Economics Chapter on Externalities
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Questions and Answers

What effect does a tax imposed on sellers have if there are external costs in a competitive market?

  • Have no effect on the equilibrium price.
  • Decrease the equilibrium quantity. (correct)
  • Decrease the equilibrium price.
  • Increase the equilibrium quantity.

What mechanism allows a city to buy and sell rights to a total discharge level of pollutants?

  • Pigouvian tax.
  • Environmental standard.
  • Emissions tax.
  • Tradable emissions permit. (correct)

Why might there be indirect benefits resulting from pollution?

  • Goods and services are produced even as pollution occurs. (correct)
  • Firms pollute only if it increases consumer prices.
  • Pollution can benefit wildlife in certain contexts.
  • Consumers find satisfaction in the act of polluting.

What does the marginal social benefit of pollution represent?

<p>The benefit to society of one more unit of pollution. (A)</p> Signup and view all the answers

What is the expected outcome when a federal government sets a cap on pollutants for industries?

<p>Creation of a market for emissions trading. (C)</p> Signup and view all the answers

What is the incentive for a firm that has more pollution permits than it plans to use?

<p>To limit pollution until the marginal benefit of emissions is $150 (A)</p> Signup and view all the answers

Which example best illustrates a policy based on tradable emission permits?

<p>Allowing companies to buy and sell the rights to emit pollutants (C)</p> Signup and view all the answers

What does the scenario of a copper mining operation discharging waste into a river indicate?

<p>Society's resources are being inefficiently allocated to copper production (A)</p> Signup and view all the answers

If an economy emits 150 units of pollution, which statement is correct?

<p>Marginal social benefit is greater than marginal social cost (C)</p> Signup and view all the answers

What is the socially optimal level of pollution emissions, based on the given context?

<p>50 (D)</p> Signup and view all the answers

When an economy produces 50 tons of emissions, which outcome is observed?

<p>It produces below the socially optimal level of production (B)</p> Signup and view all the answers

What could be a potential result of firms lacking sufficient pollution permits?

<p>Encouragement to invest in clean technologies (D)</p> Signup and view all the answers

What is the opportunity cost of emitting one ton of sulfur dioxide for all firms?

<p>$150 (A)</p> Signup and view all the answers

What is the most likely reason that negotiations to internalize the negative externality of traffic congestion do not occur?

<p>Transaction costs associated with communication among parties are prohibitive. (A)</p> Signup and view all the answers

Which reason best explains why negotiations to internalize the negative externality of loud music on campus are unlikely to happen?

<p>High transaction costs hinder communication among students. (C)</p> Signup and view all the answers

If cities can buy and sell rights to discharge sewage, what does the government's environmental policy utilize?

<p>Tradable pollution permits. (D)</p> Signup and view all the answers

Which of the following describes an environmental policy that employs tradable pollution permits?

<p>Permitting drivers to buy and sell rights to emit a set level of emissions. (C)</p> Signup and view all the answers

If the market price of a tradable emissions permit for sulfur dioxide is $150, which statement is likely inaccurate?

<p>The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. (D)</p> Signup and view all the answers

What hinders the ability of individuals to negotiate over the rights to drive during congested times?

<p>The multitude of interested drivers complicating negotiations. (B)</p> Signup and view all the answers

Which statement best reflects a misconception about the nature of loud music as a negative externality?

<p>It is viewed as an experience rather than a physical good. (D)</p> Signup and view all the answers

How can cities along a river ensure compliance with pollution discharge levels?

<p>Through tradable pollution permits that incentivize compliance. (D)</p> Signup and view all the answers

What is the optimal Pigouvian tax per ton of pollution to achieve socially optimal levels?

<p>$15 (B)</p> Signup and view all the answers

What occurs if the government sets an environmental standard that limits pollution to 30 tons?

<p>There is too much pollution because marginal social cost exceeds marginal social benefit. (D)</p> Signup and view all the answers

What will be the outcome if a Pigouvian tax of $10 per acre of pollution is imposed?

<p>Marginal social benefit is less than the marginal social cost. (C)</p> Signup and view all the answers

If the government sets an environmental standard to limit pollution to not exceed 20 tons, what will be the outcome?

<p>Too little pollution because its marginal social benefit exceeds its marginal social cost. (A)</p> Signup and view all the answers

Without government regulation, what level of pollution would be emitted in a market economy?

<p>Q1 (D)</p> Signup and view all the answers

What is the likely consequence if the government imposes a pollution cap of 40 tons?

<p>Too much pollution because its marginal social cost exceeds its marginal social benefit. (C)</p> Signup and view all the answers

Which level of pollution represents the socially optimal level?

<p>Q1 (B)</p> Signup and view all the answers

If the current pollution level is at Q1, what does this imply about the pollution being emitted?

<p>Too much pollution is emitted because MSB is greater than MSC. (D)</p> Signup and view all the answers

If firms are the only beneficiaries of pollution, how does this affect the allocation of resources?

<p>Resources are generally over-allocated since firms do not bear the costs of pollution. (B)</p> Signup and view all the answers

Given the competitive market model, what can be said about the output at the level Q if there are no external benefits or costs?

