Exam 16: Externalities, Public Goods, and Common Resources

Your favorite holiday is Halloween and each year you decorate your yard with pumpkins, skeletons, and tombstones, and you install a noise machine which blasts haunting sounds 24 hours a day. It is such a spectacle that hundreds of people drive by your house each day to gawk at the display. The noise and traffic disturb your neighbors who sue you, and you are required to take down your display permanently. This is an example of

Refer to the data provided in Table 16.3 below to answer the following question(s). Table 16.3 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution. Table 16.3 Firm A Firm A Firm A Firm B Firm B Firm B Reduction of Pollution by Firm A MC of reducing pollution for Firm A TC of reducing pollution for Firm A Reduction of Pollution by Firm B MC of reducing pollution for Firm B TC of reducing pollution for Firm B 1 \ 8 \ 8 1 \ 16 \ 16 2 12 20 2 24 40 3 18 38 3 32 72 4 26 64 4 40 112 5 36 100 5 48 160 -Refer to Table 16.3. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits, how many permits will be traded between the two firms?

At the ________ level of provision for a ________ good, the government must know everyone's preferences.

If ________ bargaining to resolve an externality is to result in an efficient outcome, the initial assignment of rights must be clear to ________ parties.

There are 1,000 families in a neighborhood that is affected by noise pollution from a local factory. The noise level is within legal limits, but could be reduced further if the company spent $5,000 on technological improvements. The company agrees to make these improvements if the affected families contribute the $5,000. A committee starts to collect donations to pay for the improvements. Which of the following is most likely to occur?

If there are external costs in production and firms do not have to account for these costs, then firms will produce

The optimal pollution level is found where the marginal social benefit of polluting equals the marginal social cost of polluting.

If you ________ prevent at a low cost another person from enjoying the benefits of a good that you produced, the good is nonexcludable. This is a characteristic of a ________ good.

In any case where there is a negative externality, it is better to form a government agency to solve the problem.

Traffic congestion is an example of a(n)

Refer to the information provided in Figure 16.1 below to answer the question(s) that follow. Figure 16.1 -Refer to Figure 16.1. The efficient amount of fertilizer is

Relating to the Economics in Practice on page 330: By not factoring in the external costs on society resulting from an environmental disaster caused by a specific firm, the firm will most likely ________ its product, and at equilibrium, the marginal social costs of production will be ________ the price.

Refer to the data provided in Table 16.4 below to answer the following question(s). Table 16.4 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution. Table 16.4 Firm A Firm A Firm A Firm B Firm B Firm B Reduction of Pollution by Firm A MC of reducing pollution for Firm A TC of reducing pollution for Firm A Reduction of Pollution by Firm B MC of reducing pollution for Firm B TC of reducing pollution for Firm B 1 \ 2 \ 2 1 \ 16 \ 16 2 6 8 2 24 40 3 12 20 3 32 72 4 20 40 4 40 112 5 30 70 5 48 160 -Refer to Table 16.4. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits and all possible trades are made, Firm A will reduce its pollution by a total of ________ units.

A cost or benefit resulting from some activity that is imposed or bestowed on third parties is

There are 3,000 families in a small town that are affected by air pollution from a local factory. The air pollution could be reduced if the company spent $10,000 on upgraded ventilators. The company agrees to install the ventilators if the affected families contribute the $10,000. However, because individuals will benefit from the reduction in air pollution whether they contribute or not, most people will not contribute and the firm will not install the ventilators. This outcome is an example of the

At the optimal level of public goods provision, society's total willingness to pay per unit is equal to the marginal cost of producing the good.

Taxes on a producing firm's ________ are meant to force decision makers to consider the full costs of their actions.

An efficient outcome can always be reached by requiring the individual who produces the externality to fully compensate individuals for any damage inflicted.

Marginal social cost is the difference between the marginal cost and the marginal damage cost.

Assuming there are no externalities, if a firm produces an output level where the benefits to consumers ________ the cost to suppliers to produce it, then price is ________ marginal cost.