Exam 11: Externalities, Property Rights, and the Environment

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. The two policies being considered will result in the same amount of pollution reduction:

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then the Coase theorem predicts that if the cigar smoker has the right to determine whether smoking is allowed, then there ________ be smoking, and if the other nine people in the room have the right to determine whether smoking is allowed, then there ________ be smoking.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Quick Burger Operates a Drive-Thrmugh Windav Quick Burger Daes Nat Operate Brive-Thraugh Window Quick Burper \ 24,000 \ 15,000 The Surshine Caf \ 11,000 \ 23,000 If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café can negotiate with each other at no cost, then will Quick Burger operate a drive-through window?

Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below.   Suppose the firms are both currently using process A. If the government requires each firm to reduce pollution by 20 percent, then the firms will adopt process ________, and a total of ________ tons of smoke will be emitted each day.

Two firms, Industrio and Capitalista, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted.   Suppose a permit system has been adopted and each firm has already purchased one permit. Industrio would be willing to pay up to ________ for the right to emit a second ton of smoke, and Capitalista would be willing to pay up to ________ for the right to emit a second ton of smoke.

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. Relative to driving an average car, driving a larger-than-average car generates:

The tragedy of the commons refers to the:

If the consumption of good generates an external benefit, then the market equilibrium quantity will be:

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. The marginal cost of litter removal ________ due to ________.

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The private market equilibrium quantity is ________ doses per day.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window.   Quick Burger Operates a Drive-Thrmugh Windav Quick Burger Daes Nat Operate Brive-Thraugh Window Quick Burper \ 24,000 \ 15,000 The Surshine Caf \ 11,000 \ 23,000 If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would have to pay Quick Burger at least ________ per month to NOT operate a drive-through window.

On Saturdays, Stan goes to the park to play his saxophone. Some of the people in the park love listening to Stan play, while others find his music really annoying. In this case, Stan's saxophone playing generates:

Which of the following is an example of an activity with an external cost?

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Because firms face increasing marginal costs to reduce pollution, the demand curve for pollution permits will be:

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars)for the three parties are listed below.   Suppose you observe that Erie has not added a filter. You could conclude that the Coase theorem failed to solve the externality problem because:

In order to achieve the socially optimal level of output, goods that entail positive externalities should be:

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.)As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The residents of Dry Gulch will overuse water relative to the social optimum because ________.

If the market equilibrium quantity is less than the socially optimal quantity, one can infer that:

The existence of a negative externality will result in:

Two firms, Kegareta Inc. and Sucio Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table.   Suppose the government wants to reduce pollution by 50 percent by imposing a tax of $T per day on each ton of smoke emitted. Of the options listed, what's the smallest tax, $T, that will achieve this goal?