CHAPTER 18 EXTERNALITIESAND PUBLIC GOODS QUESTIONS FOR REVIEW 1.Which of the following describes an externality and which does not?Explain the difference a A poliey of restricted coffee exports in Brazil causes the U.S.price of coffe to rise,which in turn also causes the price of tea to rise. Externalities cause market inefficiencies because the price of the good does not reflect the true social value of the good.A policy of restricting coffee exports in Brazil causes the U.S.price of coffee to rise,because supply is reduced.As the price of coffee rises consumers switch to tea.thereby increasing the demand for tea,and hence,increasing the price of tea These are market effects.not externalities. An advertising blimp distracts a motorist who then hits a telephone pole An advertising blimp is producing information by announcing th availability of some good or service.However,its method of supplying this information can be distracting for some consumers,especially those consumers who happen to be driving near telephone poles.The blimp is reating a negative externality that influences the driv the prio ch arged by the advertising firm doe es not incorporate th externality of distracting drivers,too much of this type of advertising is produced from the point of view of society as a whole. 2.Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain:(a)an emissions fee,(b)an emissions standard,and (c)a system of transferable emissi ons permit Since pollution creates an external cost that is not reflected in the margina cost of production,its emission creates an externality.Three policy tooks can be used to reduce pollution:an emissions fee.an emissions standard. and a system of transferable permits.The choice between a fee and a standard will depend on the marginal co and marginal of reducing polltion If change b ement yield】 efitswhile addi little to cost,the cost of not reducing emissions is high.Thus standard should be used.However,if small changes in abatement yield little benefit while adding greatly to cost,the cost of reducing emissions is high.Thus fees should be used. A system of transferable emissions permits combines the features of fees and standards to reduce pollution.Under this system,a standard is set
CHAPTER 18 EXTERNALITIES AND PUBLIC GOODS 一、QUESTIONS FOR REVIEW 1. Which of the following describes an externality and which does not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise, which in turn also causes the price of tea to rise. Externalities cause market inefficiencies because the price of the good does not reflect the true social value of the good. A policy of restricting coffee exports in Brazil causes the U.S. price of coffee to rise, because supply is reduced. As the price of coffee rises, consumers switch to tea, thereby increasing the demand for tea, and hence, increasing the price of tea. These are market effects, not externalities. b. An advertising blimp distracts a motorist who then hits a telephone pole. An advertising blimp is producing information by announcing the availability of some good or service. However, its method of supplying this information can be distracting for some consumers, especially those consumers who happen to be driving near telephone poles. The blimp is creating a negative externality that influences the drivers’ safety. Since the price charged by the advertising firm does not incorporate the externality of distracting drivers, too much of this type of advertising is produced from the point of view of society as a whole. 2. Compare and contrast the following three mechanisms for treating pollution externalities when the costs and benefits of abatement are uncertain: (a) an emissions fee, (b) an emissions standard, and (c) a system of transferable emissions permits. Since pollution creates an external cost that is not reflected in the marginal cost of production, its emission creates an externality. Three policy tools can be used to reduce pollution: an emissions fee, an emissions standard, and a system of transferable permits. The choice between a fee and a standard will depend on the marginal cost and marginal benefit of reducing pollution. If small changes in abatement yield large benefits while adding little to cost, the cost of not reducing emissions is high. Thus, standards should be used. However, if small changes in abatement yield little benefit while adding greatly to cost, the cost of reducing emissions is high. Thus, fees should be used. A system of transferable emissions permits combines the features of fees and standards to reduce pollution. Under this system, a standard is set
and fees are used to transfer permits to the firm that values them the most (i.e.a firm with high abatement costs).However,the total number of permits can be incorrectly chosen. Too w permits will create exces demand,increasing price and inefficiently diverting resources to owners of the permits.Tvpically.pollution control agencies implement one of thre mechanisms.measure the results,reassess the success of their choice. then reset new levels of fees or standardsor select a new policy tool 3.When do externalities require government intervention?When is such intervention unlikely to be necessary? Economic efficiency can be achieved without vernment intervention whe the externality affects a small number of people and when property rights are well specified.When the number of parties is small.the cost of negotiating an agreement among the parties is small.Further.the amount of required information the benefts toeach party)ismall Whe property rights ar uncertainty costs and benefits increases and efficient choices might not be made. The cost of coming to an agreement,including the cost ofdelaving such an agreement could be greater than the cost of government intervention,including the expected cost ofchoosing the wrong policy instrument. 