Chapter 10

Josiah installed a metal sculpture in his front yard. A positive externality arises if the sculpture

increases the value of other properties in the neighborhood

when externalities are present in a market, the well being of market participants

is directly affected, and market bystanders are indirectly affected

a command and control policy is another term for a

government regulation

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that

Firm A and will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Mary pays Cathy $16 so that Mary can smoke

Regulations to reduce pollution

are typically a more costly solutions to society than a corrective tax

WHAT IS THE DIFFERENCE BETWEEN COMMAND AND CONTROL POLICIES AND MARKET BASED POLICIES TOWARD EXTERNALITIES

command and control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change behaviors

In some cases tradable permits may be better than corrective taxes because _____

the government can set a maximum level of pollution using permits

most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because

the market base solution is less costly to society the market based solution an result in a greater reduction in pollution the market based solution raises revenue for the government

suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

the pollution has potential for creating a health risk for water users in the region surrounding the pork production facility

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

the social value of education exceeds the private value of education

in the absence of externalities, the "invisible hand" leads a market to maximize

total benefit to society from that market