Deck 6: The Economics of Externalities and the Environment

Question 1

The emissions of waste water and schedule for cleaning costs for a natural gas drilling operation using hydraulic fracturing (hydrofracking) are found below:
a. If regulatory agency sets an emission fee of $10 and the plant's discharge is 3,000, gallons what is the best economic decision for the firm? Why?
b. With a $10 emission fee, what is the firm's best choice if its emissions are 12,000 gallons per day?

Answer 1

a. If the regulatory agency sets an emission fee of $10 and the plant's discharge is 3,000 gallons per day, the best economic decision for the firm is to compare the marginal cost of cleaning with the emission fee. In this case, the marginal cost of cleaning for 3,000 gallons is $8, which is lower than the emission fee of $10. Therefore, it is economically beneficial for the firm to clean the waste water and comply with the emission fee.

b. With a $10 emission fee, the firm's best choice if its emissions are 12,000 gallons per day is to compare the marginal cost of cleaning with the emission fee. In this case, the marginal cost of cleaning for 12,000 gallons is $11, which is higher than the emission fee of $10. Therefore, it is economically beneficial for the firm to pay the emission fee instead of cleaning the waste water.

Question 2

Suppose a smoke-emitting factory covers a nearby country club's tennis courts with soot, requiring court reconditioning and resurfacing costing $4,000 per year. Washing the tennis courts each day to avoid reconditioning and resurfacing would cost $5,600 per year to remedy the problem. Alternatively, a smokestack filter would cost $3,000 and last about nine years.
a. What is the efficient solution to the problem?
b. What should the factory do if the country club is granted a legal right to soot-free tennis courts? Explain.

Answer 2

a. The efficient solution to the problem would be for the factory to install the smokestack filter. This is because the cost of the filter, at $3,000, is lower than the cost of either reconditioning and resurfacing the tennis courts at $4,000 per year or washing the courts daily at $5,600 per year. Additionally, the filter would last for nine years, providing a long-term solution to the problem.

b. If the country club is granted a legal right to soot-free tennis courts, the factory should still install the smokestack filter. This is because it is the most cost-effective solution in the long run, and it would also ensure that the country club's legal right to soot-free tennis courts is upheld. By installing the filter, the factory would be taking proactive measures to prevent soot from affecting the tennis courts, thereby fulfilling their legal obligation to the country club.

Question 3

Explain how a tradable emissions allowances system would work to control emissions. How does this compare to the realities of a cap-and-trade system? Compare this approach to command-and-control regulation.

Answer 3

A tradable emissions allowances system works by setting a limit on the total amount of emissions that can be released by a group of polluters, such as companies or industries. This limit is then divided into individual allowances, each representing a specific amount of emissions. These allowances can be bought, sold, or traded among polluters, allowing them to either reduce their own emissions or purchase additional allowances from others if they exceed their limit.

In a cap-and-trade system, the government sets an overall cap on emissions and then distributes or auctions off allowances to polluters. This system allows for flexibility and encourages innovation, as companies can find the most cost-effective ways to reduce their emissions. It also creates a financial incentive for companies to reduce their emissions, as those who can reduce their emissions more easily can sell their excess allowances to those who struggle to meet their limits.

In comparison, a command-and-control regulation system sets specific limits and standards for emissions that companies must meet, without the flexibility of trading allowances. This approach can be more rigid and less adaptable to changing circumstances, and it may not provide the same financial incentives for companies to reduce their emissions.

Overall, a tradable emissions allowances system and a cap-and-trade system provide a more flexible and market-based approach to controlling emissions, allowing for cost-effective reductions and incentivizing innovation. This is in contrast to the more rigid and prescriptive nature of command-and-control regulation.

Question 4

Use a diagram to illustrate the optimal level of pollution abatement.

Question 5

The environment qualifies as a public good because no one can be denied access to using it.

Question 6

The services of the environment cannot be classified as common property.

Question 7

A pollution tax can shift the external cost of pollution from the general public to the polluting firm.

