Exam 10: Externalities- When the Price Is Not Right

Overproduction occurs in the presence of a negative externality because the external costs are paid by someone other than the producers and consumers.

Under the EPA's tradable allowances program, clean energy is ______ and dirty energy is ______.

What is the importance of the Clean Air Act of 1990?

Ronald Coase argued that market equilibriums would be efficient even in the presence of externalities when property rights are ______ and transaction costs are ______.

One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose Winston and Chloe decide to solve this problem using the Coase theorem. If they are successful, what is a possible result of the execution of this theorem?

When the government intervenes in markets with external costs, it does so in order to:

Government intervention is necessary to correct all externalities.

Figure: Negative Externality The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions. a. What is the market quantity in this market? b. What is the social cost of the product? c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the tax has been imposed?

Using a demand and supply diagram, demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to get vaccinated. Therefore, which statement is correct?

An external cost is a cost paid by:

When external benefits are present in a market:

Command and control policies ensure economic efficiency.

The advantage of using command and control to solve an externality problem is that:

Use the following to answer questions: Exhibit: EPA Regulations There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650. -(Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants released into the environment after the two firms have traded allowances?

An example of a transaction cost for a shirt is the price you pay for a shirt.

The market for honey 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 6^th unit has a social value of ______ and a private cost of ______.