4.Consider a market in which a firm has monopoly power.Suppose in ddition that the firm produces under the presence of (i)a positive or (ii)a negative externality. Does the externality necessarily lead to a greater misallocation of resources? In the presence of a negative externality the market will produce too much output,as compared to the socially optimal solution.The monopolist will however produce too little output.It is possible therefore that the monopolist by himself will produce closer to the socially optimal soution than the competitive firms would For the case of the positive externalit the competitive firms will produce too little output,the monopolist will produce even less,and the monopolist is therefore leading to a greater misallocation of resources. Externalities arise solely because individuals are unaware of the ons equences of their actions.Agree or disagree?Explain. This is not a true statement.It is not that people are unaware but that they are not forced to consider and account for all of th e consequences o their actions.If a firm dumps waste into a river that affects a swimming area downstream it is generating an externality given it is not forced to consider the cost it is imposing on users of the swimming area.This is true whether the firm is aware of these costs or not. 6.To encourage an industry to produce at the socially optimal level the government sh ould impose a uni t tax on output that is equal to the margina cost of production.True or false?Explain
and fees are used to transfer permits to the firm that values them the most (i.e., a firm with high abatement costs). However, the total number of permits can be incorrectly chosen. Too few permits will create excess demand, increasing price and inefficiently diverting resources to owners of the permits. Typically, pollution control agencies implement one of three mechanisms, measure the results, reassess the success of their choice, then reset new levels of fees or standards or select a new policy tool. 3. When do externalities require government intervention? When is such intervention unlikely to be necessary? Economic efficiency can be achieved without government intervention when the externality affects a small number of people and when property rights are well specified. When the number of parties is small, the cost of negotiating an agreement among the parties is small. Further, the amount of required information (i.e., the costs of and benefits to each party) is small. When property rights are not well specified, uncertainty regarding costs and benefits increases and efficient choices might not be made. The costs of coming to an agreement, including the cost of delaying such an agreement, could be greater than the cost of government intervention, including the expected cost of choosing the wrong policy instrument. 4. Consider a market in which a firm has monopoly power. Suppose in addition that the firm produces under the presence of (i) a positive or (ii) a negative externality. Does the externality necessarily lead to a greater misallocation of resources? In the presence of a negative externality the market will produce too much output, as compared to the socially optimal solution. The monopolist will however produce too little output. It is possible therefore that the monopolist by himself will produce closer to the socially optimal solution than the competitive firms would. For the case of the positive externality the competitive firms will produce too little output, the monopolist will produce even less, and the monopolist is therefore leading to a greater misallocation of resources. 5. Externalities arise solely because individuals are unaware of the consequences of their actions. Agree or disagree? Explain. This is not a true statement. It is not that people are unaware but that they are not forced to consider and account for all of the consequences of their actions. If a firm dumps waste into a river that affects a swimming area downstream it is generating an externality given it is not forced to consider the cost it is imposing on users of the swimming area. This is true whether the firm is aware of these costs or not. 6. To encourage an industry to produce at the socially optimal level the government should impose a unit tax on output that is equal to the marginal cost of production. True or false? Explain
This statement is false.While a tax can encourage firms to produce at the socially optimal level,the tax should be set equal to the marginal external cost and not the marginal private cost.Firms will maximiz profit by producing at the point where price is equal to marginal cost When there are external costs involved the marginal cost of the firm is too low from society's point of view,and as a result too much output is produced.By settina taxequal to the additional cos not being realized by the firm (the marginal external cost)the firm will be encouraged to consider all costs and will reduce output because the tax will increase the overall marginal cost 7.George and stan live next door to each other.George likes to plant flowers in his garden.but every time he does.Stan's dog comes over and digs them up. Since it is Stan's dog that is ved,it ausing necessary that S a pay to put up a fence aro d to ke the dog in. Agree or disagree?Explain. If there are leash laws then this would be true.Stan would either need t keep his dog on a leash or put up a fence.In general.it is possible for the two parties to bargain and come up with a solution that will benefit both of them.They could for ex mple split the cost of the fence.Economic ency doe ot require that Stan pay for the e t requir that Stan and George negotiate over how best to address the problem and come up with a solution that will work for both of them 8.An emissions fee is paid to the government.whereas an iniurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to arise under these two arrangements? When victims can recive the damages directly,they are more likely to file claim,initiate a suit,and try to overstate their damages. When victims are not able to receive the damages directly,they are less likely to report violations and are less likely to overstate their damages.In theory, emissions fees paid to the government require the polluting firm to pav compensation for any damage inflicted and hence towards the socally optimal eve of production An individual who is inju by a firm's polluting behavior is again less likely to file a complaint if they do not feel they can directly receive the compensation. 9.Why does free access to a common property resource generate an inefficient outcome? Free access to a resource means that the marginal cost to the user is less than because has no his use of the resource will affect the use of the resource by other users.The use of a common property resource by a person or firm excludes others from
