Exam 5: Externalities, Environmental Policy, and Public Goods

The Wilfer Resort Hotel has a spectacular view of a pine forest along a river bank. Suppose a commercial logger has purchased the pine forest and is planning to clear-cut the forest in a way that has a negative impact on the resort. Can the two parties arrive at a Coasian solution and if so what might that solution be?

Which of the following describes a positive externality?

Classifying a good as excludable means

In the past the federal government often employed what is called a "command-and-control" approach to the reduction of pollution emissions. Many economists are critical of this approach because

If transactions costs are low, private bargaining will always result in an efficient solution to the problem of externalities.

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 ________.

Ronald Coase is famous for the Coase Theorem, which is based on the premise that there is an economically efficient level of pollution reduction. Many economists believe that the tradable emissions allowance program that has been used to deal with the problem of acid rain has been successful in reducing emissions of sulfur dioxide in an economically efficient manner. Why isn't this program an example of the Coase Theorem?

Figure 5-14 Figure 5-14 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 5-14 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.

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?

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

Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was

Figure 5-13 Figure 5-13 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production. -Refer to Figure 5-13. The market equilibrium quantity of gasoline is ________ million gallons per month.

Which of the following is an example of a nonexcludable product?

The Coase theorem asserts that government intervention is a prerequisite for addressing externality problems.

Sefronia and Bella share an apartment and they are deciding whether or not to purchase a weekly housecleaning service. The value of the service to each of them is $50 and it costs $80 to hire a housecleaner. Suppose Bella is lazy and a spendthrift and Sefronia suspects that Bella will be willing to pay $80. What is Sefronia likely to do, given that she is as rational as any other person?

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

When a negative externality exists, the private market produces

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

What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?