Question 8

Economists generally favor elimination of all pollution as an environmental policy.

Question 9

Water pollution is a positive externality.

Question 10

A pollution tax can cause the externalization of the external benefits of pollution.

Question 11

The Coase Theorem argues that the creation of property rights over certain aspects of the environment can offset the social costs of pollution.

Question 12

If a firm had to purchase "rights" or permits to pollute, external costs would be no more efficiently reduced than achieved by command-and-control regulation.

Question 13

Command-and-control regulation relies upon emission fees as a means of reducing pollution.

Question 14

Emission fees dissuade firms from polluting by appealing to morality and business ethics.

Question 15

The best way to encourage recycling is to force people to do it.

Question 16

A community should pursue policies that reduce the waste stream by 100 percent.

Question 17

Recycling and user fees are a means of curtailing the stream of solid waste.

Question 18

Pollution's only source is man-made wastes.

Question 19

If pollution abatement is approached using benefit-cost analysis, it will always be better to expand pollution abatement until all the pollution is gone.

Question 20

Collective consumption of environmental services makes solutions to environmental problems readily manageable through markets.

Question 21

Property rights over the services of the environment eliminate the possibility of free riding.

Question 22

Unlike other goods, environmental quality can be improved without sacrificing alternative goods.

Question 23

Improving environmental quality entails the sacrifice of alternative goods and activities.

Question 24

Federal subsidies to state and local governments to improve waste treatment have been the largest federal expenditure on environmental improvement.

Question 25

The presence of large external benefits causes the overproduction of the good.

Question 26

External costs result in underproduction of a good.

Question 27

A criticism of command-and-control regulation is that it does not provide effective economic incentives to reduce pollution efficiently.

Question 28

Efforts to improve environmental quality have diminished in the last five to ten years.

Question 29

The 1990 Clean Air Act adopts no new measures for environmental improvement.

Question 30

Stratospheric ozone depletion is a small policy concern.

Question 31

Endangered species are part of the environmental problem.

Question 32

The qualities of exclusivity and rival consumption apply to the use of the atmosphere.

Question 33

Soil erosion is not part of the environmental problem.

Question 34

The EPA's offset policy introduced economic incentives to reduce emissions.

Question 35

Emissions fees:

A) encourage firms with high cleaning costs to pay the fee while firms with low cleaning costs clean emissions
B) dissuade all firms from polluting for ethical reasons
C) are being phased in on public toilets to comply with federal standards to lower the solid waste stream
D) encourage all firms to increase emissions so that paying the emission fee is more financially desirable than cleaning emissions

Question 36

Pollution is:

A) a negative externality
B) a positive externality
C) an addition to social benefits
D) not an economic problem

Question 37

The greatest share of federal expenditures for pollution control is in the form of:

A) pollution taxes
B) EPA rule writing
C) environmental testing
D) subsidies for water treatment plants

Question 38

Firms with high cleaning costs will react to a low emission fee by:

A) cleaning their emissions
B) neither cleaning emissions nor paying the fee
C) paying the fee
D) relocating to countries with high emissions fees

Question 39

The environment can be classified as a:

A) public good
B) private good
C) negative externality
D) vice good

Question 40

The Coase Theorem argues that:

A) pollution is inevitable
B) pollution costs can be internalized through the conveyance and administration of property rights
C) command-and-control standards are best for pollution abatement
D) the EPA is a social externality.