This statement is false. While a tax can encourage firms to produce at the socially optimal level, the tax should be set equal to the marginal external cost and not the marginal private cost. Firms will maximize profit by producing at the point where price is equal to marginal cost. When there are external costs involved the marginal cost of the firm is too low from society’s point of view, and as a result too much output is produced. By setting a tax equal to the additional cost not being realized by the firm (the marginal external cost) the firm will be encouraged to consider all costs and will reduce output because the tax will increase the overall marginal cost. 7. George and Stan live next door to each other. George likes to plant flowers in his garden, but every time he does, Stan’s dog comes over and digs them up. Since it is Stan’s dog that is causing the damage, if economic efficiency is to be achieved, it is necessary that Stan pay to put up a fence around his yard to keep the dog in. Agree or disagree? Explain. If there are leash laws then this would be true. Stan would either need to keep his dog on a leash or put up a fence. In general, it is possible for the two parties to bargain and come up with a solution that will benefit both of them. They could for example split the cost of the fence. Economic efficiency does not require that Stan pay for the fence. It merely requires that Stan and George negotiate over how best to address the problem and come up with a solution that will work for both of them. 8. An emissions fee is paid to the government, whereas an injurer who is sued and held liable pays damages directly to the party harmed by an externality. What differences in the behavior of victims might you expect to arise under these two arrangements? When victims can receive the damages directly, they are more likely to file a claim, initiate a suit, and try to overstate their damages. When victims are not able to receive the damages directly, they are less likely to report violations and are less likely to overstate their damages. In theory, emissions fees paid to the government require the polluting firm to pay compensation for any damage inflicted and hence to move towards the socially optimal level of production. An individual who is injured by a firm’s polluting behavior is again less likely to file a complaint if they do not feel they can directly receive the compensation. 9. Why does free access to a common property resource generate an inefficient outcome? Free access to a resource means that the marginal cost to the user is less than the social cost because each user has no incentive to consider how his use of the resource will affect the use of the resource by other users. The use of a common property resource by a person or firm excludes others from
using it.For example.the use of water by one consumer restricts its use by another.Since private marginal cost is below social marginal much h of the by the individual user ereating an inefficient outcome.Each individual using the common property resource considers only his own actions and does not consider how all of the users collectively are impacting the resource. 10.Public goods are both nonrival and nonexclusive.Explain each of these terms and show clearly how they differ from each other A good is nonril if for any level of production,the marginal cost of providing the good to an additional consume production oost of an additional unit oould be greater than zero). A good is nonexclusive if it is impossible or very expensive to exclude individuals from consuming it.Public goods are nonrital and nonexclusive.Commodities can be (exclusive and rival (2)exclusive and nonrival.(3)nonexclusive and rival,or (4)nonexclusive and nonrival. Most of the modities in the text to this point have been of the first type.In thi chapter,we focus on commodities of the last type. Nonrival refers to the production of a good or service for one more customer. It usually involves a production process with high fixed costs such as the cost of building a highway or lighthouse.(Remember that fixed cost depends on the period:the cos of lighting the lamp at the lighthouse can vary over time,but does not vary with the number of consumers.)Nonexclusive refers to exchange.where the cost of charging consumers is pmohibitive.Incurring the cost of identifving consumers and collecting from them would result in losses.Some economists focus on the property of publie gods because it is this characteristic that poses the most significant problemsfor eficient provision 11.A village is lo ocated next to 1000 acres of prime grazing land The village presently owns the land and allows all residents to graze cows freely.Some members ofthe village council have suggested that the land is being overgrazed Is this likely to be true?These same members have also suggested that the village should either require grazers to rchase an annual pe nit.or sell off the land to the e grazers.Would either of these be a good ide It is true that the common land is likely to be overgrazed since each individual will their own private co and not the true o cost of grazing.The social cost of grazing is likely to be higher than any one individual's private cost because no one individual has an incentive to take into account how his For individual co zing affects the opp ecide tunities ofothers to graz ain areas durin certain time s of the year,while preserving other areas for other timeso the year.However,the individual will not do this if the resource is common property as any other grazer can come along and freely disrupt
