Sapling Ch. 16 Externalities

Classify the statements as true or false.

True: -An emission tax is a type of Pigouvian tax -Emissions Taxes encourage firms to find innovative ways to remove pollution. False: -Firms generate the same level of pollution, regardless of any emissions taxes that are imposed. -Environmental standards are typically more efficient than emissions taxes. -With an emissions tax, firms must pay a fine if they pollute more than the legally specified amount.

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? What is the size of the tax that would move the market to this socially optimal quantity?

- 8 Tons -$120 Per Ton

According to the Coase theorem, private parties can negotiate to an efficient solution in the presence of externalities if the _____ is (are) relatively low. 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: Classify each scenario according to whether or not it is a potential way to internalize the externality.

- transaction costs -an external cost Private solution to an externality: -The fraternity pays the local community to compensate for the noise pollution. -The residents of the apartment complex pay Mu Epsilon Nu not to have loud parties. Non‑private solution to an externality: -The local city government sends the police to break up the parties.

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? 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)?

-Firm X: 400 tons -Firm Y: 400 tons -500 tons

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(n)]: This example of the spreading of knowledge is also a:

-Technology spillover -Positive externality

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? Suppose the government is interested in moving the market closer to the socially optimal quantity. Which policy would likely result in the desired outcome?

-This decision generates a 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.

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 -external cost

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?

-subsidizing Montgomery for every three-eyed fish found in the pond

Classify each item according to whether or not it is associated with network externalities.

Associated with a network externality: -A facebook account -Operating systems, such as Mac or Windows Not associated with a network externality: -A power strip -Plastic grocery bags -Steel production, which results in air pollution

Categorize each policy response according to the type of regulation it best describes.

Environmental standards: -The government requires that auto manufacturers use a new, cleaner technology in producing cars. -The government requires that auto manufacturers limit pollution to a specified threshold. Tradable emissions permits: -Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution licenses. Emissions taxes: -An Auto manufacturer is charged a fee per unit of pollution emitted into the river.

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

Positive Externalities: -obtaining an education -reducing pollution -receiving a flu vaccine -developing a productivity-enhancing technology -enhancing the aesthetic appeal of a property in a residential neighborhood No Externalities: -eating a delicious cookie -playing an addictive single-player cell phone game such as happy fish Negative Externalities: -overfishing -cigarette smoking in a non-smoking section

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.

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).