ECON Ch. 10

Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The local city government sends the police to break up the parties.

non-private solution to an externality

Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?

Chloe pays Winston weekly to refrain from playing music loudly.

Which of these statements is TRUE in the case of externalities? I. In the case of externalities, prices do not reflect the true cost or benefit of the product. II. In the case of externalities, prices sometimes send the wrong signals about a market. III. Externalities discourage new producers from entering the industry since the price is the same as efficient price.

I and II only

Which statement about taxes is INCORRECT?

Taxes in markets always cause deadweight losses.

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?

The EPA should allow High to increase its pollution level and trade with Low, who would cut its pollution to lower than the required level.

Which statement is TRUE?

The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot.

Consider the production of paper in Stresa. Suppose that the supply of paper is upward‑sloping and the demand for paper is downward‑sloping. The smell of the paper‑production process in this town is both strong and horrific. Suppose that the production of paper causes a negative externality of $1.25 per ream, and the conditions outlined by the Coase theorem do not hold. By how much does the optimal price per ream of paper differ from the market price per ream of paper?

The optimal price is higher than the market price by less than $1.25.

If the social cost of an activity equals the private cost, what kind of externality exists?

There is no externality.

What is the difference between tradable allowances and a Pigouvian tax?

Tradable allowances target quantity and a Pigouvian tax targets price.

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex were willing to pay $50 to emit an extra pound of carbon dioxide and Tyler were willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?

Yes, it would lower the cost of pollution abatement.

An external cost is:

a cost paid by people other than the consumer or the producer trading in the market.

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

an external cost.

Tradeable allowances for pollution:

allow firms to reduce pollution levels at lower costs.

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

an external cost

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

both the beekeeper and the orchard owner.

The government requires that auto manufacturers limit pollution to a specified threshold.

command-and-control regulation

The government requires that auto manufacturers use new, cleaner technology in producing cars.

command-and-control regulation

An auto manufacturer is charged a fee per unit of pollution emitted into a river.

corrective tax

A neighbor plays loud music that annoys the surrounding community.

example of a negative externality

A factory emits pollution into the atmosphere as a by-product of production.

example of negative externality

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)

external benefit

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)

external benefit

If an external cost is present in a market, economic efficiency may be enhanced by:

government intervention.

A free market with an external benefit is _____, and one with an external cost is _____.

inefficient; inefficient

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?

positive externality because the replacement of gas-powered vehicles with solar-powered vehicles will result in less environmental pollution.

A steel mill pays nearby homeowners to compensate them for the noise they must endure.

private property rights

Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The fraternity pays the local community to compensate for the noise pollution.

private solution to an externality

Indicate whether each possible solution is a private or non-private approach to the problem caused by the loud fraternity. The residents of the apartment complexes pay Mu Epsilon Nu not to have loud parties.

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? It would not work to

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

Ronald Coase's ideas on property rights have helped economists and policymakers better understand environmental problems. Identify the true statement regarding Coase and property rights.

the assignment of property rights to someone is essential.

The social cost is:

the cost to everyone.

Private solutions to externalities are MOST likely to occur when there are:

well-defined property rights and low transaction costs.

The Coase theorem posits that externality problems can be solved without government intervention:

when transaction costs are low and property rights are clearly defined.

Government solutions to externality problems include: I. Pigouvian taxes. II. tradeable allowances. III. command and control.

All of these.

Which statement illustrates the concept of external cost?

Raymond cannot open his windows at times because he lives downwind from a mushroom farm.

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

Auto manufacturers are allowed to pollute as much as they wish, provided that they have purchased a sufficient number of pollution vouchers.

tradable pollution permits