using it. For example, the use of water by one consumer restricts its use by another. Since private marginal cost is below social marginal cost, too much of the resource is consumed by the individual user, creating an inefficient outcome. Each individual using the common property resource considers only his own actions and does not consider how all of the users collectively are impacting the resource. 10. Public goods are both nonrival and nonexclusive. Explain each of these terms and show clearly how they differ from each other. A good is nonrival if, for any level of production, the marginal cost of providing the good to an additional consumer is zero (although the production cost of an additional unit could be greater than zero). A good is nonexclusive if it is impossible or very expensive to exclude individuals from consuming it. Public goods are nonrival and nonexclusive. Commodities can be (1) exclusive and rival, (2) exclusive and nonrival, (3) nonexclusive and rival, or (4) nonexclusive and nonrival. Most of the commodities discussed in the text to this point have been of the first type. In this chapter, we focus on commodities of the last type. Nonrival refers to the production of a good or service for one more customer. It usually involves a production process with high fixed costs, such as the cost of building a highway or lighthouse. (Remember that fixed cost depends on the period under consideration: the cost of lighting the lamp at the lighthouse can vary over time, but does not vary with the number of consumers.) Nonexclusive refers to exchange, where the cost of charging consumers is prohibitive. Incurring the cost of identifying consumers and collecting from them would result in losses. Some economists focus on the nonexclusion property of public goods because it is this characteristic that poses the most significant problems for efficient provision. 11. A village is located next to 1000 acres of prime grazing land. The village presently owns the land and allows all residents to graze cows freely. Some members of the village council have suggested that the land is being overgrazed. Is this likely to be true? These same members have also suggested that the village should either require grazers to purchase an annual permit, or sell off the land to the grazers. Would either of these be a good idea? It is true that the common land is likely to be overgrazed since each individual will consider only their own private cost and not the true social cost of grazing. The social cost of grazing is likely to be higher than any one individual’s private cost because no one individual has an incentive to take into account how his grazing affects the opportunities of others. For example, one individual could decide to graze only in certain areas during certain times of the year, while preserving other areas for other times of the year. However, the individual will not do this if the resource is common property as any other grazer can come along and freely disrupt
the preservation system that the individual has set up.Selling annual permits o ing the land outright would be viable options the overgrazing problem.By requiring the grazers to buy a permit,thei marginal costs will go up and grazing should go down.If an individual purchases the land they will then have an incentive to consider all of the costs associated with using the land.and as a result will use it in such a way that the resource is preserved since they alone capture all of the benefits of preserving the resource 12.Public television is funded in part by private donations,even though anyone with a television set can watch for free.Can you explain this phenomenon in light of the free rider problem? The free-rider pmoblem refers to the difficulty of excluding persons from consuming a nopexclusive commodity.Non-paving consumers can Public tevision is funded in part by contributions.Some viewers contribute,but most watch without paying.hoping that someone else will pay so they will not. To combat this pmoblem these stations (1)ask consumers to assess their true willingness to pav.then (2)ask consumers to contribute up to this amount. and(3)attempttomake everyone else feel guilty for free-riding. 13.Explain why the median voter outcome need not be efficient when majority rule voting determines the level of public spending. The median voter is the citizen with the middle preference:half the voting population is more strongly in favor of the issue and half is more strongly opposed to the issue.Under majority-rule voting where each citizen's vote is weighted equally.the preferred spending level on public-goods provision of the median toter will win an election any other alter However, ajority rule s not n rily effic nt,b cause it gives each citizen's preferences equal weight.For an efficient outcome,we would need a system that measures and aggregates the willingness to pay of those citizens consuming the public good.Majority rule is not this system. However,as we have n in previous chapt th that all dt treated ally ,we aga山 trade-off between equity and efficiency 二、EXERCISES 1.A number of firms have located in the western portion of a town afte single-family residences took up the eastern portion.Each firm produces the same product and,in the process,emits noxious fumes that adversely affect the residents of the communitv. Why is there an externality created by the firms?