<p>The output is efficient. (B)</p> Signup and view all the answers

What does a Pigouvian tax aim to accomplish?

<p>Ensure that social costs are reflected in market prices. (D)</p> Signup and view all the answers

In a competitive market with external costs, what can one infer about resource allocation?

<p>Resources will be overallocated to the production of the good. (A)</p> Signup and view all the answers

Under what condition can pollution be considered socially optimal?

<p>When marginal social cost equals marginal social benefit. (C)</p> Signup and view all the answers

What results from insufficient Pigouvian taxation on pollution?

<p>Persistent market failure due to unaddressed externalities. (B)</p> Signup and view all the answers

What is the result of an environmental standard that restricts pollution impact on social welfare?

<p>It can hinder economic growth. (B)</p> Signup and view all the answers

Which statement correctly describes the trade-off between pollution and social cost?

<p>Firms benefit from pollution while society bears the cost. (C)</p> Signup and view all the answers

How can the optimal quantity of pollution be achieved?

<p>With a Pigouvian tax. (B)</p> Signup and view all the answers

In the absence of government intervention, how many tons of pollution will be produced?

<p>45 (C)</p> Signup and view all the answers

What is the amount by which the marginal social cost of pollution exceeds the marginal benefit in the absence of intervention?

<p>$15.00. (C)</p> Signup and view all the answers

At the equilibrium without intervention, what are the values of marginal social cost and marginal social benefit of pollution?

<p>$25; $0 (C)</p> Signup and view all the answers

What is the socially optimal quantity of pollution?

<p>20 (A)</p> Signup and view all the answers

If the market produced 30 tons of pollution, what would be the resulting efficiency?

<p>Marginal social benefit would be less than marginal social cost. (C)</p> Signup and view all the answers

What happens to the marginal social cost and benefit if the firm produces 20 tons of pollution?

<p>Marginal social cost equals marginal social benefit. (B)</p> Signup and view all the answers

What would be the direct consequence of producing 45 tons of pollution?

<p>Marginal social costs would greatly outweigh social benefits. (A)</p> Signup and view all the answers

Flashcards

Negative Externality

A cost imposed on a third party who is not involved in the production or consumption of a good or service.

Internalizing an Externality

Making the party responsible for the externality bear the cost of the harm they are causing.

Transaction Costs

The expenses incurred in negotiating, monitoring, and enforcing a contract or agreement.

Coase Theorem

A proposition that private bargaining can solve the problem of externalities if transaction costs are low.

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Tradable Pollution Permits

A system where government issues permits allowing companies to pollute up to a certain limit, and allows them to buy and sell these permits.

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Opportunity Cost

The value of the next best alternative that is forgone when a choice is made.

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Pigouvian Subsidies

Government payments to encourage a company to reduce its negative externalities.

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Command and Control

Government regulations that set specific limits on pollution or other activities.

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Tradable Emission Permits

A system where companies can buy and sell the right to emit a certain level of pollution. This allows for flexibility and incentivizes reducing emissions by trading permits.

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Opportunity Cost of Pollution

The value of the next best alternative use of resources that are used for emitting pollution.

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Social Cost of Pollution

The total cost to society from pollution, including both private costs and external costs.

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Externality in Copper Production

When a copper mining operation discharges waste into a river, causing harm to downstream users without being compensated, there is a negative externality.

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Socially Optimal Level of Pollution

The level of pollution where the marginal social benefit of pollution equals the marginal social cost.

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Figure: The Quantity of Pollution

Shows the relationship between the quantity of pollution emitted and the marginal social benefit and cost of pollution.

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Marginal Social Benefit (MSB)

The additional benefit to society from emitting one more unit of pollution.

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Marginal Social Cost (MSC)

The additional cost to society from emitting one more unit of pollution.

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Pigouvian Tax

A tax imposed on producers who generate negative externalities, aiming to internalize those costs and encourage a reduction in the activity causing the externalities.

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External Costs

Costs imposed on third parties who are not directly involved in the production or consumption of a good, often related to environmental damage or pollution.

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Marginal Social Benefit of Pollution

The additional benefit to society from one more unit of pollution, which is usually negative.

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How does a tax affect the equilibrium in a market with external costs?

A tax on sellers in a market with external costs reduces the equilibrium quantity, leading to a more efficient outcome by internalizing the cost of the externality.

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Socially Optimal Quantity of Pollution

The quantity of pollution that maximizes overall societal welfare, balancing the benefits of production with the costs of pollution.

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Efficiency and Pollution

A situation where the quantity of pollution is such that the marginal social benefit of pollution equals the marginal social cost of pollution.

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What happens when MSC is greater than MSB?

The market is producing too much of the good or service, leading to a net loss in social welfare.

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What happens in the absence of government intervention?

Firms will produce more pollution than the socially optimal level because they only consider their own private costs and benefits.

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What happens when MSB is greater than MSC?

The market is producing too little of the good or service, leading to a net loss in social welfare.

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Optimal Pigouvian Tax

The amount of tax per ton of pollution that would lead to the socially optimal quantity of pollution, where marginal social benefit equals marginal social cost.

