs are internalized, a firm will:

choose to produce at the output level where MR is equal to social MC, at 200 units.

Process regulation is a type of

command-and-control policy requiring specific processes such as catalytic converters, lead-free gasoline, and sorting and recycling.

natural monopoly

is a type of monopoly that exists as a result of the high fixed costs or startup costs of operating a business in a specific industry. Additionally, they can arise in industries that require unique raw materials, technology or other similar factors to operate.

in a natural monopoly, marginal cost is always:

less than average total cost

Emission charges, user fees, and pollution fines increase the _______ of polluting.

opportunity cost (Emission charges, user fees, and pollution fines increase the internal cost of polluting.)

if a firm has the the lowest private costs they have;

the lowest absolute level of costs borne by the producer.

Profit is equal to:

total revenue minus total cost

a fee on emissions shifts the marginal cost curve-

up and to the left, causing the firm to produce a lower quantity.

Once again a natural monopoly will produce where:

MC = MR if unregulated

Government failure occurs when:

Government intervention fails to improve economic outcomes. Government failure occurs when government intervention worsens market outcomes.

Profit maximization occurs where:

MR = MC

The long-run average total cost curve of a natural monopolist:

Is downward-sloping in the relevant range of production A combination of high fixed costs and very low marginal costs of a natural monopoly generates a unique, downward-sloping ATC curve reflecting economies of scale.

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 reduced pollution through:

Pollution fines

Which of the following is used as an antitrust tool that focuses on the structure of industry?

Prohibiting mergers and acquisitions. Prohibiting mergers and acquisitions will impact the structure of the industry, whereas regulation and forbidding business practices deal with the behavior of firms.

In cost-benefit analysis, the government should intervene as long as:

The improvement in the environment exceeds the costs -As long as the benefit of government intervention exceeds the costs, the market outcome will be improved. However, if the benefit of government intervention is less than the cost, the market outcome will be worse, and government failure will occur.

Many economists would argue that

The optimal amount of pollution is greater than zero

Profit regulation involves mandating a price equal to:

average total cost, and thus a profit equal to zero (and TR = TC)