Question 1

The goal a standards and charges system is to reduce the externality to the

Accepted Answer

The answer of The goal a standards and charges system...

Question 2

In markets with externalities, if property rights are assigned unambiguously and if the parties involved can negotiate costlessly, then the ________ theorem suggests that the parties will arrive at a Pareto-optimal outcome regardless of which one owns the property rights.

Accepted Answer

The Coase theorem posits that if property rights are clearly defined and transaction costs are negligible, parties will negotiate to correct externalities and reach an efficient outcome, regardless of who initially holds the rights.

Question 3

Marketable pollution permits are a method of government intervention to prevent externalities whereby a government-issued permit allows a firm to pollute the environment

Accepted Answer

Marketable pollution permits allow firms to pollute the environment by a specified amount, which is determined by the government issuing the permit. This system allows for a limited amount of pollution to be released while also providing a financial incentive for firms to reduce their pollution levels in the long term.

Question 4

A firm with a high marginal cost of abatement is willing to pay a _______ amount to buy a marketable pollution permit.

Accepted Answer

A firm with a high marginal cost of abatement would be willing to pay a high amount to buy a marketable pollution permit because it would be more cost-effective for them to buy the permit than to reduce their emissions.

Question 5

Which of the following government policies involves the least amount of intervention?

Accepted Answer

Marketable pollution permits allow the market to determine the value of pollution and allocate permits accordingly, with minimal government intervention. Standards and charges involve government regulations and fees, and Pigouvian taxes involve government intervention in the form of taxes imposed on goods or services that generate negative externalities.

Question 6

Your neighbor plays loud music every night. The detriment to you of a sleepless night is valued at $3. The benefit to your neighbor of a night of loud music is $2. The two of you should be able to negotiate a quiet night if you offer to pay your neighbor

Accepted Answer

Offering your neighbor $2.50 ensures that they receive more benefit from accepting the payment for a quiet night ($2.50) than they derive from playing loud music ($2). This makes the negotiation appealing to them while also being cost-effective for you, as it is less than the $3 detriment you face from a sleepless night.

Question 7

Social marginal cost represents private marginal cost _____________ external costs.

Accepted Answer

Social marginal cost is calculated by adding private marginal cost to external costs, reflecting the total cost to society.

Question 8

The efficient way to achieve any given set of pollution standards in a multifirm market is to have the firms with a lower cost of abatement reduce their emissions of pollutants by ______________ the firms with a higher cost of abatement.

Accepted Answer

Having firms with lower cost of abatement reduce their emissions more than the firms with a higher cost of abatement will result in achieving the given pollution standards in the most cost-effective way. This is because the firms with a lower cost of abatement can achieve the same level of pollution reduction at a lower cost compared to the firms with a higher cost of abatement. Therefore, it makes economic sense to allocate a higher share of the pollution reduction responsibility to the firms with a lower cost of abatement.

Question 9

Explain the difference between Pigouvian taxes and a system of standards and charges.

Accepted Answer

The answer of Explain the difference between Pigouvian taxes and...

Question 10

Among the interventionist solutions to the externality problem, which requires the least amount of government involvement?

Accepted Answer

The answer of Among the interventionist solutions to the externality...

Question 11

In the paper-water economy, a Coasian solution is possible

Accepted Answer

The Coasian solution suggests that as long as property rights are well-defined and bargaining costs are low, the allocation of resources will be efficient regardless of who initially owns the property rights. Therefore, a Coasian solution is possible no matter who owns the property rights to use the river in the paper-water economy.

Question 12

The agents in a market distorted by an externality should be able to agree on a mutually beneficial way to _________ the gains that could be achieved by altering the market outcome to the Pareto-optimal level.

Accepted Answer

If the externality can be internalized, both parties can benefit from an arrangement where the party causing the externality compensates the other party. Splitting the gains is a mutually beneficial way to ensure both parties gain from the arrangement. Ignoring the externality would mean accepting market inefficiencies, while reducing gains would not provide a mutually satisfactory solution.

Question 13

The imposition of a Pigouvian tax will force the paper mill to ______________ its externality.

Accepted Answer

A Pigouvian tax is a tax on a negative externality, such as pollution. By imposing this tax, the paper mill will need to pay a higher cost for the pollution it creates. This will increase the firm's private cost of production to a level that includes the social cost of pollution. As a result, the paper mill will be forced to internalize the negative externality it was creating and will be incentivized to reduce its pollution levels to avoid paying higher taxes. Therefore, the best choice is A) internalize.

Question 14

A system for a government to intervene in a market with externalities in order to reduce their effects by levying charges on the agents causing the externality in order to force them to reduce the externality to the acceptable level is called

Accepted Answer

The answer of A system for a government to intervene...

Question 15

Why do you think that the Coase theorem depends on costless negotiation?

Accepted Answer

The answer of Why do you think that the Coase...

Question 16

At equilibrium in a multifirm market, the marginal costs of abatement for the firms are

Accepted Answer

At equilibrium, firms will have optimized their abatement costs as much as possible, resulting in equal marginal costs of abatement for all firms. This is because if one firm had a lower marginal cost, they would have an advantage over other firms and could potentially undercut their prices or drive them out of business. Therefore, in order to maintain a competitive equilibrium, all firms must have equal marginal costs of abatement.

Question 17

What are the three conditions for a Pareto-optimal outcome in a perfectly competitive two-product economy? Which are is not satisfied when an externality is present?

Accepted Answer

The answer of What are the three conditions for a...

Question 18

Compared to private marginal cost, a firm's marginal cost curve after the imposition of an environmental charge is

Accepted Answer

The imposition of an environmental charge increases the cost for the firm in terms of environmental damages. Therefore, the firm's marginal cost curve after the imposition of an environmental charge is higher than its private marginal cost curve. This is because the firm is now internalizing the externality cost of their actions on the environment, resulting in a higher cost of production.

Question 19

You live in a house with a group of friends. Your next-door neighbors play loud rap music day or night. Explain whether the music is or is not an externality. What if it is loud classical music?

Accepted Answer

The answer of You live in a house with a...

Question 20

In order to set a Pigouvian tax at the optimal level, the government must know the exact amount of the externality, which is

Accepted Answer

Obtaining the exact amount of the externality can be difficult as it requires a comprehensive understanding of the behavior and interactions of individuals and firms in the market. Governments often rely on estimates and modeling techniques to determine the optimal level of Pigouvian tax.

Quiz 24: Externalities: the Free Market Interventionist Battle Continues