the preservation system that the individual has set up. Selling annual permits or selling the land outright would be viable options to the overgrazing problem. By requiring the grazers to buy a permit, their marginal costs will go up and grazing should go down. If an individual purchases the land they will then have an incentive to consider all of the costs associated with using the land, and as a result will use it in such a way that the resource is preserved since they alone capture all of the benefits of preserving the resource. 12. Public television is funded in part by private donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider problem? The free-rider problem refers to the difficulty of excluding persons from consuming a nonexclusive commodity. Non-paying consumers can “free-ride” on commodities provided by paying customers. Public television is funded in part by contributions. Some viewers contribute, but most watch without paying, hoping that someone else will pay so they will not. To combat this problem these stations (1) ask consumers to assess their true willingness to pay, then (2) ask consumers to contribute up to this amount, and (3) attempt to make everyone else feel guilty for free-riding. 13. Explain why the median voter outcome need not be efficient when majority rule voting determines the level of public spending. The median voter is the citizen with the middle preference: half the voting population is more strongly in favor of the issue and half is more strongly opposed to the issue. Under majority-rule voting, where each citizen’s vote is weighted equally, the preferred spending level on public-goods provision of the median voter will win an election against any other alternative. However, majority rule is not necessarily efficient, because it gives each citizen’s preferences equal weight. For an efficient outcome, we would need a system that measures and aggregates the willingness to pay of those citizens consuming the public good. Majority rule is not this system. However, as we have seen in previous chapters, majority rule is equitable in the sense that all citizens are treated equally. Thus, we again find a trade-off between equity and efficiency. 二、EXERCISES 1. A number of firms have located in the western portion of a town after single-family residences took up the eastern portion. Each firm produces the same product and, in the process, emits noxious fumes that adversely affect the residents of the community. a. Why is there an externality created by the firms?
Noxious fumes created by firms enter the utility function of residents,and the residents have no control over the quantity of the fumes.We can assume that the fumes de ecrease the utility of the residents(ie.,they are a negative externality)and lower property values Do you think that private bargaining can resolve the problem?Explain If the residents anticipated the location of the firms,housing prices should reflect the disutility of the fumes;the externality would have been internalized by the bousing market in housing prices.If the noxious fumes ,private bargaining probem of the externality only if there are a relatively mall numbe and families)and property rights are well specified.Private bargaining would rely on each family's willingness to pay for air quality,but truthful revelation might not be possible.All this will be complicated by the adaptability of the production technology known to the firms and the employ ent relations between the firms and families.It is unlikely that private bargaining will resolve the problem. How might the community determine the efficient level ofair quality? The community oould determine the economically efficient level of air quality by aggregating the families'willingness to pay and equating it with the marginal cost of pollution reduction.Both steps involve the acquisition oftruthful information 2.A computer p everyon homh四copyrigh地飞a5gaig少” aovati program for perso computers and that exposure to a wide variety of computer programs will inspir young programmers to create even more innovative programs.Considering the marginal social benefits possibly gained by this proposal,do you agree with this position? Computer software as information is a classic example of a public good. Since it can be coped.the ng sofiware to an additional user is near zero.Therefore,software is nonrival.(The fixed costs of creating software are high,but the variable costs are low. Furthermore,it is expensive to exclude consumers from copying and using software because copy protection schemes are available only at high cost or high inconvenience tousers nonexclusive.As both nonrival and nonexe usive,computer software suffers the problemsof public goods provision:the presence of free-riders makes it difficult or impossible for markets to provide the efficient level of software.Rather than regulating this market directly,the legal system guarantees property rights to fware.If copyright were it is likely that the softwar re market would or that there would be significant decrease in the quantity of software developed and supplied