Question 41

Answer the next three questions on the basis of the following diagram:


-The diagram illustrates:

A) internalizing an externality
B) externalizing an internality
C) a social demand function for pollution abatement
D) that more pollution abatement can be obtained only by sacrificing other goods

Question 42

Answer the next three questions on the basis of the following diagram:


-Expanding pollution abatement from Z to W:

A) entails sacrificing XY dollars' worth of other goods
B) requires traveling from D to G on the curve
C) has no opportunity cost
D) is always a good idea

Question 43

Answer the next three questions on the basis of the following diagram:


-Moving from D to G:

A) is socially irresponsible
B) portrays an unacceptable tradeoff
C) infers that society might have to tolerate greater environmental damage in the present to obtain other goods
D) is not among the realm of society's choices
E) will probably help farmers

Question 44

The purpose of offering subsidies to polluters is to:

A) reduce the polluters' costs of cleaning up pollution
B) increase the polluters' cost of cleaning up pollution
C) provide an incentive to pollute more
D) redistribute income to polluting firms

Question 45

Exhaustible resources such as fossil fuels can be managed by market allocation because:

A) common property rights and the qualities of public goods prevail
B) the government should not intervene
C) oil suppliers need high incomes
D) private property and the qualities of private goods apply
E) there is an explicit constitutional ban on treating mining and oil and gas drilling any other way

Question 46

If a system is "closed," it means that:

A) you can't get out
B) wastes are injected from outside and degrade environmental quality
C) patterns are fixed
D) free riding must develop
E) wastes must be recycled in the long run or environmental quality will degrade

Question 47

Your neighbor's dog barks incessantly every night so that you cannot sleep. You are experiencing:

A) mind control
B) a negative externality
C) a positive externality
D) the better half of canine life
E) accounting costs

Question 48

An internal cost refers to:

A) direct production costs borne by the producers
B) costs spilled over to third parties
C) deeply felt costs
D) yield from the sale of a product

Question 49

An external cost refers to:

A) direct production costs borne by the producers
B) costs spilled over to third parties
C) deeply felt costs
D) yield from the sale of a product
E) a cost that escaped the auditors

Question 50

Answer the next four questions based upon the following diagram.


-If a community uses benefit-cost analysis in order to achieve the optimal reduction of waste emissions:

A) it should select a point such as H where marginal social benefits exceed marginal social costs
B) it should select any level where net benefits are positive
C) it should extend emission reduction to where marginal benefits are zero
D) it should equate marginal benefits with marginal cost and select level OD of emission reduction

Question 51

Answer the next four questions based upon the following diagram.


-If a community does select the optimal level of emission reduction, net benefits are:

A) 0BCD
B) 0DE
C) 0BC
D) 0ACD

Question 52

Answer the next four questions based upon the following diagram.


-At the efficient level of emission reduction, total benefits are:

A) 0BCD
B) CDE
C) ABC
D) 0ACD

Question 53

Answer the next four questions based upon the following diagram.


-At the efficient level of emission reduction, the total cost is:

A) 0BCD
B) CDE
C) ABC
D) 0ACD

Question 54

The theorem describe by Ronald Coase suggests that:

A) the existence of property rights can result in inefficient solutions to externalities if transactions and enforcement costs are negligible
B) the existence of property rights cannot result in efficient solutions to externalities unless transactions and enforcement costs are substantial
C) only goodwill can successfully offset externalities
D) economists have no useful propositions about compensating for externalities

Question 55

One economically efficient means of financing solid waste disposal into landfills is to:

A) impose user fees or tipping fees
B) delay landfill sitings for years
C) set quotas on the amount of garbage a household or business can generate
D) pass through the costs in general taxes
E) form a multi-county independent authority that charges each county a fixed amount no matter how much garbage is generated

Question 56

The equity issue regarding environmental quality involves:

A) whether fees or regulations are used
B) whether optimal levels of environmental management are achieved
C) whether there is fair cost and benefit sharing for environmental improvements
D) making sure that people get equal benefits from EPA expenditures on the environment

Question 57

The Kyoto Protocol:

A) imposed more stringent emission reductions on developing nations
B) met targets for emissions reductions
C) exempted the United States because it had a head start on environmental improvement
D) has been superseded by the Copenhagen Accord's goal to hold the global temperature increase to two degrees Celsius

Question 58

Which of the following qualities generally apply to the environment?

A) nonexclusion
B) nonrival consumption
C) collective consumption
D) all of the above