Chapter 16: Externalities

Tradable emissions permits

licenses to emit limited quantities of pollutants; licenses can be bought and sold by polluters

Environmental standards

rules that protect the environment by specifying actions by producers and consumers -inflexible and don't allow reductions in pollution to be achieved at minimum cost

Which of the following is an environmental policy based on tradable emission permits? 1. allowing companies to buy and sell the right to a certain level of emissions 2. a charge to companies of $1 for every 100 units of pollutants emitted 3. paying companies $1 for each 10% reduction in emissions 4. ignoring pollution and letting private markets operate without government interference

1. allowing companies to buy and sell the right to a certain level of emissions

Both emissions taxes and tradable emissions permits: 1. are efficient cost-minimizing methods of pollution reduction. 2. encourage more pollution. 3. work only if they are coupled with environmental standards. 4. are usually less effective than environmental standards.

1. are efficient cost-minimizing methods of pollution reduction.

External benefits are associated with the production of batteries. Without government regulation, the market will: 1. price batteries above the marginal social cost. 2. produce too many batteries. 3. price batteries at less than the marginal social benefit. 4. price batteries at less than the marginal social cost.

3. price batteries at less than the marginal social benefit.

Pigouvian subsidy

a payment designated to encourage activities that yield external benefits -socially optimal quantity achieved by this -equal to the marginal social benefit at optimal quantity

Marginal social cost

additional cost imposed on society as a whole by an additional unit of pollution

Marginal social benefit

additional gain to society as a whole from an additional unit of pollution

Transaction cost

all of the costs to individual of making a deal -Private sector solutions to externalities -if transaction cost is low, private sectors will pay for their externalities

Externality

an action or transaction that affects a third party who is not a party to it

Technology spillovers

an external benefit that results when knowledge spreads among individuals and firms

Emissions tax

cost depends on the amount of pollution a firm produces

Coase theorem

even in the presence of an externality the market can still reach an efficient level provided that the transaction costs are sufficiently low -individuals internalize externalities: take into account externalities when making decisions

when polluting market outcome is

market outcome = inefficient MSC > MSB -it isn't costly to make changes

Positive externality

producing benefits to others (ex. vaccinations)

Negative externality

producing costs to others (ex. pollution) -market produces too little

Socially optimal quantity

quantity society would choose if all costs and benefits were fully accounted for

How do you measure the marginal social cost?

sum of willingness to pay among all members of society to avoid that unit of pollution -society often underestimates it

Pigouvian tax

taxes designated to reduce external costs

External cost

uncompensated cost that an individual or firm imposes on others

Network externality

when the value of the good to an individual is greater when a large number of other people also consume the good ex. social media

The marginal social benefit received from pollution is equal to its marginal social cost in the market for highly polished glass. In this situation: 1. firms in the market produce the socially optimal level of pollution. 2. firms in the market produce too little pollution. 3. society's well-being can be improved if the quantity of pollution decreases. 4. firms in the market produce too much pollution.

1. firms in the market produce the socially optimal level of pollution.

Network externalities are often: 1. not likely to move toward market domination. 2. a reason for natural monopolies. 3. less likely to occur in the communications or technology industries than in other industries. 4. separate from positive feedback.

2. a reason for natural monopolies.

If drivers decide to make phone calls without considering the costs imposed on others, the: 1. marginal social cost curve will lie below the marginal cost of production curve. 2. number of phone calls made while driving will be more than the socially optimal quantity. 3. number of phone calls made while driving will be fewer than the socially optimal quantity. 4. marginal social benefit curve will lie below the marginal social cost curve.

2. number of phone calls made while driving will be more than the socially optimal quantity.

Given the general agreement that pollution is undesirable and social welfare is increased by reducing pollution, the optimal level of pollution in a society is: 1. the level that minimizes the average total cost of producing the product that generates the pollution. 2. the level at which the marginal social cost is equal to the marginal social benefit. 3. zero. 4. the level that reduces the marginal social costs of pollution to zero.

2. the level at which the marginal social cost is equal to the marginal social benefit.

Your community requires the sewage treatment plant to process raw sewage so that it is safe to return the water to the environment. This is: 1. the Coase theorem. 2. a tradable emissions permit. 3. an emissions tax. 4. an environmental standard.

4. an environmental standard.

A good is subject to a network externality when: 1. the value of the good is determined only by marginal private benefits. 2. the value of the good to an individual is less when a large number of other people also use the good. 3. a good yields negative externalities. 4. an increase in the number of other people using the good increases its value to an individual.

4. an increase in the number of other people using the good increases its value to an individual.

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters: 1. pay the same total tax bill for their pollution. 2. reduce pollution emissions to zero. 3. emit the same amount of pollution, regardless of the marginal benefit of polluting. 4. emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax.

4. emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax.

According to the Coase theorem, when negative externalities are present, a market will: 1. always reach an efficient solution. 2. reach an efficient solution only if the negative externalities are offset by positive externalities. 3. reach an efficient solution only if the government intervenes in the market. 4. reach an efficient solution if transaction costs are low and property rights are well-defined.

4. reach an efficient solution if transaction costs are low and property rights are well-defined.

The efficient rate of emissions occurs when: 1. government forbids all pollution no matter what the cost. 2. the marginal social benefits of pollution exceed the marginal social costs of pollution. 3. there is absolutely no damage done to a pristine environment. 4. the change in social benefits and the change in social costs due to an additional unit of emissions are equal

4. the change in social benefits and the change in social costs due to an additional unit of emissions are equal

Market Failure

failure to provide the socially optimal amount of goods and services -not efficient

How do you measure marginal social benefit

highest willingness to pay for the right to emit that unit measured across all polluters