Noxious fumes created by firms enter the utility function of residents, and the residents have no control over the quantity of the fumes. We can assume that the fumes decrease the utility of the residents (i.e., they are a negative externality) and lower property values. b. Do you think that private bargaining can resolve the problem? Explain. If the residents anticipated the location of the firms, housing prices should reflect the disutility of the fumes; the externality would have been internalized by the housing market in housing prices. If the noxious fumes were not anticipated, private bargaining could resolve the problem of the externality only if there are a relatively small number of parties (both firms and families) and property rights are well specified. Private bargaining would rely on each family’s willingness to pay for air quality, but truthful revelation might not be possible. All this will be complicated by the adaptability of the production technology known to the firms and the employment relations between the firms and families. It is unlikely that private bargaining will resolve the problem. c. How might the community determine the efficient level of air quality? The community could determine the economically efficient level of air quality by aggregating the families’ willingness to pay and equating it with the marginal cost of pollution reduction. Both steps involve the acquisition of truthful information. 2. A computer programmer lobbies against copyrighting software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create even more innovative programs. Considering the marginal social benefits possibly gained by this proposal, do you agree with this position? Computer software as information is a classic example of a public good. Since it can be costlessly copied, the marginal cost of providing software to an additional user is near zero. Therefore, software is nonrival. (The fixed costs of creating software are high, but the variable costs are low.) Furthermore, it is expensive to exclude consumers from copying and using software because copy protection schemes are available only at high cost or high inconvenience to users. Therefore, software is also nonexclusive. As both nonrival and nonexclusive, computer software suffers the problems of public goods provision: the presence of free-riders makes it difficult or impossible for markets to provide the efficient level of software. Rather than regulating this market directly, the legal system guarantees property rights to the creators of software. If copyright protection were not enforced, it is likely that the software market would collapse, or that there would be a significant decrease in the quantity of software developed and supplied
which would reduce the marginal social benefits.Therefore,we do not agree with the computer programmer. 3.Assume that scientifie studies provide you with the following information concerning the benefits and costs ofsulfur dioxide emissions: Benefits of abating(reducing)emissions: MB=500-20A Costs ofabating emissions MC=200+5A where A is the quantity abated in millions of tons and the benefits and costs are given in dollars per ton. a.What is the socially efficient level ofemissions abatement? To find the socially efficient level of emissions abatement,set marginal benefit equal to marginal cost and solve for A: 500-20A=200+5A A=12 b.What are the marginal benefit and marginal cost of abatement at the socially efficient level of abatement? Plug A=12 into the marginal benefit and marginal cost functions to find the benefit and cost: MB=50020(12260 MC=200+5(12260. c.What happens to net social benefits (benefits minus costs)if you abate 1 million more tons than the efficient level?1 million fewer? Net social benefits are the area under the marginal benefit curve minus the area under the marginal cost curve.At the socially efficient level of abatement this is equal to area a+b+c+d in Figure 18.3.cor 0.(500-200)(12)=1800 million dollars If you abate 1 million more tons then the net social benefit is are a+b+c+d-e or 1800-0.5(265-2401=1800-12.5=1787.5 million dollars. If you abate 1 million less tons then the net social benefit is area a+bor 0.5600-28011)+(280-25511)+0.5255-200)(111787.5 million dollars d.Why is it socially efficient to set marginal benefits equal to marginal costs rather than abating until total benefits equal total costs? It is socially efficient to set marginal benefit equal to marginal cost rather than total benefit equal to total cost because we want to maximize net benefits.which are total benefit minus total cost Maximizing total benefit minus total co means that at the margin,the last unit abated will have an
which would reduce the marginal social benefits. Therefore, we do not agree with the computer programmer. 3. Assume that scientific studies provide you with the following information concerning the benefits and costs of sulfur dioxide emissions: Benefits of abating (reducing) emissions: MB=500-20A Costs of abating emissions: MC=200+5A where A is the quantity abated in millions of tons and the benefits and costs are given in dollars per ton. a. What is the socially efficient level of emissions abatement? To find the socially efficient level of emissions abatement, set marginal benefit equal to marginal cost and solve for A: 500-20A=200+5A A=12. b. What are the marginal benefit and marginal cost of abatement at the socially efficient level of abatement? Plug A=12 into the marginal benefit and marginal cost functions to find the benefit and cost: MB=500-20(12)=260 MC=200+5(12)=260. c. What happens to net social benefits (benefits minus costs) if you abate 1 million more tons than the efficient level? 1 million fewer? Net social benefits are the area under the marginal benefit curve minus the area under the marginal cost curve. At the socially efficient level of abatement this is equal to area a+b+c+d in Figure 18.3.c or 0.5(500-200)(12)=1800 million dollars. If you abate 1 million more tons then the net social benefit is area a+b+c+d-e or 1800-0.5(265-240)(1)=1800-12.5=1787.5 million dollars. If you abate 1 million less tons then the net social benefit is area a+b or 0.5(500-280)(11)+(280-255)(11)+0.5(255-200)(11)=1787.5 million dollars. d. Why is it socially efficient to set marginal benefits equal to marginal costs rather than abating until total benefits equal total costs? It is socially efficient to set marginal benefit equal to marginal cost rather than total benefit equal to total cost because we want to maximize net benefits, which are total benefit minus total cost. Maximizing total benefit minus total cost means that at the margin, the last unit abated will have an
