Question 1

Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem,

Accepted Answer

The Coase theorem states that in the presence of low transaction costs and willing parties, an efficient solution can be reached regardless of the initial assignment of property rights. This means that if the parties are able to bargain, they can come to an agreement that benefits both of them and eliminates the negative externality. Therefore, government intervention is not necessary and the assignment of property rights does not matter as long as the parties are willing to negotiate.

Question 2

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

According to the Coase theorem, if property rights are well-defined and transaction costs are low, private individuals can negotiate and internalize externalities without government intervention. In this situation, the company is not liable for the damages its pollution causes, indicating that property rights are not well-defined. Therefore, government action is not necessary to achieve an efficient amount of pollution. However, the question does not provide information about transaction costs, so we cannot determine whether government action is necessary to achieve an equitable outcome.

Question 3

Economists Kenneth Chay and Michael Greenstone find 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 the pollution levels decrease, so the benefit of reducing pollution in 1970 was much higher than it would be for a proportional reduction in pollution today when the levels are already lower.

Question 4

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 of some air pollutant is greater than the marginal cost, it means that society will benefit from further reductions. Therefore, option A is the correct choice. Option B may be true in some cases, but it is not necessarily always the case. Option C is not true as reducing emissions to zero may not be feasible or desirable. Option D may be a possible solution, but it is not the only solution and depends on the specific context.

Question 5

Steven Cheung examined the relationship between beekeepers and apple growers. Cheung noted that: "Pollination contracts usually include stipulations regarding the number and strength of ... [bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung suggests that the relationship between beekeepers and apple growers is an example of

Accepted Answer

The relationship between beekeepers and apple growers, as described by Cheung, reflects the principles of the Coase Theorem. Essentially, this theorem suggests that when property rights are clearly defined, parties can negotiate and form mutually beneficial agreements, regardless of who initially holds those property rights. In this case, the beekeepers own the hives and can offer pollination services to the apple growers in exchange for payment and agreed-upon terms. The two parties can negotiate based on their ability to generate value and reach a mutually beneficial agreement. Therefore, the relationship between beekeepers and apple growers is an example of how the Coase Theorem can encourage the efficient use of resources in economic relationships.

Question 6

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 is because reducing pollution beyond this point would result in a cost that is greater than the benefit gained from the reduction, while not reducing pollution enough would result in a benefit that is greater than the cost of reduction. Therefore, the most economically efficient level is where these two factors are balanced. Option A is incorrect because zero pollution is generally not possible or feasible, and it would result in certain economic costs, such as those related to production and transportation. Option B is incorrect because it assumes that there is an equal balance between costs and benefits, which may not always be the case. Option D is incorrect because maximizing total benefits may not necessarily lead to an economically efficient outcome.

Question 7

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, according to the Environmental Protection Agency. This is due to regulations and enforcement of air pollution controls by the government and industry, along with technological advancements in pollution control equipment.

Question 8

In the United States, many beekeepers travel from state to state, renting out their bee colonies to farmers for pollination services. This is an example of

Accepted Answer

Beekeepers traveling from state to state and renting out their bee colonies to farmers is an example of a Coasian solution to a positive externality problem. This is because the beekeepers and farmers negotiate and come to a mutually beneficial agreement, where the beekeeper gets paid for renting out their bees, and the farmer benefits from increased crop yields due to pollination. This is an example of private bargaining and efficient allocation of resources, which aligns with the Coase theorem.

Question 9

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 10

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 focused on the idea that, under certain circumstances, private solutions to externalities can occur without government intervention. He argued that if transaction costs are low, parties can negotiate and come to an agreement that internalizes the externality. This concept is known as the Coase Theorem.

Question 11

If electric utilities continually reduce their emissions of sulfur dioxide,

Accepted Answer

As electric utilities continually reduce their emissions of sulfur dioxide, the marginal cost of further emissions will rise. This is because as emissions are reduced, it becomes more difficult and expensive to achieve further reductions. Therefore, the cost of reducing each additional unit of sulfur dioxide emissions will increase.

Question 12

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

Accepted Answer

This statement aligns with the Coase theorem, which states that in the presence of an externality, private parties will reach an efficient outcome through bargaining and negotiation, regardless of the initial assignment of property rights. Coase argued that government intervention may not always be necessary to address externalities, and that the outcome can be achieved through private negotiations.

Question 13

Consider the following characteristics: a. low transaction 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, clear assignment of property rights, and does not assume any specific level of pollution. While it is more likely to be applicable in cases of small levels of pollution, it can still be applied to cases of high pollution. Therefore, option B is incorrect. Option A is incorrect because it includes small levels of pollution which is not a specific assumption of the Coase Theorem. Option D is incorrect because although low transaction costs are an assumption, it is not the only assumption. Therefore, option C is the best choice.

Question 14

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, then it means that the cost of reducing pollution is greater than the benefits that society would receive from the reduction. Therefore, further reduction would make society worse off.

Question 15

According to Steven Cheung: "Pollination contracts usually include stipulations regarding the number and strength of ...[bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung cites this as evidence that

Accepted Answer

Cheung's statement suggests that there is a market for pollination services and that individuals and businesses are able to negotiate and enforce contracts without government intervention. This implies that the market is functioning efficiently without the need for government regulation.

Question 16

James Meade, who won the Nobel Prize in Economics in 1977, argued that positive externalities resulted from

Accepted Answer

Meade argued that positive externalities (beneficial effects on society) resulted from apple growing and beekeeping, as they benefit both the apple industry and honey production while also improving pollination of other plants in the area.

Question 17

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

Accepted Answer

Private solutions to externality problems can only occur if the transaction costs to negotiate a solution are relatively low. If the transaction costs are too high, it may be more efficient for the government to step in and regulate the activity causing the externality. A and C are not necessary conditions for a private solution, and D is not relevant to private solutions.

Question 18

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

Transaction costs are the costs involved in facilitating an exchange of goods or services, including search costs, information costs, bargaining costs, and enforcement costs. It includes both explicit costs (such as fees, commissions, etc.) and implicit costs (such as the time and effort spent in negotiating and finalizing an agreement).

Question 19

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 can be done by dedicating some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park. This way, there are parks where dogs are allowed and parks where they are not, giving both dog lovers and those who prefer dog-free parks a space to enjoy. It also avoids the need to impose fees or restrictions on either group.

Question 20

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 incurred in suing the polluting firm would be considered transaction costs, as they are expenses incurred in the process of making a transaction (in this case, pursuing legal action) to address the harm caused by the pollution. External costs refer to costs imposed on third parties who are not involved in the transaction, while marginal benefits refer to the additional benefits gained from a particular action. The social costs of pollution include both private costs (such as the cost of repainting a house) and external costs (such as the harm caused to the environment and public health).

Quiz 5: Externalities, Environmental Policy, and Public Goods