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Which activity generates a negative externality?
a) You buy a new car, then discover it needs a new transmission.
b) Your next-door neighbor mows the lawn at 5 A.M.
c) The only two coffee shops in town conspire to raise prices.
d) After Jane buys health insurance, she begins riding her motorcycle on the weekends.
 
The marginal benefit of pollution emissions _____ as the quantity of pollution emissions _____.
a. decreases; increases
b. increases; increases
c. decreases; decreases
d. remains unchanged; goes up or down
 
In reality, the Coase theorem is unlikely to work because:
a) most people don't care if they are affected by an external cost.
b) externalities are rare and difficult to identify.
c) transaction costs are often high, making negotiations difficult.
d) prices will increase as a result of ending the externality.
 
Suppose that the marginal cost from the production process itself (to the producer) is 0.
The market-determined quantity of pollution is _____ tons.
a. 0
b. 2
c. 4
d. 8
 
The extra safety your neighbor might have because everyone else in the area has purchased burglar alarms is a(n):
a) private cost.
b) external cost.
c) private benefit.
d) external benefit.
 
Which statement describes a positive externality?
a) Sam dug a pond, so he could go fishing, but the pond has contributed to an explosion of mosquitoes in your neighborhood.
b) Sam has dozens of cats, and they come into your yard to hunt the birds that come to your birdbath.
c) Sam buys a dilapidated house, renovates it, and increases the property values of all the houses in the neighborhood.
d) Liquid waste from Sam's chicken farm flows into a neighbor's well water.
 
Licenses that are exchangeable and that enable the holder to pollute up to a specified amount during a given period are called:
a) emissions taxes.
b) environmental standards.
c) tradable emissions permits.
d) Pigouvian taxes.
 
A Pigouvian subsidy is:
a) designed to discourage activities generating externalities.
b) designed to encourage activities generating external benefits.
c) appropriate when the marginal social cost curve is above the marginal cost of production curve.
d) appropriate when the marginal social cost curve and the marginal social benefit curve intersect at an inefficient level.
 
When the consumption of a good generates positive external benefits, the market tends to produce:
a) too much of the good, since there are positive external benefits from the consumption of the good.
b) too little of the good, since the market does not consider the positive external benefits from the consumption of the good.
c) there are no positive external benefits from the consumption of the good.
d) externalities are rare and difficult to identify.
 
A market economy will produce _____ without any government regulation in the presence of an externality.
a) too little pollution
b) too much pollution
c) the socially optimal amount of pollution
d) the amount of pollution that maximizes total surplus
 
Tony has a cell phone, and his service provider is Verizon. When he calls his wife, Meleah, who is also a
Verizon customer, he does not have to pay for those minutes. The more Verizon customers there are
in the market, the more benefit Tony receives. This is:
a. a network externality.
b. the Coase theorem.
c. a Pigouvian subsidy.
d. a technology spillover.
 
For most pollutants, the socially efficient level of pollution is zero.
a) True
b) False
 
An emissions tax creates efficiency in the sense that it will ensure
that the __________ of pollution is equal for all sources of pollution.
marginal benefit
 
In the case of a negative externality, the market produces too ____ of
the good if it does not take into account the externality
much
 
In the case of a positive externality, the market produces too ____ of the good if it does not
take into account the externality
little
 
From a producers prospective, the benefit from emitting one more unit of pollution is measured
by the costs the producer saves from not having to do what?
buy and install expensive pollution-control equipment
 
One can measure the marginal social benefit of an additional unit of pollution by finding out  what is
the ___________ to pay for the right to emit this unit of pollution among all the polluters in the society
highest willingness
 
Polluters know that avoiding pollution requires using ___________ and
therefore reduction of pollution carries a cost
scarce resources
 
When externalities are present, the market fails to produce the optimal amount of the good
True
 
When an externality can be directly observed, then it can be regulated through what?
direct controls, taxation, subsidization
 
When an externality cannot be directly observed, then the government must implement policies that do what?
aim at generating the right amount of the activity that produces the externality
 
One of the problems with pollution is that it inflicts a cost on who?
The entire society
 
Companies and individuals who create pollution typically bear the cost of their negative externality?
False
 
Pollution generates what two things for society?
costs and benefits
 
A term that describes the spread of knowledge among individuals and firms:
it measures the external benefit that occurs when new knowledge is discovered in one application and then
this knowledge is used in other applications
Technology Spillover
 
This occurs when the value of a good to a consumer increases as more people own or use the good;
frequently occur in technology driven sectors of the economy
Network Externality
 
The additional cost imposed on society of an additional unit of pollution
Marginal social cost of pollution
 
A principal source of market failure occurs when the market fails to consider side effects or _______ of
consumption or production decisions
externalities
 
A ______ externality is a side effect that imposes costs to others
negative
 
A ________ externality is a side effect that provides benefits to to others
positive
 
The marginal cost of pollution is a(n) ______ sloping line, since each additional unit of pollution represents
a greater cost to society as the environment deteriorates
upward
 
The additional benefit to society from an additional unit of pollution
Marginal Social Benefit of pollution
 
