Deck 8: Government Policies to Regulate Pollution

Question 1

When a polluter is forced to account for the costs he imposes on others in his own cost-benefit analysis, we say that the polluter has been forced to _____

A) Externalize the social cost
B) Subsidize social costs
C) Cap and trade
D) Internalize the externality

Answer 1

Cap and trade:
Cap-and-trade refers a pollution control program primarily sets the effluent standard up to which emissions would be allowed and hence, regulation powers that be sale the permits to the sources of pollution. Therefore, option "c" is incorrect.
Subsidize social costs:
Social cost refers to the cost of producing a commodity that is not only bear by the producer but also by the entire society. The expense of providing subsidy any goods can be covered by levying taxes to the public. Thus, the effect of the subsidy at the individual is less. Therefore, option "b" is incorrect.
Externalize the social cost:
Social cost refers to the cost of producing a commodity that is not only borne by the producer but also by the entire society. The social cost is the sum of private cost and external cost. Externality occurs when once some of the costs or the benefits of certain goods or service are passed on to some other person apart from the immediate buyer or seller. Therefore, option "a" is incorrect.
Internalize the externality:
Internalize the externality refers the act of constructing a firm's private costs or profit in order to construct them identical to the firm's social costs or profit.
Therefore, option "d" is the correct answer.

Question 2

Consider the case of Jackson and Max, described in Section 8. 3. Suppose that installing a pollution control device costs $800. Suppose also that for each pollution-control device installed, both Jackson and Max will see their health care costs decrease by $600.
a. Recreate Figure 8. 1, incorporating the new information given in this problem. What is the equilibrium outcome in the game Jackson and Max are playing? What type of game did you construct?
b. Suppose that government offers Jackson and Max a subsidy for installing a pollution-control device. What is the minimum subsidy necessary to induce Jackson and Max to do so? Incorporate that subsidy into a new payoff matrix that reflects the changed incentives. What is the equilibrium in this new game?

Answer 2

Negative externality:
Externality is the result of an economic activity that a third party, unrelated to the activity experiences. The negative externality is the cost incurred by a third party due an economic transaction.
a. Payoff matrix:
Table -*1 illustrates the payoff of the two individual by selecting the different strategy.
Table- 1: It is given that J and M are two people who drive an Oldsmobile and if they install a pollution control device costing $800, they can reduce their health care cost by $600. From the payoff matrix it is clear that the dominant strategy for both J and M is "Don't install". The lower right cell of the matrix depicts the Nash equilibrium. The Nash equilibrium is that state of a system of interaction where no party involved in the interaction can gain from changing their strategy while the strategy of other parties remains unchanged. But this steady state is not ideal because both the participants do not install the pollution control device and receive a payoff of zero, but if they cooperate with each other and install the device each participant will be made $400 better off and the economic pie will be $800.
The above payoff matrix is a version of the prisoner's dilemma game. The prisoner's dilemma is a situation where the participants involved in an activity act according to their self-interest which does not provide an ideal outcome for the activity.
b. The government provides a subsidy:
The government can offer subsidy for the pollution control device to encourage J and M to install the device. The ideal amount of subsidy will be that where the payoffs to installing will exceed the payoffs to not installing the pollution control device. So in this case the payoff to "don't install" is $200 so the ideal subsidy should be greater than $200. A subsidy of amount $201 will motivate both the participants J and M to install the pollution control device.
The new payoff matrix:
Table -*1 illustrates the payoff of the two individual by selecting the different strategy.
Table -2 The figure 2 explains the payoff matrix for J and M after including the government subsidy of $201. In this case the equilibrium is for both the parties to install the pollution control device. In this changed payoff matrix the dominant strategy is "Install".

Question 3

Costs that are directly borne by the producer of a good or services are called _____

A) Social costs
B) External costs
C) Monitoring and enforcement costs
D) Private costs

Answer 3

Social cost:
Social cost refers to the cost of producing a commodity that is not only bear by the producer but also by the entire society. The social cost is the sum of private cost and external cost. Therefore, option "a" is incorrect.
External costs:
External cost refers to the cost borne by the third person due to the consumption or production of the goods and services. Therefore, option "b" is incorrect.
Monitoring and Enforcement costs:
Costs incurred on the enforcement of the new environmental-protection policies and on to monitor the operational efficiency of these policies are defined as enforcement costs. Therefore, option "c" is incorrect.
Private cost:
Private cost refers to the additional cost incurred when an individual is produces or consumes something in the market and this is also called as the cost of production or consumption.
Therefore, option "d" is the correct answer.

