Microeconomics Lecture #16

True or False: Emissions taxes encourage firms to find innovative ways to remove pollution.

True

True or False: An emissions tax is a type of Pigouvian tax.

True A Pigouvian tax is a tax which attempts to reduce external costs.

True or False: Firms generate the same level of pollution, regardless of any emissions taxes that are imposed.

False

True or False: With an emissions tax, firms must pay a fine if they pollute more than the legally specified amount.

False With an emissions tax, there is no legal amount that each firm is allowed to pollute.

True or False: Environmental standards are typically more efficient than emissions taxes.

False Most economists argue that environmental standards are less efficient than emissions taxes because environmental standards assume that all firms have identical marginal benefits of pollution.

Policymakers are provided data about the private and social benefits of a good being sold in the market. What is the size of the externality? If the externality is positive, enter a positive number. If negative, make it a negative number.

If the social marginal benefit is greater than the private marginal benefit, then there is a positive externality. Size of the externality: $2

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. What is the socially optimal number of years of schooling for each citizen?

Optimal schooling: 14 years

Classify each statement as a positive externality associated with education or a negative externality associated with education. A higher voter participation rate

Positive externality

Classify each statement as a positive externality associated with education or a negative externality associated with education. An increased standard of living

Positive externality

Classify each statement as a positive externality associated with education or a negative externality associated with education. Reduced welfare dependency

Positive externality

According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the ____ is (are) relatively low.

The Coase theorem states that private citizens can reach efficient solutions to externalities if the transaction costs (the costs associated with making deals) are relatively low. According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the transaction costs is (are) relatively low.

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.

The optimal quantity of education for each citizen is found at the point at which the MSC and MSB curves intersect.

The accompanying graph depicts the marginal social cost (MSC) and marginal social benefit (MSB) of pollution emissions. What is the optimal quantity of pollution?

5 metric tons of pollution

Suppose Jeremy, Francis, and Andrew are part of Mu Epilson 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 A. An external cost B. Neither an external cost nor an external benefit C. An external benefit

A. An external cost

The government requires that auto manufacturers use a new, cleaner technology in producing cars. A. Environmental standards B. Tradable emissions permits C. Emissions taxes

A. Environmental standards Environmental standards directly mandate the behavior of individuals and/or firms.

Classify each scenario according to whether or not it is a potential way to internalize the externality. The local city government sends the police to break up the parties. A. Non-private solution to an externality B. Private solution to an externality

A. Non-private solution to an externality

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 10 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 12 hours in the dark. This example of the spreading of knowledge is also a A. Positive externality B. Negative externality C. Neither

A. Positive externality

Classify each scenario according to whether or not it is a potential way to internalize the externality. The fraternity pays the local community to compensate for the noise pollution. A. Private solution to an externality B. Non-private solution to an externality

A. Private solution to an externality

Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution licenses. A. Tradable emissions permits B. Emissions taxes C. Environmental taxes

A. Tradable emissions permits A system of tradable emissions permits does not impose a direct restriction on how much an individual firm or actor can pollute as long as they acquire permission to pollute.

Policymakers are provided data about the private and social benefits of a good being sold in the market. Given this data, policymakers must decide whether to address the associated externality with a subsidy or a tax. As their economic consultant, which of the two policy tools would you recommend. A. A tax B. A subsidy

B. A subsidy

Suppose the solar-powered car technology advances to the point that solar-powered cars become affordable for the average consumer. Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome? A. A new tax levied on the makers of solar-powered cars B. A subsidy to consumers who choose to purchase solar-powered vehicles. C. A price floor above the observed average price for a solar-powered car. D. Granting one firm monopoly rights to produce solar-powered vehicles.

B. A subsidy to consumers who choose to purchase solar-powered vehicles.

An auto manufacturer is charged a fee per unit of pollution emitted into a river. A. Tradable emissions permits B. Emissions taxes C. Environmental taxes

B. Emissions taxes An emissions tax, or Pigouvian tax, is intended to cause actors to internalize the external cost of their behavior by imposing a tax (fee) for each unit of pollution their behavior causes.

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 her roommate hates loud music and the smell of donuts . makes her sick, she will reject both apartments due to what she sees as A. Private good B. External cost C. External benefit D. Asymmetric information E. Price floor

B. External cost

Classify each scenario according to whether or not it is a potential way to internalize the externality. The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties. A. Non-private solution to an externality B. Private solution to an externality

B. Private solution to an externality

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? A. Clearly defining property rights to indicate that Springfield is the owner of the pond and, as the owner, has the right to compensation from Montgomery for any damages from the pollution. B. Subsidizing Montgomery for every three-eyed fish found in the pond. C. Charging Montgomery $1,000 for every barrel of toxic waste his nuclear reactors produce D. The government giving Montgomery a permit to allow a limited amount of pollution but no more

B. Subsidizing Montgomery for every three-eyed fish found in the pond. A subsidy for each radioactive, mutant fish would not help Montgomery account for the social cost of running his plant. Rather, a subsidy will encourage him to pollute more.

