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 setCHAPTER 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