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?

The benefit to society of one more unit of pollution. Signup and view all the answers

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

Creation of a market for emissions trading. Signup and view all the answers

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

To limit pollution until the marginal benefit of emissions is $150 Signup and view all the answers

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

Allowing companies to buy and sell the rights to emit pollutants Signup and view all the answers

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

Society's resources are being inefficiently allocated to copper production Signup and view all the answers

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

Marginal social benefit is greater than marginal social cost Signup and view all the answers

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

50 Signup and view all the answers

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

It produces below the socially optimal level of production Signup and view all the answers

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

Encouragement to invest in clean technologies Signup and view all the answers

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

$150 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?

Transaction costs associated with communication among parties are prohibitive. 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?

High transaction costs hinder communication among students. Signup and view all the answers

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

Tradable pollution permits. Signup and view all the answers

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

Permitting drivers to buy and sell rights to emit a set level of emissions. 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?

The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. Signup and view all the answers

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

The multitude of interested drivers complicating negotiations. Signup and view all the answers

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

It is viewed as an experience rather than a physical good. Signup and view all the answers

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

Through tradable pollution permits that incentivize compliance. Signup and view all the answers

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

$15 Signup and view all the answers

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

There is too much pollution because marginal social cost exceeds marginal social benefit. Signup and view all the answers

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

Marginal social benefit is less than the marginal social cost. 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?

Too little pollution because its marginal social benefit exceeds its marginal social cost. Signup and view all the answers

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

Q1 Signup and view all the answers

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

Too much pollution because its marginal social cost exceeds its marginal social benefit. Signup and view all the answers

Which level of pollution represents the socially optimal level?

Q1 Signup and view all the answers

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

Too much pollution is emitted because MSB is greater than MSC. Signup and view all the answers

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

Resources are generally over-allocated since firms do not bear the costs of pollution. 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?

The output is efficient. Signup and view all the answers

What does a Pigouvian tax aim to accomplish?

Ensure that social costs are reflected in market prices. Signup and view all the answers

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

Resources will be overallocated to the production of the good. Signup and view all the answers

Under what condition can pollution be considered socially optimal?

When marginal social cost equals marginal social benefit. Signup and view all the answers

What results from insufficient Pigouvian taxation on pollution?

Persistent market failure due to unaddressed externalities. Signup and view all the answers

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

It can hinder economic growth. Signup and view all the answers

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

Firms benefit from pollution while society bears the cost. Signup and view all the answers

How can the optimal quantity of pollution be achieved?

With a Pigouvian tax. Signup and view all the answers

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

45 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?

$15.00. 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?

$25; $0 Signup and view all the answers

What is the socially optimal quantity of pollution?

20 Signup and view all the answers

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

Marginal social benefit would be less than marginal social cost. Signup and view all the answers

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

Marginal social cost equals marginal social benefit. Signup and view all the answers

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

Marginal social costs would greatly outweigh social benefits. Signup and view all the answers

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.