Exam 13: External Costs and Benefits

Pollutants A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month. -Refer to Pollutants.Suppose transactions costs preclude the possibility of private bargaining between the chemical plant and the farm.Which liability rule will not result in an efficient outcome?

In the principal-agent problem,assigning full liability to the agent gives no incentive for the principal to avoid damages.

A Cap and Trade system is more prone to error than a Pigou tax.

Smith' s construction of an 8-foot fence around his property will block his neighbor Johnson's scenic view.If Smith constructed a 6-foot fence,Johnson's view would not be blocked.If Johnson values his view at $1,000 and Smith values the extra 2 feet of fence at $500,then a possible resolution is that

An employer is liable for torts committed by his employees under the

Changes in property rights will not affect the allocation of resources as long as transactions costs are zero and the subsequent effects on market demand are negligible.

The doctrine of Respondent Superior contends that an employer is sheltered from torts committed against his employees.

Negative Externality The following questions refer to the accompanying diagram, which shows the effects of a negative externality created by an industry's production. The equilibrium quantity in the absence of any attempt to internalize the externality is QE, and the optimal quantity according to a Pigovian analysis is QO. -Refer to Negative Externality.Suppose there are no transactions costs.Also suppose the externality is internalized when the damaged parties offer producers a bribe of $5 per unit to reduce their production.Coase's analysis indicates that social gain in this situation will equal

Suppose transactions costs are created by a principal-agent problem.If the objective is economic efficiency,who should be made liable for damages resulting from the interaction of the principal and the agent?

What does it mean to say that a firm has been made liable?

Discuss the similarities and differences between "Cap and Trade" and a "Pigou Tax" as they apply to correcting for externalities.Focus on how each affects the price paid by consumers,the price received by producers,and the amount of revenue received by the government.Also discuss the potential problems with achieving the efficient outcome under each system.

How does a Pigou tax work? Why might a Pigou tax fail to achieve an efficient outcome?

Coase argues that every case of externalities

All cars contribute positively to social gains.

A neighbor slips on an icy sidewalk in front of your house,resulting in $500 of medical bills.The court rules that the accident had a 20% chance of occurring.Under a negligence standard,you will be held liable for damages if removing the ice from the sidewalk would have cost you less than

According to Coase's analysis,when are private costs and social costs the same?

Under a standard of contributory negligence,a plaintiff cannot collect for damages if his cost of preventing the accident is less than

Negligence is irrelevant when a strict liability standard is applied.

Cap and Trade is a system aimed at correcting for externalities by

The Strong Coase Theroem states that in the absence of transaction costs,the assignment of property rights