equal cost and benefit.Choosing the point where total benefit is equal to total cost will result in too much abatement,and would be analogousto choosing to produe where total revenue was equal to total cost. If tota revenue was always equal to total cost by choice,then there would never be any profit.In the case of abatement,the more we abate,the costlier it is Given that funds will tend to be scarce,dollars should be allocated to abatement the benefit of the last unit of abatement isater than or equal to the cost of the last unit of abatemen MC 500 a 6 MB A 111213 25 Figure18.3.c 4.Four firms located at different points on a river dump various quantities of efuent into it.The effuent adversely affects the quality of swimming for homeowners who live downstream.These people can build swimming pools to avoid swimming in the river,and firms can purchase filters that eliminate harmful chemicals in the material dumped in the river.As a policy advisor for a regional planning organization.how would you compare and contrast the following options for dealing with the harmful effect of the effluent: An equal-rate effluent fee on firms located on the river. First,one neds tokow the valueto homeowners of swimming in the river This information can be difficult to obtain,because homeowners will have an incentive to overstate this value.As an upper boundary,if there are m considerations other than swimming.one could use the cost of building
equal cost and benefit. Choosing the point where total benefit is equal to total cost will result in too much abatement, and would be analogous to choosing to produce where total revenue was equal to total cost. If total revenue was always equal to total cost by choice, then there would never be any profit. In the case of abatement, the more we abate, the costlier it is. Given that funds will tend to be scarce, dollars should be allocated to abatement only so long as the benefit of the last unit of abatement is greater than or equal to the cost of the last unit of abatement. $ A 11 12 13 25 500 MC MB a b c d e Figure 18.3.c 4. Four firms located at different points on a river dump various quantities of effluent into it. The effluent adversely affects the quality of swimming for homeowners who live downstream. These people can build swimming pools to avoid swimming in the river, and firms can purchase filters that eliminate harmful chemicals in the material dumped in the river. As a policy advisor for a regional planning organization, how would you compare and contrast the following options for dealing with the harmful effect of the effluent: a. An equal-rate effluent fee on firms located on the river. First, one needs to know the value to homeowners of swimming in the river. This information can be difficult to obtain, because homeowners will have an incentive to overstate this value. As an upper boundary, if there are no considerations other than swimming, one could use the cost of building
swimming pools,either a pool for each homeowner or a public pool for all homeowners. Next,one needs to know the the abatement technology is well understood,this information shoul be readily obtainable.If the abatement technobgy is not understood,an estimate based on the firms'knowledge must be used. The choice of a policy tool will depend on the marginal benefits and costs of abatement.If firms are charged an equal-rate effluent fee,the firms will to the fee If this reducton higheou topermit wimm ng,the could be increased.Alternatively.revenue from the fees could be used to provide swimming facilities,reducing the need for effluent reduction. An equal standard per firm on the level ofeffluent that each can dump. Standards will be efficient only if the policy maker has complte information regarding the marginal costs and benefits of abatement,so that the efficient level of the standard can be determined.Moreover,the standard will not encourage firms to reduce effluents further when new filtering technologies become available. A transferable effluent permit system in which the aggregate level of effluent is fixed and all firms receive identical permits. A transferable effluent permit system requires the policy maker to determine the efficient effluent standard.Once the permits are distributed and a market develops,firms with a higher cost of abatement will purchas permit from firms with lower abatement costs However,unless permit are sol initially,rather than merely distributed,no revenue will be generated for the regional organization. 5.Medical research has shown the negative health effects of"secondhand"smoke Recent social trends point to growing intolerance of smoking in public areas.If you wish to ontinue smoking despite tougher anti smoking ibe the e effect of the lowing le ive proposals on your behavio As a result of these programs,do you,the individual smoker,benefit? Does society benefit as a whole? Since smoking in public areas is similar to polluting the air.the programs proposed here are similar to those examined for air pollution.A bill to lower tar and nicotine levels is similar to an emissions standard,and a tax on cigarettes is similartoan emissions fee g moking permitis similar to a system of emissions permits,assuming that the permits would not be transferable.The individual smoker in all of these programs is being forced to internalize the externality of"second-hand"smoke and will be worse off Society will be better off if the benefits of a particular the benefits of reducing second-hand smoke are uncertain,and assessing those benefits is costly