Cleaning up pollution requires the use of __________ that would otherwise be used to produce goods and services
scarce resources
 
The Marginal social benefit of pollution is a (n) ________ sloping line; when pollution is negligible,  an additional unit
has a high benefit to society; when there is a lot of pollution, an additional unit brings little benefit to society
downward
 
What is the optimum level of pollution for a society?
When marginal social cost (of pollution) = marginal social benefit (of pollution)
 
It is likely that the market will generate the optimal amount of pollution
False
 
In the absence of government intervention, polluters will pollute up to the point where
Marginal Social Benefit is equal to what?
Zero
 
With network externality, the _________ to the individual is dependent on the number of other individuals
who use the good
marginal benefit
 
A good with a network externality exhibits __________: as more people use the good, even more people are inclined
to use the good and if fewer people use the good, then fewer people are inclined to use the good
positive feedback
 
Companies recognize the importance of network externalities and the positive feedback effect, and they sometimes
offer a new product at a very ____ price in hopes of generating a strong network effect
low
 
The quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for
Socially Optimal Quantity of Pollution
 
The market level of pollution is ______ than the optimal level of pollution, and that market level of pollution
is ______ since, at this level of pollution, the marginal social cost of pollution is ______ than the marginal
social benefit of pollution
greater, inefficient, greater
 
A reduction in pollution emissions will result in a large _____ in the total social cost of pollution emissions, while
causing ____ change in the total social benefits of pollution emissions
decrease, little
 
A reduction in pollution emissions, does what to total surplus?
increases it
 
Further reduction in pollution emissions will continue to increase total surplus until that level of pollution
emissions is achieved where ____=____
MSC, MSB
 
According to this, the private sector can correct externalities and produce the efficient level of the good, provided
that transaction costs are sufficiently low
Coase Theorem
 
This states that externalities need not lead to inefficiencies, since people have an incentive to make mutually beneficial
transactions, which leads individuals to take externalities into account when making decisions, provided that transaction
costs are not too great
Coase Theorem
 
When individuals take into account externalities when making decisions
internalizing the externality
 
This does not occur if the cost of communication between the affected parties is too high, if the cost of making a
legally binding contract is too great, or if there are costly delays in the bargaining.
Internalization of an externality
 
When transaction costs prevent people from internalizing the externality, what must happen to correct
the market and its failure to internalize the externality?
Government Intervention
 
The government can reduce the amount of pollution by doing what?
enforcing environmental standards
 
Rules that protect the environment, by specifying what actions need to be taken by producers and consumers
Environmental Standards
 
Environmental standards are inefficient
True
 
Economists believe that pollution can be reduced at a lower cost through the use of what?
taxes and tradable permits
 
Taxes that depend on the amount of pollution a firm produces
Emissions Taxes
 
An emissions tax is more efficient than an environmental standard, since the emissions tax ensures that the marginal
benefit of pollution is equal for all sources of pollution, while environmental standard does not consider the marginal
benefit of pollution when it is enforced
True
 
_____ can be used to reduce any kind of activity that generates a negative externality
Taxes
 
The use of taxes to address the problem of negative externality, used to reduce external costs
Pigouvian Tax
 
Both _______ and _______ create an incentive for producers to create and use less-polluting technology
emissions taxes, tradable emissions permits
 
What is another name for tradable emissions permits?
Cap and trade systems
 
Cap and Trade systems are efficient with pollution that is dispersed, but is less effective with pollution
that is ________ localized
geographically
 
When an activity generates an external benefit, or a benefit received by someone other than the people directly
involved in the transaction, the market does not produce ______ of this good
enough
 
In the case of a positive externality, the government must target what, rather than the external benefit, because
the external benefit can be difficult or impossible to measure
original activity
 
Although effective as a policy, Pigouvian taxes are difficult to implement since government officials do not
always know with certainty what level of tax is the efficient level of tax
True
 
licenses granted by the government that give the holder of the license permission to emit limited quantities of the
pollutant; can be bought and sold by the polluter
Tradable Emissions Permits
 
When the level of pollution is limited by tradable emissions permits, this results in producers basing their decision about
whether or not to pollute on the basis of what?
costs of reducing their pollution
 
What is the government's greatest challenge when implementing tradable emissions permits?
determining the optimal number of permits for the economy
 
To gain the socially optimum amount of a positive externality requires what?
Pigouvian Subsidy
 
The creation of _______ poses the greatest single source of external benefits in the modern economy
technology
 
An uncompensated cost that an individual or firm imposes on others; also known as a negative externality
external cost
 
An uncompensated benefit that an individual or firm confers on others; also known as positive externality
External Benefit
 
External Benefits and external costs
Externalities
 
The costs to individuals of making a deal
Transaction Costs
 
A payment designed to encourage activities that yield external benefits
Pigouvian Subsidy
 
Taxes that are designed to reduce external costs
Pigouvian Taxes
 
Suppose the local government decides to tax emission of sulfur dioxide. The optimal Pigouvian tax equals the marginal
cost of Pollution at the ________ quantity of pollution
socially optimal
 
When the government implements an optimal Pigouvian tax, it shifts the supply curve up by the _________
external cost