Question 1

What is meant by the term "internalizing an externality"? How does a Pigovian tax or subsidy internalize an externality?

Accepted Answer

The answer of What is meant by the term "internalizing...

Question 2

Some environmentalists have criticized tradable emission allowances on the grounds that they give permit holders a license to pollute.Furthermore,environmentalists argue that those who sell their permits receive a monetary benefit from their contribution to polluting the environment.Use economic reasoning to evaluate this criticism.

Accepted Answer

The answer of Some environmentalists have criticized tradable emission allowances...

Question 3

Economist A.C.Pigou argued that to deal with a negative externality in production,the government should impose a tax equal to the cost of the externality.What did Pigou believe should be done in the case of a positive externality in consumption? How would his recommendation impact the demand and market equilibrium for the product which is generating the positive externality?

Accepted Answer

The answer of Economist A.C.Pigou argued that to deal with...

Question 4

Figure 4-26
  Figure 4-26 shows the market for aviation security. Aviation security generates a positive externality because people who are not airline passengers benefit from aviation security.
-Refer to Figure 4-26 to answer the following questions.
a.In the absence of any government intervention what is the equilibrium level of security that airlines will supply? Using the diagram,denote this level,Q*.Briefly explain why this quantity is not the economically efficient level of aviation security.
b.In the diagram,illustrate the presence of positive externalities in the aviation security market.Label any new curve that you draw.
c.On your diagram identify the economically efficient level of aviation security.Denote this level Qe.
d.Explain how a government subsidy for the airlines can bring about the economically efficient aviation security level.Be sure to identify the size of the subsidy.

Accepted Answer

The answer of Figure 4-26
  Figure 4-26 shows the...

Quiz 4: Market Efficiency and Market Failure

What is meant by the term "internalizing an externality"? How does a Pigovian tax or subsidy internalize an externality?