Exam 10: Externalities- When the Price Is Not Right

If the production of a good causes a negative externality, the efficient level of output of that good is zero.

Market solutions to externality problems work when: I. property rights are easily identifiable. II. transaction costs are relatively low. III. the market quantity is above the efficient quantity.

Which method achieves the lowest per-gallon cost of reducing water consumption?

In the presence of significant externalities, a market equilibrium maximizes:

Economist James Meade wrote that the market for honey was:

Use the following to answer questions: Figure: Efficient Market Outcome -(Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium?

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

Government solutions to externality problems include:

If an external cost is present in a market, economic efficiency may be enhanced by:

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.

Suppose there will be global catastrophe unless we hold total carbon dioxide emissions at or below 35 million tons per year. As a result, 35 million tons of emissions permits are auctioned off and the proceeds distributed equally between everybody on Earth. Is this better, worse, or basically the same as allocating to each of 7 billion people on Earth 10 pounds of untradable emissions permits per year?

Use the following to answer questions: Figure: Palm Oil -(Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. According to this diagram, what is the external cost (per ton) of producing palm oil?

To ensure an efficient equilibrium outcome when external costs are present in the market, the government could: I. implement a tax equal to the level of the external cost. II. create a system of tradable allowances to reduce output to the efficient quantity. III. institute command and control policies to reduce output to the efficient quantity.

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

The market for a good that generates an external benefit is still considered efficient.

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?

Explain and graphically illustrate why underuse of vaccines is not efficient and how the inefficiency may be improved.

Use the following to answer questions: Figure: Market for Vaccines -(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

When external benefits are significant:

One benefit of markets in pollution allowances is that environmentalists can pay to permanently take emissions off the market.