Suppose that the government is concerned about climate change and therefore wants to reduce carbon emissions. Which is least likely to reduce carbon emissions? A. The government choosing to enact carbon taxes to account for the externalities imposed by carbon emission B. The government issuing carbon permits to polluting firms where firms are able to acquire an unlimited number of permits at no cost C. Issuing a finite amount of permits to emit carbon D. Funding research and helping with the implementation of alternative sources of fuel

B. The government issuing carbon permits to polluting firms where firms are able to acquire an unlimited number of permits at no cost

The accompanying graph depicts the marginal social cost (MSC) and marginal social benefit (MSB) of pollution emissions. The optimal quantity of pollution is not zero because: A. The marginal social cost of pollution exceeds the marginal social benefit of pollution at zero metric tons of pollution B. The marginal social benefit of pollution exceeds the marginal social cost of pollution at zero metric tons of pollution C. The marginal social cost of pollution equals the marginal social benefit of pollution at zero metric tons of pollution.

B. The marginal social benefit of pollution exceeds the marginal social cost of pollution at zero metric tons of pollution

The government requires that auto manufacturers limit pollution to a specified threshold. A. Tradable emissions permits B. Emissions taxes C. Environmental standards

C. Environmental standards

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) A. Private good B. External cost C. External benefit D. Willingness to pay E. Price floor

C. External benefit

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 10 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 12 hours in the dark. This example of the spreading of knowledge is known as a A. Industrial policy B. Positive feedback C. Technology spillover D. Network externality

C. Technology spillover Technology spillover occurs when knowledge about a new technology spreads among individuals and firms.

Suppose the 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? A. This decision generates a negative externality because including new technology in the cars will drive up the market price. B. This decision generates a negative externality because companies that do not produce solar-powered cars will be put out of business. C. This decision generates a positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution. D. This decision generates a positive externality because individuals can use the money they save on gasoline to help the local community.

C. This decision generates a positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution.

Marginal external costs of pollution are the A. Sum of the marginal private benefit and marginal external benefits of pollution B. Sum of the marginal private cost and marginal social cost of pollution C. Additional positive effects imposed on others due to one more unit of pollution D. Additional negative effects imposed on others due to one more unit of pollution

D. Additional negative effects imposed on others due to one more unit of pollution

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 is a morning person and loves the smell of donuts, she will view the donut shop as a(n) A. Private good B. External cost C. Willingness to pay D. External benefit E. Price floor

D. External benefit

A steel mill pays nearby homeowners to compensate them for the noise they must put up with as a result of the steel manufacturing process. A. Environmental standards B. Tradable pollution permits C. Emissions tax D. Private bargaining

D. Private bargaining

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. A. If the cost of paying a pollution charge (tax on bovine methane emissions) is less than the cost of reducing pollution, the farmer will have an incentive to reduce pollution. B. Environmental standards regarding cow-generated methane creates strong incentives for the farmer to reduce as much as possible. C. To maximize social welfare, all pollution should be removed. D. The efficient level of pollution removal occurs where the marginal benefit of pollution removal equals the marginal cost of pollution removal (some pollution could be allowed). E. The benefit of pollution cleanup to society is always less than the cost of pollution cleanup, especially if all costs are borne by the producer (which means the farmers, but technically, the cows are doing the producing)

D. The efficient level of pollution removal occurs where the marginal benefit of pollution removal equals the marginal cost of pollution removal (some pollution could be allowed).

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. 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?

If the benefit from education is completely externalized, the MSB that the individual experiences is zero. A subsidy equal to the MSB at the socially optimal point would induce them . to obtain the optimal level of education. Pigouvian subsidy: $30 thousand

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Cigarette smoking in a non-smoking section

Negative externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Overfishing

Negative externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Eating a delicious cookie

No externalities

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Playing an addictive single-player cell phone game such as Happy Fish

No externalities

Classify each statement as a positive externality associated with education or a negative externality associated with education. Lower crime rates

Positive externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Developing a productivity-enhancing technology

Positive externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Enhancing the aesthetic appeal of a property in a residential neighborhood

Positive externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Receiving a flu vaccine

Positive externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Reducing pollution

Positive externality

Identify whether the activities are associated with positive externalities (external benefits), negative externalities (external costs), or no externalities. Obtain an education

Positive externality

The 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.

The optimal point for pollution emissions is represented by the point where the marginal social cost of pollution is equal to the marginal social benefit of pollution.