Deck 10: Decentralized Policies: Liability Laws, Property Rights, Voluntary Action

Question 1

If the chemical factory has the property right to use the river what bargaining will result in the socially efficient equilibrium? What are the net gains experienced by each party?

Answer 1

Since the chemical factory has the right to pollute,the fishery will need to pay the factory to get it to reduce its emissions.The socially efficient level of emissions is equal to 80 units of emissions.At this level of emissions,the MDC = MAC = $800.The fishery will need to pay the chemical factory $800 per unit of emissions it abates to get it to emit 80 tonnes.This "bribe" is equal to $128,000.The net gain to the fishery is equal to the reduction in total damage costs moving from unregulated emissions of 240 units to 80 units minus the bribe it pays to the chemical factory which equals $288,000 - 32,000 - $128,000 = $128,000.The net gain to the chemical factory is equal to the bribe it receives from the fishery less its total abatement costs which equals 128,000 - 64,000 = $64,000.

Question 2

List and very briefly explain the three problems encountered with the use of property rights as a technique to internalize externalities.

Answer 2

Property rights fail to result in the socially efficient level of emissions when:1)transactions costs are too high due to the presence of numerous parties to be involved in the negotiating process;2)property rights cannot be assigned due to the good being a public good such as an open access fishery;and 3)some other laws prevent property owners from capturing the full social value of the resource in question.

Question 3

When people can negotiate with each other to come up with mutually satisfactory ways to deal with environmental externalities with little or no involvement of the government this is referred to as ________.

A)moral suasion
B)an incentive-based approach
C)a decentralized approach
D)a centralized approach

Answer 3

C

Question 4

Suppose both a chemical company and a commercial fishery operate on the same river.According to the Coase theorem the socially efficient level of emissions can be reached through bargaining between the two parties if ________ has the right to use the river.

A)just the chemical company
B)just the fishery
C)either the chemical company or the fishery
D)the regulator

Question 5

The more public an environmental good is,the more likely private property rights can be used to achieve the socially optimal level of emissions.
Public goods tend to be non-exclusionary making it difficult to assign property rights.

Question 6

Production and consumption of green goods shifts the marginal abatement cost curve downward.

Question 7

If no liability laws are in place,what damages will the chemical factory inflict on the fishery?

Question 8

Illustrate graphically and very briefly explain how the production and consumption of green goods results in lower emissions.

Question 9

Coase proposed that in the case of an externality if transactions costs are low,bargaining can achieve the socially efficient outcome regardless of the initial allocation of property rights.

Question 10

What level of emissions will occur if the chemical factory is not regulated? What would the total abatement costs for the chemical factory be if emissions are controlled and reduced to zero?

Question 11

Define green goods and give two examples of green goods.

Question 12

The Coase theorem states that social efficiency can be obtained through bargaining and that the gains to each party involved will be identical regardless of who has the rights.
The net gains to each party depend on the initial allocation of property rights.

Question 13

Goods that give the same level of pleasure as ordinary goods but that involve less environmental damage in either their production,use or disposal are known as ________.

A)generic goods
B)luxury goods
C)green goods
D)environmental goods

Question 14

________ suggest(s)that in the presence of an externality bargaining can achieve the socially efficient equilibrium regardless of the initial allocation of property rights.

A)Liability laws
B)The Coase theorem
C)The legal doctrine of standing
D)The burden of proof

Question 15

Net social gains are independent of who has the property rights to environmental resources.
The net gains to society differ depending upon who holds the property rights to pollute.

Question 16

If the fishery has the property right to use the river what bargaining will result in the socially efficient equilibrium? What are the net gains experienced by each party?

Question 17

When a good is an open-access resource,the free-rider problem effectively defeats the chances that a socially efficient equilibrium can be achieved through property rights assignments and bargaining.

Question 18

If the government puts in place a liability law that requires the chemical factory to compensate the fishery for the damages it causes,what level of emissions will take place and what are the total costs of compliance for the chemical company?

Question 19

If the MAC and MD curves do not change based on who has the property rights,the same socially efficient equilibrium will be reached independent of who holds the rights to pollute.

Question 20

Which of the following is NOT a reason why private bargaining can fail to achieve the socially optimal level of emissions?

A)The resource is an open-access good making it difficult to assign property rights.
B)Net social gains depend on the initial assignment of property rights.
C)Restrictions on use prevent property owners from capturing social values.
D)Transaction costs are too high due to the necessity to include many parties in the negotiations.