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Pigouvian Tax Effect on Pollution

A Pigouvian tax, when set at the optimal level, will reduce the quantity of pollution produced by firms to the socially optimal level.

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Environmental Standard Impact on Pollution

A government-imposed environmental standard sets a specific limit on the quantity of pollution allowed. This can lead to either too much or too little pollution depending on the standard's level compared to the social optimum.

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Too Little Pollution

A situation where the marginal social benefit of pollution exceeds the marginal social cost. This suggests that more pollution would be beneficial from a societal perspective.

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Too Much Pollution

A situation where the marginal social cost of pollution exceeds the marginal social benefit. This indicates that the cost of pollution outweighs the benefits, suggesting a need for reduction.

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Marginal Social Benefit & Marginal Social Cost

The marginal social benefit (MSB) is the extra benefit society receives from one more unit of pollution. The marginal social cost (MSC) is the extra cost society bears from one more unit of pollution. The optimal quantity of pollution is where MSB = MSC.

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Inefficient Resource Allocation

When the quantity of pollution is not at the socially optimal level, resources are not allocated efficiently. This means that society is either forgoing potential benefits or bearing unnecessary costs.

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Socially Optimal Pollution

The level of pollution where the marginal social benefit (MSB) of pollution equals the marginal social cost (MSC). It represents the most efficient balance between the benefits and costs of pollution.

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Market Pollution Without Regulation

In a market economy without government intervention, firms will pollute up to the point where their private marginal benefit (which is equal to the market price) equals their private marginal cost.

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Socially Optimal Pollution Level

The level of pollution where the marginal social benefit (MSB) of pollution equals the marginal social cost (MSC). This level ensures that the benefits of pollution are maximized while minimizing its negative impact on society.

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Efficient Market Outcome?

In a market with no external costs or benefits, the equilibrium quantity will be efficient, meaning it maximizes social welfare.

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External Costs and Efficiency

When external costs exist, the market equilibrium will overallocate resources to the production of the good because the market price does not reflect the true cost to society.

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External Costs and Market Price

The presence of external costs will lead to a lower market price than if those costs were internalized. This is because companies are not fully bearing the costs of their actions.

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Study Notes

Practice 2: Externalities

  • Negative Externality Example (Traffic Congestion): Traffic congestion is a negative externality. Negotiating driving times to internalize this externality is possible in principle, but likely won't happen due to difficult enforcement and high transaction costs among many drivers.

  • Coase Theorem: The Coase theorem suggests that negotiations between parties can resolve externality issues, but practical challenges often impede such agreements (e.g., enforcing agreements related to public roads, high transaction costs involved in coordinating with many parties).

  • Negative Externality Example (Loud Music): Loud music on a college campus creates a negative externality. Students might not recognize it as such or the transaction costs involved in negotiation can be significant.

  • Environmental Policy (Tradable Pollution Permits): Tradable permits allow industries to buy and sell pollution rights. This is an environmental policy type.

  • Tradable Pollution Permits Example: A $0.10 charge for every 10% reduction in emissions is an example that can illustrate tradable emission permits.

Socially Optimal Level of Pollution

  • Socially Optimal Quantity of Pollution: An economy's production level isn't socially optimal if the marginal social benefit is greater than the marginal social cost of pollution.

  • Pollution Emissions: Determining the socially optimal level of pollution requires considering both social benefits and costs associated with pollution.

  • Economic Perspective: Economists often suggest that a socially optimal level of pollution exists where marginal benefit and cost intersect.

Internalizing Externalities

  • Internalizing Negative Externalities: Methods like Pigouvian taxes or tradable pollution permits can help internalize negative externalities (like pollution).

  • Environmental Standards: Environmental standards are government regulations that control how much of a substance or waste can be released or discharged into the environment. These rules prevent polluters for behaving solely in their self interest.

  • Pigouvian Tax: A tax designed to curb activities that produce negative externalities.

  • Subsidy: A subsidy is a payment by the government to encourage certain behaviors that have positive externalities.

Quantity of Pollution

  • Consequences of Pollution: The quantity of pollution emitted affects the welfare of producers, consumers and other members of society.

  • Socially Optimal Quantity: The socially optimal quantity of pollution occurs where the marginal social costs equal the marginal welfare benefits.

  • Market Failures: Economic markets without government intervention are prone to generating socially undesirable outcomes like excessive pollution, because the market doesn't account for the costs to society of pollution as these costs are borne by society as a whole.

Efficiency and Pollution

  • Socially Optimal Quantity: The point where the marginal social cost from pollution equals the marginal social benefit.

  • Marginal Social Cost: The full cost incurred by society from pollution, which includes costs to production and other externalities.

  • Marginal Social Benefit: The full value to society from pollution, including value to producers.

  • Externalities: Costs or benefits of production that are not reflected in the market price.

  • Correcting Market Failures: In the presence of negative externalities, there's an efficiency problem. This is where government intervention (like a tax) improves efficiency by creating better allocation of resources.

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Description

This quiz explores externalities, specifically negative externalities such as traffic congestion and loud music. It also covers the Coase theorem and environmental policies like tradable pollution permits. Test your understanding of these concepts and their implications in the real world.

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