Exam 15: Externalities , Environmental Policy and Public Goods

How does a positive externality in consumption reduce economic efficiency?

-Refer to Figure 15-2. The marginal benefit of the last unit produced is represented by the price

Explain how the decision by parents to not immunise their children, hoping that their children will not get sick because other parents have had their children immunised, is an example of free riding. How is this behaviour dangerous to the public?

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?

What are some of the limitations of the Coase theorem in practice?

-Refer to Figure 15-11. S₁ represents the supply curve that reflects the private cost of production, and S₂ represents the supply curve that reflects the social cost of production. One way to internalise the external cost generated by utilities is to impose a Pigovian tax on the production of electricity. What is the size of the Pigovian tax that will internalise the cost of the externality?

The tragedy of the commons was avoided in the Middle Ages by

The social cost of a good or service is the cost borne by the producer.

-Refer to Figure 15-14. The current market equilibrium output is partly the result of overfishing. In that case, what does S₂ represent?

'Free riding' is a characteristic of which type of good?

Which of the following displays rivalry and excludability in consumption?

Consider the following methods of pollution reduction: a. the government sets a target for maximum emissions B. the government mandates the installation of specific pollution abatement equipment C. the government imposes a per unit tax on the good that creates pollution D. the government gives firms a tax rebate for every unit of pollution abated Which of the above is an example of a command and control approach to reducing pollution?

What is an externality?

When there is an externality in a market,

Which of the following displays these two characteristics: rivalry and non-excludability?

When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalise the externality.

Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?

Pollution is an example of a

Classifying a good as rival means

Which of the following is an example of a non-excludable product?