Exam 10: Externalities- When the Price Is Not Right

A plague called The Black Death swept Medieval Europe. At the time, people believed cats spread the plague (cats were associated with the Devil) and started killing them to prevent the spread of disease. In reality, rats spread the plague and the slaughter of their natural predators only hastened the disease's proliferation. With this in mind, a market for cats would have had a ______ externality because the cats ______.

Which of the following statements is TRUE? I. The EPA's tradable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. II. One criticism of tradable allowances is that they prohibit nonbusinesses and environmental groups from purchasing the allowances. III. The tradable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

In an efficient market, the supply curve will decrease by the amount of the external cost.

The system of tradable allowances for carbon dioxide proposed by President Obama: I. would be easy to implement today if not for the political in-fighting in Congress. II. would create incentives for firms to move toward the use of fuels that contribute less to global warming (such as nuclear, solar, and so forth). III. would create large revenues for the government, but do little to increase economic efficiency.

Figure: Social Benefit Refer to the figure. Which price and quantity combination represents the efficient equilibrium?

The main difference between tradable allowances and taxes is:

Which of the following statements is TRUE? I. Taxes may reduce consumption by exactly the same amount as government regulations. II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity. III. Command and control policies effectively reduce consumption, but they may not be the lowest cost method for doing so.

Externalities are:

In an effort to save energy, a 1992 federal law requires that new showerheads cannot flow at a rate faster than 2.5 gallons per minute. Which of the following statements is TRUE? I. This law is an example of command and control. II. This policy reduces energy use at a lower cost than a tax on water. III. Economists would prefer to simply tax water consumption because this gives people the flexibility to reduce water consumption in their lowest-valued use.

The market for bathroom cleaners can be defined by this set of equations: Q_d = 24 - 2P Q_s = -4 + 2P where P is the price of bathroom cleaners in dollars, and Q is quantity in thousands. When bathroom cleaners are washed down the drain, they cause environmental poisoning. The government estimates that the external cost related to the use of each container of bathroom cleaner is $3 and is considering imposing a tax of $3 on the producers of the bathroom cleaner. Using this information, answer the following questions. a. What are the market price and market quantity in the bathroom cleaner market? b. What is the social cost of this quantity of bathroom cleaner? c. If producers are charged a tax of $3, this would cause the supply curve to the shift to the left, and the new equation for the supply curve would be Q_s = -4 + 2(P - 3). What is the efficient quantity traded in this market as a result of the tax? d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the tax). e. What is the dollar amount of the deadweight loss that would be removed from this market as a result of the tax?

The EPA's system of tradable allowances is a successful application of the Coase theorem.

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

Many remedies to resolving externalities involve "internalizing the externality." Which BEST approximates that goal?

The efficient equilibrium is always equal to the market equilibrium.

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

Use the following to answer questions: Figure: External Benefit -(Figure: External Benefit) Refer to the figure. Shingles is a painful and blistering skin rash that generally affects older adults. The shingles virus is transmitted by those with an active outbreak, and it can cause chicken pox in people who never had it. The efficient number of vaccinations is ______, and the market quantity of vaccinations is ______.

In a competitive market, a free market approach is always best when an external cost is present.

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?