Exam 16: External Costs and Environmental Policy

The least costly method for reducing pollution would be to have all firms lower their levels of emissions by the same amount.

What role can the government play in correcting for external costs?

Once the tradable pollution permits have been issued to firms:

A company earns $200,000 in profit.The total costs paid by the firm are $800,000.Production of the goods contaminate the by river and small lakes,which reduces the profits of the salmon fishermen by $90,000.The external cost to society of the company's production is ________.

If,while producing goods and services,a factory is producing pollution and not incurring the cost of this pollution,then a(n)________ exists.

Another name for marketable pollution permits is a cap-and-trade system.

How does the outcome of a command-and-control policy compare with the outcome of a pollution tax?

Once a firm is forced to consider an external cost,the price of its product will:

Recall the application about the marginal cost and marginal benefit of reducing methane emissions.What does the optimal level of methane abatement depend on?

Additional Application For the first seven months of 2006 Stockholm,Sweden has been testing a possible solution to the city's traffic congestion.It is called "congestion pricing" and their system includes "small transponder boxes,laser detectors and a network of cameras to track the path of every car…" They want to reduce problems associated with smog and gridlock and,in turn,improve the quality of life. The experiment recorded each car's registration,the date and time of day,as it passed through specific electronic tolls and calculated a fee that was charged to the car's owner.During the rush hour the fee could be as high as $2.75.But in the evenings the toll would be zero.The expectation is that people will respond to these varying tolls,change their driving habits to be more efficient,and take more public transportation. The next step is to put a referendum to the voters to decide whether this system will become a permanent feature in the life of Stockholm drivers. Leila Abboud and Jenny Clevstrom,"Stockholm's Syndrome: Hostages to Traffic,Swedes Will Vote on High-Tech Plan To Untangle Snarls With Tolls," Wall Street Journal,August 29,2006,http://infoweb.newsbank.com,accessed 11/22/06. -As the cost of driving during specific times increases,people will drive less during those times.This supports the basic economic notion that:

Comment on the following statement: "The socially optimal amount of pollution is zero."

The automobile is the biggest source of smog-causing pollutants.

Explain how a pollution tax on automobiles would work toward effectively internalizing an external cost.

A market for pollution permits can efficiently allocate the right to pollute.

The biggest problem with using a tax as a way to solve an externality problem is that:

If we compare the effects of a pollution tax with those of a command-and-control policy,production cost will be:

When dealing with a pollution problem,pollution permits are more efficient than taxes or command-and-control policies because:

Comment on the following statement: "Taxes on pollution are typically used to eliminate the pollution generated."

The U.S.currently uses marketable permits to regulate automobile pollution.

Economically speaking,it would be socially optimal to chose the level of pollution where the marginal abatement cost is considerably less than the marginal benefit.