Welfare Analysis and Environmental Externalities
24 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a Pigovian tax designed to do?

  • Increase government revenue only
  • Subsidize harmful industries
  • Correct market inefficiencies (correct)
  • Encourage pollution

    • Negative externalities can only result from production activities.

    False

    Define marginal cost in the context of market transactions.

    The cost of producing or consuming one more unit of a good or service.

    The _______ principle states that those who pollute should bear the costs of their actions.

    <p>Polluter Pays</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Marginal Benefit = The benefit of producing or consuming one more unit Equilibrium Price = The market price where quantity supplied equals quantity demanded Negative Externality = An unwelcome side effect of a transaction impacting outsiders negatively Positive Externality = A beneficial side effect of a transaction impacting outsiders positively</p> Signup and view all the answers

    What happens to the equilibrium price if negative externalities are not accounted for in the market?

    <p>It remains unchanged</p> Signup and view all the answers

    What is the effect of taxation on external costs in the context of environmental externalities?

    <p>Taxation helps internalize external costs, making market decisions reflect true social costs.</p> Signup and view all the answers

    Positive externalities are harmful to society and should be minimized.

    <p>False</p> Signup and view all the answers

    What is the purpose of a Pigovian tax?

    <p>To compensate society for pollution damages</p> Signup and view all the answers

    The equilibrium price is always synonymous with the highest possible price in a free market.

    <p>False</p> Signup and view all the answers

    Define price elasticity of demand.

    <p>It measures the change in the consumption of a product in relation to a change in its price.</p> Signup and view all the answers

    The ______________ principle states that polluters should bear the costs related to the damages they cause.

    <p>Polluter Pays</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Upstream Taxation = Tax imposed on producers before goods enter the market Downstream Taxation = Tax imposed on consumers after goods are sold Marginal Cost = The cost of producing one additional unit Marginal Benefit = The additional satisfaction gained from consuming one more unit</p> Signup and view all the answers

    Which of the following best describes optimal pollution?

    <p>Optimal pollution is when marginal cost of reduction equals marginal benefit of reduction.</p> Signup and view all the answers

    What is the role of a price ceiling?

    <p>To impose a maximum price to help consumers cope with high prices.</p> Signup and view all the answers

    Welfare economics studies the effects of resource allocation on social welfare.

    <p>True</p> Signup and view all the answers

    What does the Free-rider Effect primarily lead to in terms of public goods?

    <p>Undersupply of public goods</p> Signup and view all the answers

    The Coase Theorem suggests that property rights directly resolve disputes without costs involved.

    <p>False</p> Signup and view all the answers

    What is the Holdout Effect?

    <p>The ability of a single entity to hinder a multiparty agreement by making disproportionate demands.</p> Signup and view all the answers

    The principle that requires the polluter to bear the cost of pollution is known as the ______.

    <p>Polluter Pays Principle</p> Signup and view all the answers

    If a factory is assigned the right to pollute, what is a potential issue that communities may face when trying to compensate the factory?

    <p>Communities may wait for others to take action, leading to a lack of agreement.</p> Signup and view all the answers

    Assignment of rights to either the factory or the communities guarantees a simple resolution to pollution disputes.

    <p>False</p> Signup and view all the answers

    Define Marginal Benefit.

    <p>The additional benefit received from consuming one more unit of a good or service.</p> Signup and view all the answers

    Match the following economic concepts with their descriptions:

    <p>Pigovian Tax = A tax imposed to correct the negative externalities of a market activity Equilibrium Price = Price at which the quantity demanded equals the quantity supplied Upstream Taxation = Taxation applied to the production process, affecting the supply side Downstream Taxation = Taxation applied to consumers for products derived from production</p> Signup and view all the answers

    Study Notes

    Welfare Analysis of Externalities

    • Price ceiling is a government-imposed maximum price for a good or service, usually implemented to protect consumers from high prices.
    • Welfare economics studies how resource allocation impacts social welfare.
    • Welfare analysis helps evaluate the effects of price ceilings, such as those implemented for natural gas, which aims to benefit consumers.

    Optimal Pollution

    • Optimal pollution is the level where the cost of reducing pollution (abatement cost) equals the benefit of reducing pollution (improved health and environmental quality).
    • Zero pollution is impractical because production inevitably generates some pollution.
    • Society must determine an "optimal" pollution level based on the trade-off between production and environmental impact.

    The Theory of Environmental Externalities

    • Externalities are unintended consequences of market transactions impacting those outside the transaction.
    • Negative externalities create harmful impacts, such as pollution, which are not reflected in market prices.
    • Positive externalities create beneficial impacts, such as afforestation, benefiting those not involved in the original transaction.

    Internalizing Environmental Costs

    • Internalizing external costs involves incorporating external costs into market decisions, often through taxation.
    • Pigovian tax is a tax levied on activities generating negative externalities to reflect the true social cost.
    • Examples of Pigovian taxes include excise taxes on cigarettes and sugar-sweetened beverages.

    Property Rights and the Environment

    • Coase Theorem states that in the absence of transaction costs, efficient outcomes will emerge regardless of initial property rights allocation.
    • Free market environmentalism advocates for property rights and market mechanisms to address environmental issues.
    • Free-rider effect occurs when individuals benefit from a resource without contributing to its upkeep, leading to undersupply of public goods.
    • Holdout effect occurs when a single entity can obstruct multi-party agreements by making exorbitant demands.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    EM1-M: Lecture 4 - The Theory of Environmental Externalities PDF

    Description

    This quiz covers key concepts in welfare economics, specifically focusing on price ceilings and their impact on social welfare. It also delves into optimal pollution levels and the theory of environmental externalities, highlighting the trade-offs between economic production and environmental health.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser