Question 1

Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If the Coase theorem holds and the victims of the pollution could not legally enforce the right of their property not to be damaged, the amount of pollution reduction

Accepted Answer

If the Coase theorem holds, then regardless of legal liability, the parties involved can negotiate an efficient outcome where the marginal benefit of pollution reduction equals the marginal cost. Therefore, the amount of pollution reduction would be the same whether or not the owners of the smelter were legally liable for damages.

Question 2

Applying Coase's theorem, if the cost to you from having the airplane seat in front of you reclined is ________ the benefit to the reclining passenger, you should ________.

Accepted Answer

The answer of Applying Coase's theorem, if the cost to...

Question 3

Congress passed the Clean Air Act in 1970. Since this act was passed, emissions of the six main air pollutants

Accepted Answer

Since the Clean Air Act was passed in 1970, emissions of the six main air pollutants have fallen by more than one-half. This is due to the implementation of regulations and technologies to control pollution emissions.

Question 4

If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered

Accepted Answer

The legal fees in this scenario are considered transaction costs, as they are the costs incurred in the process of making a transaction or engaging in legal action.

Question 5

If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost,

Accepted Answer

If the marginal benefit of reducing emissions is greater than the marginal cost, then society will benefit from further reductions. This means that it is economically efficient to reduce emissions up to the point where marginal benefit equals marginal cost. However, reducing emissions to zero may not be desirable or feasible in all cases. It is also important to determine who should bear the cost of further reductions, whether it should be private businesses or consumers, depending on the circumstances.

Question 6

Compare two situations. (A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel. (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that if the property rights are assigned and transactions costs are low

Accepted Answer

The answer of Compare two situations. (A) A firm is...

Question 7

Private solutions to the problem of externalities are most likely when

Accepted Answer

When transactions costs are low and the number of bargaining parties is small, private solutions to the problem of externalities are most likely because it is easier for parties to negotiate and come to an agreement on how to internalize the externality. When the number of parties is large, it can be difficult to coordinate and reach an agreement. If transactions costs are high, it can also make bargaining difficult and discourage private solutions. The government can encourage private solutions through policies such as tax incentives or subsidies, but it is not necessary for private solutions to occur.

Question 8

Offering to pay the passenger in front of you to keep her from reclining her airplane seat is an example of

Accepted Answer

A Coasian solution involves private bargaining between parties involved in an externality situation to reach an efficient outcome. In this case, the person behind the passenger is willing to pay to avoid the negative externality caused by the reclining seat, and the passenger in front can decide whether the compensation offered is worth giving up the option to recline.

Question 9

Economists Kenneth Chay and Michael Greenstone found that in the two years following the passage of the Clean Air Act of 1970, the sharp reduction in air pollution also led to a decline in infant deaths. Although this and other studies provide compelling evidence of the link between pollution and infant health, it is not clear that reductions from the much lower levels of ambient pollution today would have the same effect. Which of the following reasons could explain this?

Accepted Answer

The marginal benefit of reducing pollution decreases as pollution levels decrease, so it would be much more difficult to achieve the same level of benefit from a proportional reduction in air pollution today when the level of pollution is much lower than it was in 1970.

Question 10

Figure 5-8  Consider a chemical plant that discharges toxic fumes over a nearby community. To reduce the emissions of toxic fumes the firm can install pollution abatement devices. Figure 5-8 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.
-Refer to Figure 5-8. What is the economically efficient level of pollution reduction?

Accepted Answer

The answer of Figure 5-8  Consider a chemical plant...

Question 11

If electric utilities continually reduce their emissions of sulfur dioxide,

Accepted Answer

As electric utilities continually reduce their emissions of sulfur dioxide, they will have to invest in costlier technologies to reduce emissions further. This will cause the marginal cost of further emissions reductions to rise. Therefore, choice C is the correct answer.

Question 12

Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes. According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution.

Accepted Answer

The Coase theorem suggests that in a situation where property rights are clearly defined, and transaction costs are low, parties can negotiate and come to an efficient solution without the need for government intervention. However, in this situation, the utility company is not liable for the damages caused by its pollution, indicating that property rights are not well-defined. Therefore, government action is not necessary to achieve an efficient amount of pollution. However, since the company is not liable, the situation is not equitable.

Question 13

Kenneth Chay and Michael Greenstone examined the impact of reductions in air pollution since the passage of the Clean Air Act of 1970. Which of the following statements summarizes their findings?

Accepted Answer

The answer of Kenneth Chay and Michael Greenstone examined the...

Question 14

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

Accepted Answer

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are known as transaction costs. These costs include the cost of finding a trading partner, negotiating terms of the transaction, and ensuring that the agreed-upon terms are fulfilled. This concept is often used in economics to explain the barriers to efficient transactions and the importance of reducing these costs in achieving more efficient markets. Option A (enforcement costs) may be a subset of transaction costs, while options B (implicit costs) and C (explicit costs) are not directly related to transaction costs.

Question 15

In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, "There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

Accepted Answer

Assigning property rights to a particular group would mean designating certain parks exclusively for the use of visitors bringing dogs to the park. This would allow dog owners to enjoy the parks with their pets while non-dog owners can use the other parks without any disturbances from pets. Option A and B would be discriminatory as it would create a divide between dog owners and non-dog owners. Option D may not be feasible as it would be difficult to keep watch over all dogs in a public park.

Question 16

Consider the following characteristics: 
a. low transactions costs
b. small levels of pollution
c. high levels of pollution
d. clear assignment of property rights
Which of the above are assumptions behind the Coase Theorem?

Accepted Answer

The Coase Theorem assumes low transaction costs and a clear assignment of property rights for parties to negotiate and reach an efficient outcome. Pollution levels are not directly an assumption of the theorem.

Question 17

Which of the following statements about the economically efficient level of air pollution is correct?

Accepted Answer

The economically efficient level of pollution occurs where the marginal cost of pollution reduction equals the marginal social benefit of reduction. This means that the costs of reducing pollution by a small amount (marginal cost) are equal to the benefits that society receives from that reduction (marginal social benefit). At this level, any further reduction in pollution would cost more than the benefits gained, while any increase in pollution would cause more harm than its economic benefits. Therefore, this is the optimal level of pollution for society.

Question 18

Ronald Coase was awarded the 1991 Nobel Prize in Economics primarily for addressing problems related to externalities. Which of the following describes Coase's work?

Accepted Answer

Coase's work on externalities is known as the Coase Theorem, which argues that under certain conditions private solutions to externalities will develop without the need for government intervention. Specifically, Coase argued that in the absence of transaction costs and clear property rights, parties will bargain and negotiate to allocate resources efficiently, regardless of who is assigned property rights. Therefore, the best solution to externalities is to create clear property rights and reduce transaction costs. Coase's work challenged traditional economic theories that argued government intervention was necessary to correct market failures related to externalities.

Question 19

If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost,

Accepted Answer

If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost, it means that each additional unit of reduction will cost more than the benefits it will provide. Therefore, further reductions will make society worse off instead of better off. As a result, it is not economically efficient to pursue those reductions. Instead, it might make more sense to tolerate some level of pollution and focus resources on other activities with higher benefits.

Question 20

Which of the following must be present to reach a private solution to an externality problem?

Accepted Answer

In order to reach a private solution to an externality problem, the parties involved must be able to negotiate and come to an agreement. This requires low transaction costs, meaning the costs associated with negotiating a solution must not be too high. Option A is incorrect because it is not necessary for a majority to agree, only that those involved come to an agreement. Option C is also incorrect because the total number of people involved does not necessarily impact the ability to negotiate a solution. Option D is incorrect because a private solution does not require government approval, as it is a negotiated agreement between the parties involved.

Quiz 5: Externalities, Environmental Policy, and Public Goods