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