Question 4

Fidelia and Ameenah are commercial chefs at neighboring restaurants. They both dump waste from their restaurants into the stream running through town. Currently, they are dumping 10 tons of waste apiece, for a total of 20 tons. T he city council passes a law limiting dumping to 14 tons total, or a reduction of 6tons. It costs Fidelia $5 to cut her dumping by 1 ton. It costs Ameenah $3 to cut her dumping by 1 ton.
a. If Ameenah reduces her dumping by 3 tons, and Fidelia reduces her dumping by 3 tons, what will the total cost of cleaning up the 6 tons of dumping be?
b. If Fidelia cleans up 6 tons and Ameenah cleans up nothing, what will the total cost of cleaning up the 6 tons be?
c. If Ameenah cleans up 6 tons and Fidelia cleans up notl1ing, what will the total cost of cleaning up the 6 tons be?
d. Of the options discussed in (a) through (c), which option results in the lowest total cleanup cost for society?
e. Suppose a pollution-reduction system is implemented under which both Ameenah and Fidelia are given 7 pollution permits (for a total of 14 tons, which is what the city council wants). If Ameenah and Fidelia are allowed to buy and sell permits from one another, will Ameenah buy some of Fidelia's permits? Will Fidelia buy some of Ameenah's permits? Or will each simply use up the permits she has been given? Explain your reasoning.

Question 5

The costs a polluter imposes on others are called

A) Social costs
B) External costs
C) Negotiation costs
D) Private costs

Question 6

Which of the following is not one of the principles for regulating pollution in an ideal world?

A) Regulations should be designed to make polluters internalize costs of externalities.
B) The goal of regulation should be to eliminate pollution.
C) Regulations are necessary only when transactions costs preclude bargaining between polluters and victims.
D) Ideally, regulations should achieve the outcomes that affected parties would have reached had transactions costs not been so high.
E) All of the above are goals that regulators should strive for in regulating pollution.

Question 7

_______ are the costs of finding, organizing, and motivating fellow victims so that bargaining can take place.

Question 8

[Related to Application 8.1 on page 166] Read Application 8.1 carefully. One widely proclaimed government goal is to encourage the development and mainstream use of alternative-energy vehicles such as hydrogen fuel cell cars and electric cars. Moving toward these alternative fuel sources is viewed as a means to achieving long-term reductions in carbon emissions. Which of the policies discussed in the application-CAFE standards or gasoline taxes is more likely to encourage consumers and producers to develop these alternative energy sources? Why?

Question 9

In the context of Coasean bargains between polluters and victims, the costs of determining who must be bargained with are referred to as _____

Question 10

Harry's neighbor Tom has recently installed a new floodlight on his porch. The floodlight has a sensor that turns tl1e lights on at dusk and off at dawn. Unfortunately, the bright floodlight happens to shine right into Harry's bedroom. Harry tried to have a conversation witl1 Tom about the light, but Tom says that the light is on a sensor, and so there is nothing he can do. Harry has determined that he has two options: (1) purchase blackout curtains or (2) file a complaint with the city that Harry and Tom live in. (Harry believes Tom may be violating a local ordinance.) What are some pros and cons of each of these solutions?

Question 11

The transactions costs represented by the lawyers, accountants, and other administrative overhead necessary to create enforceable bargains are examples of ____ costs.

Question 12

Three tools that a government might use to regulate pollution are _______, _______ and _______.

Question 13

The costs of ensuring that involved parties live up to promises made in bargaining are called _____.

Question 14

When government pays individuals to purchase pollution-reducing technology, that payment is called a(n) ______.

Question 15

A _______ is a civil action brought in a court of law that is designed to make it feasible for people who have suffered damages to come together to sue for recovery.

Question 16

The market-based system developed by economists to help control pollution by allocating tradable pollution permits to companies is known as a ______

A) Subsidy
B) Pollution tax
C) Cap-and-trade system
D) Class action lawsuit

Question 17

In the context of the environment, which type of transactions cost might include sampling the emissions of many companies (which may require expensive scientific equipment, laboratory time, and a great deal of staff power)?

A) External cost
B) Search cost
C) Collectivization cost
D) Negotiation cost

Question 18

A is a payment or credit provided to producers or consumers by the government for behaving in a particular way.

A) Quota
B) Revenue
C) Tax
D) Subsidy

Question 19

The costs of seeking out, uniting, and rallying pollution victims in order to bargain with a polluter are known as the _____.

