HW16: Homework - Ch. 16: Externalities

Without any regulations, firm X and firm Y each produce 900 tons of a pollutant per year. Regulators have discovered that the optimal level of this pollutant is 1,000 tons of pollution each year. The accompanying graph provides the marginal benefit curves of pollution for each firm. Suppose that regulators limit each firm's annual pollution to 500 tons each. By how much will each firm reduce its emissions? Firm X: ______________ tons Firm Y: ______________ tons Noting that it is less expensive for firm X to reduce emissions, regulators decide to use a corrective tax instead of a strict environmental standard. Adjust the black line on the graph to show the optimal corrective tax to reduce total emissions to 1,000 tons per year. Under this tax, by how much will firm X reduce emissions (compared to the situation in which there are no regulations)? ______________ tons

Graph: Emission Tax Line y = 100 400 400 500

Policymakers realize that, although education creates a positive benefit for those who obtain it, it also creates external benefits for the community where the educated individual resides. The graph depicts the marginal social cost (MSC) and the marginal social benefit (MSB) associated with education. On the graph, move the point, P, to the point representing the optimal level of education. What is the socially optimal number of years of schooling for each citizen? optimal schooling: ________________ years Assuming that the marginal social benefits of education are completely externalized from the educated individual, how large would a Pigouvian subsidy need to be in order to reach this optimal level of schooling? Pigouvian subsidy: $ _____________ thousand

Graph: Point-P Intersection 14 30

The accompanying graph depicts the marginal social cost (MSC) and the marginal social benefit (MSB) associated with pollution emissions. Assume the polluters bear none of the social cost of pollution and all of the benefits. Move point P to the socially optimal level of pollution. What is the socially optimal amount of pollution? ______________ tons What is the size of the tax that would move the market to this socially optimal quantity? $ _______________ per ton

Graph: Point-P Intersection 8 120

he accompanying graph depicts the marginal social cost (MSC) and marginal social benefit (MSB) of pollution emissions. Move the point, P, to the point representing the optimal level of pollution. What is the optimal quantity of pollution? __________________ metric tons The optimal quantity of pollution is not zero because:

Graph: Point-P at intersection 5 the marginal social benefit of pollution exceeds the marginal social cost of pollution at zero metric tons of pollution.

The Environmental Protection Agency is attempting to rule on whether pollution from greenhouse gas emissions endangers public safety. Among the many greenhouse gas polluters are cows emitting methane. Economists have devised a theory to help address this issue. Identify the statement that is true according to economic theory.

The efficient level of pollution removal occurs where the marginal benefit of pollution removal equals the marginal cost of pollution removal; i.e., some pollution could be allowed.

Indicate whether or not each item generates network externalities. a. a Facebook account b. steel production, which results in air pollution c. operating systems, such as Windows or Mac d. a power strip e. plastic grocery bags

a. generate network externalities b. does not generate network externalities c. generate network externalities d. does not generate network externalities e. does not generate network externalities

Categorize each policy response according to the type of regulation it best describes. a. Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution licenses. b. The government requires that auto manufacturers limit pollution to a specified threshold. c. The government requires that auto manufacturers use a new, cleaner technology in producing cars. d. An auto manufacturer is charged a fee per unit of pollution emitted into a river.

a. tradable emissions permits b. environmental standards c. environmental standards d. emissions taxes

Select the appropriate term to complete the sentences. a. According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the __________________ is (are) relatively low. b. Suppose Jeremy, Francis, and Andrew are part of Mu Epsilon Nu, a college fraternity known for its very loud, rambunctious weekend parties. The parties annoy many of the residents in nearby apartment complexes due to the loud music and blaring neon lights. This is an example of _____________________ . Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. c. The local city government sends the police to break up the parties. ________________ d. The fraternity pays the local community to compensate for the noise pollution. _____________________________ e. The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties. _________________

a. transaction costs b. an external cost c. non-private solution to an externality d. private solution to an externality e. private solution to an externality

Classify the statements as true or false. a. Emissions taxes encourage firms to find innovative ways to remove pollution. b. Firms generate the same level of pollution regardless of any emissions taxes that are imposed. c. An emissions tax is a type of Pigouvian tax. d. Environmental standards are typically more efficient than emissions taxes. e. With an emissions tax, firms must pay a fine if they pollute more than the legally specified amount.

a. true b. false c. true d. false e. false

The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she likes to stay up late and loves listening to all kinds of music, she will view the bands practicing as a(n) If she is a morning person and loves the smell of donuts, she will view the donut shop as a(n) If her roommate hates loud music, and the smell of donuts makes her sick, she will reject both apartments due to what she sees as

external benefit. external benefit. an external cost.

The graph shows the marginal social benefit curve (MSB) and marginal social cost curve (MSC) of pollution emissions. For the 87th unit of pollution emissions, the MSB is __________ the MSC. Determine the socially optimal quantity of pollution emissions. pollution emissions: ____________ tons Will a market economy, without any government intervention, produce the socially optimal quantity of pollution emissions?

less than 45 No, it will produce more.

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Obtaining an education results in _____________ externalities Overfishing results in ______________ externalities. Playing an addictive single-player cell phone game such as Happy Fish results in __________________ externalities. Reducing pollution results in ______________________ externalities. Receiving a flu vaccine results in ______________ externalities. Enhancing the aesthetic appeal of a property in a residential neighborhood results in ______________ externalities. Developing a productivity-enhancing technology results in ______________ externalities. Cigarette smoking in a non-smoking section results in ______________ externalities. Eating a delicious cookie results in ______________ externalities.

positive negative no positive positive positive positive negative no

Suppose that solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Which type of externality is likely to result from a consumer's decision to purchase a solar-powered vehicle instead of a gas-powered vehicle, and how does it arise? This decision generates a Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome? An effective option is

positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution. a subsidy to consumers who choose to purchase solar-powered vehicles.

Montgomery owns a nuclear power plant in the town of Springfield. His power plant dumps substantial quantities of radioactive waste into the local pond, which has given rise to a mutant guppy fish population with three eyes. The town decides to have Montgomery do something about the externality. Which method would NOT result in Montgomery accounting for the social cost of running the power plant? It would not work to

subsidize Montgomery for every three‑eyed fish found in the pond.

Suppose Turing Inc. creates the first ever solar powered cell phone battery that absorbs ambient light and converts it into electrical power. Furthermore, the battery stores excess absorbed light as an internal battery that lasts up to 1010 hours in the dark. At a conference, a Turing Inc. representative presents the battery to representatives from many other companies, proclaiming the invention will revolutionize the cell phone industry. A few months later, Algos creates a solar powered cell phone battery that lasts 1212 hours in the dark. This example of the spreading of knowledge is known as [a(n)] This example of the spreading of knowledge is also a

technology spillover. positive externality.