swimming pools, either a pool for each homeowner or a public pool for all homeowners. Next, one needs to know the marginal cost of abatement. If the abatement technology is well understood, this information should be readily obtainable. If the abatement technology is not understood, an estimate based on the firms’ knowledge must be used. The choice of a policy tool will depend on the marginal benefits and costs of abatement. If firms are charged an equal-rate effluent fee, the firms will reduce effluents to the point where the marginal cost of abatement is equal to the fee. If this reduction is not high enough to permit swimming, the fee could be increased. Alternatively, revenue from the fees could be used to provide swimming facilities, reducing the need for effluent reduction. b. An equal standard per firm on the level of effluent that each can dump. Standards will be efficient only if the policy maker has complete information regarding the marginal costs and benefits of abatement, so that the efficient level of the standard can be determined. Moreover, the standard will not encourage firms to reduce effluents further when new filtering technologies become available. c. A transferable effluent permit system in which the aggregate level of effluent is fixed and all firms receive identical permits. A transferable effluent permit system requires the policy maker to determine the efficient effluent standard. Once the permits are distributed and a market develops, firms with a higher cost of abatement will purchase permits from firms with lower abatement costs. However, unless permits are sold initially, rather than merely distributed, no revenue will be generated for the regional organization. 5. Medical research has shown the negative health effects of “secondhand” smoke. Recent social trends point to growing intolerance of smoking in public areas. If you are a smoker and you wish to continue smoking despite tougher anti smoking laws, describe the effect of the following legislative proposals on your behavior. As a result of these programs, do you, the individual smoker, benefit? Does society benefit as a whole? Since smoking in public areas is similar to polluting the air, the programs proposed here are similar to those examined for air pollution. A bill to lower tar and nicotine levels is similar to an emissions standard, and a tax on cigarettes is similar to an emissions fee. Requiring a smoking permit is similar to a system of emissions permits, assuming that the permits would not be transferable. The individual smoker in all of these programs is being forced to internalize the externality of “second-hand” smoke and will be worse off. Society will be better off if the benefits of a particular proposal outweigh the cost of implementing that proposal. Unfortunately, the benefits of reducing second-hand smoke are uncertain, and assessing those benefits is costly
A bill is proposed that would lower tar and nicotine levels in all cigarettes. The smoker will most likely try to maintain a constant level of consumption ofnicotineandwilincea e his or her may not benefit from this plan if the total amount of tar and niootine released into the air is the same. A tax is levied on each pack of cigarettes sold. Smokers might turn to cigars.pipes or might start rolling their own cigarettes.The extent of the effect of a tax on cigarette consumption depends on the elasticity of demand for cigarettes.Again,it is questionabe whether society will benefit. Smokers would be required to carry government issued smoking permits at all times. Smoking permits would effectively transfer property rights to can airfrom smokers to non-smokers The main obstacle to society benefiting from such a proposal would be the high cost of enforcing a smoking permits system. In addition,the cost of the permit raises the effective price of the cigarettes and the resulting affecton quantity smoked will depend on the elasticity of demand. 6.The market for paper in a particular region in the United States is characterized by the following demand and supply curves Q-160,000-2000 P and=40,000+2000P where o is the quantity demanded of paper in 100 Ib.lots,s is the quantity demanded of paper in 100 lb.lots,and P is the price per 100 Ib.lot of paper Currently there is no attempt to regulate the dum ing of ef uent into str and rivers by the pape a result,dumping is widespread. marginal external cost (MEC)associated with the production of paper is given by the curve Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent. The equilibrium price and output would be where quantity demand is equal quantity supplied: 160,000-2000P=40,000+2000P 4000P=120,000 P=$30 per 100 Ib.lot Q=100.000 lots of 100 Ib.each
a. A bill is proposed that would lower tar and nicotine levels in all cigarettes. The smoker will most likely try to maintain a constant level of consumption of nicotine, and will increase his or her consumption of cigarettes. Society may not benefit from this plan if the total amount of tar and nicotine released into the air is the same. b. A tax is levied on each pack of cigarettes sold. Smokers might turn to cigars, pipes, or might start rolling their own cigarettes. The extent of the effect of a tax on cigarette consumption depends on the elasticity of demand for cigarettes. Again, it is questionable whether society will benefit. c. Smokers would be required to carry government issued smoking permits at all times. Smoking permits would effectively transfer property rights to clean air from smokers to non-smokers. The main obstacle to society benefiting from such a proposal would be the high cost of enforcing a smoking permits system. In addition, the cost of the permit raises the effective price of the cigarettes and the resulting affect on quantity smoked will depend on the elasticity of demand. 6. The market for paper in a particular region in the United States is characterized by the following demand and supply curves QD = 160,000 − 2000P and QS = 40,000+ 2000P, where QD is the quantity demanded of paper in 100 lb. lots, QS is the quantity demanded of paper in 100 lb. lots, and P is the price per 100 lb. lot of paper. Currently there is no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost (MEC) associated with the production of paper is given by the curve . a. Calculate the output and price of paper if it is produced under competitive conditions and no attempt is made to monitor or regulate the dumping of effluent. The equilibrium price and output would be where quantity demand is equal to quantity supplied: 160,000-2000P=40,000+2000P 4000P=120,000 P=$30 per 100 lb. lot Q=100,000 lots of 100 lb. each