A) Collectivization costs
B) Search costs
C) External costs
D) Negotiation costs

Question 20

Suppose that John and Jacob both brew beer. • John can brew beer at a cost of materials and labor of $2.50 per bottle; Jacob can brew beer at a cost of $1.7 5 per bottle.
• People who drink their beers get $5 of value from each beer.
• Brewing beer is a messy and smelly process. Every bottle that is brewed causes $3 of damage to the people who live near the brewery.
The benevolent social planner would like to see

A) Both John and Jacob brew beer
B) Only John brew beer
C) Only Jacob brew beer
D) Neither John nor Jacob brew beer

Question 21

______ are the costs of the actual process of hashing out the terms of an agreement between polluter and victim.

A) Negotiation costs
B) Search costs
C) External costs
D) Private costs

Question 22

In problem, every time beer is brewed, pollution is created. Government can reduce this pollution to the ideal amount by taxing beer producers for each bottle they produce. The ideal tax to accomplish this is
A) $1.75
B)$2.50
C) $3.00
D) $5
Problem:
Suppose that John and Jacob both brew beer.
• John can brew beer at a cost of materials and labor of $2.50 per bottle; Jacob can brew beer at a cost of $1.7 5 per bottle.
• People who drink their beers get $5 of value from each beer.
• Brewing beer is a messy and smelly process. Every bottle that is brewed causes $3 of damage to the people who live near the brewery.
The benevolent social planner would like to see

A) Both John and Jacob brew beer
B) Only John brew beer
C) Only Jacob brew beer
D) Neither John nor Jacob brew beer

Question 23

In 2012, the Department of Justice brought an antitrust lawsuit against Apple for conspiring to raise e-book prices (see https://ebooksagsettlements.com). The DOJ alleged that several publishers, together with Apple, planned an arrangement that raised e-book prices and then banded together to attempt to impose the pricing model on Amazon.com, which had been steeply discounting e-books. The settlement agreement resulted in $400 million in payments from Apple to individuals who paid high prices for e-books during the period in question. Explain why the government's action against Apple may be more effective at eliminating this anticompetitive behavior than relying on individuals to seek damages from Apple through a privately initiated lawsuit.

Question 24

Drawing on problem, suppose that the government sets the tax at $6. From the benevolent social planner's standpoint, what is wrong with setting the tax this high?
A) The tax discourages John from brewing beer.
B) The tax discourages Jacob from brewing beer.
C) The tax is not high enough to discourage John from brewing beer.
D) T he tax is not high enough to discourage Jacob from brewing beer.
In problem, every time beer is brewed, pollution is created. Government can reduce this pollution to the ideal amount by taxing beer producers for each bottle they produce. The ideal tax to accomplish this is
A) $1.75
B)$2.50
C) $3.00
D) $5
Problem:
Suppose that John and Jacob both brew beer.
• John can brew beer at a cost of materials and labor of $2.50 per bottle; Jacob can brew beer at a cost of $1.7 5 per bottle.
• People who drink their beers get $5 of value from each beer.
• Brewing beer is a messy and smelly process. Every bottle that is brewed causes $3 of damage to the people who live near the brewery.
The benevolent social planner would like to see

A) Both John and Jacob brew beer
B) Only John brew beer
C) Only Jacob brew beer
D) Neither John nor Jacob brew beer

Question 25

Are the costs of negotiating with polluters likely to be higher, lower, or equal to the costs of filing a class-action lawsuit against polluters on behalf of victims? Why do you suppose there are more class-action lawsuits filed against polluters than there are negotiations between polluters and victims?

Question 26

Drawing on problem, suppose that the government sets the tax at $0.50. From the benevolent social planner's standpoint, what is wrong with setting the tax this low?
A) The tax discourages John from brewing beer.
B) The tax discourages Jacob from brewing beer.
C) The tax is not high enough to discourage John from brewing beer.
D) The tax is not high enough to discourage Jacob from brewing beer.
In problem, every time beer is brewed, pollution is created. Government can reduce this pollution to the ideal amount by taxing beer producers for each bottle they produce. The ideal tax to accomplish this is
A) $1.75
B)$2.50
C) $3.00
D) $5
Problem:
Suppose that John and Jacob both brew beer.
• John can brew beer at a cost of materials and labor of $2.50 per bottle; Jacob can brew beer at a cost of $1.7 5 per bottle.
• People who drink their beers get $5 of value from each beer.
• Brewing beer is a messy and smelly process. Every bottle that is brewed causes $3 of damage to the people who live near the brewery.
The benevolent social planner would like to see

A) Both John and Jacob brew beer
B) Only John brew beer
C) Only Jacob brew beer
D) Neither John nor Jacob brew beer

Question 27

The full cost of producing an item, including the producer's private costs and all the external costs, is referred to as the _____

Question 28

Describe how a cap-and-trade system of regulation works. How does such a system differ from the other tools that are used to regulate pollution?

Question 29

When a policy is created based on an ideal of what should be as opposed to what current data and research support, an economist would say that this policy is based on concerns.

Question 30

(Related to Application 8.2 on page 168] Application 8.2 discusses some of the practical difficulties in dealing with climate change. Referring to each of the four types of transactions costs discussed in the chapter, explain why a solution to climate change is unlikely to stem from private bargaining between polluter and victims.