ECON-1006EL Lecture Notes - Lecture 1: Pigovian Tax, Coase Theorem, Marginal Cost

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pearmosquito296

20 Jun 2018

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-1006EL

Professor

Eastman

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Micro

Part C — Matching Deﬁnitions (15%)

Externalities: External Costs and Beneﬁts

Marginal External Cost (MEC): An uncompensated cost that an individual or ﬁrm imposes on

others.

Marginal External Beneﬁt (MEB): A beneﬁt that an individual or ﬁrm confers on others without

receiving compensation.

Marginal Private Beneﬁt (MPB): The additional beneﬁt the polluter receives from producing

another unit of pollution

Negative Externality: Also known as external costs.

Positive Externalities: Also known as external beneﬁts

Internalize the Externality: When individuals take external costs or beneﬁts into account.

Emissions Tax: A tax that depends on the amount of pollution a iim produces.

Transaction Costs: The costs to individuals of making a deal.

Coase Theorem: This states that even in the presence of externalities an economy can always

reach an efﬁcient solution given that transaction costs are sufﬁciently low.

Pigouvian Tax: These are designed to reduce external costs.

Pigouvian Subsidy: A payment designed to encourage actives that yeild external beneﬁts.

Technology Spillover: An external beneﬁt that results when knowledge spreads among

individuals and ﬁrms.

Environmental Standards: Rules that protect the environment by specifying nations by

producers and consumers.

Marginal Social Beneﬁt Of Pollution(MSB): The addition gain to society as a whole from an

additional unit of pollution. MSB = MPB + MEB

Marginal Social Cost of Pollution (MSC): The addition cost imposed on society as a whole by

additional unit of pollution. MSC = MPC + MEC

Marginal Private Cost of Pollution (MPC): is the additional cost imposed on the polluter if the

polluter creates another unit of pollution.

Tradable Emissions Permits: Licenses to emIt limits quantities of pollutants that can be bought

and sold by polluters.

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Document Summary

Marginal external cost (mec): an uncompensated cost that an individual or rm imposes on others. Marginal external bene t (meb): a bene t that an individual or rm confers on others without receiving compensation. Marginal private bene t (mpb): the additional bene t the polluter receives from producing another unit of pollution. Internalize the externality: when individuals take external costs or bene ts into account. Emissions tax: a tax that depends on the amount of pollution a iim produces. Transaction costs: the costs to individuals of making a deal. Coase theorem: this states that even in the presence of externalities an economy can always reach an ef cient solution given that transaction costs are suf ciently low. Pigouvian tax: these are designed to reduce external costs. Pigouvian subsidy: a payment designed to encourage actives that yeild external bene ts. Technology spillover: an external bene t that results when knowledge spreads among individuals and rms.

Related Questions

Question 1

An externality

		enhances market efficiency.
		is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
		is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
		refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

		the high price of goods and services
		individuals; firms
		market prices; market incomes
		oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

		the level of output is too high, and the supply curve should shift to the left to account for the externality.
		the price of the product is too high, and production should be expanded to lower the price.
		the level of output is optimal, and there should be no change in the supply curve.
		the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

		MSC = MPC - MD
		MPC = MSC + MD
		MSC = MPC + MD
		MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

		the demand curve will shift to the left.
		the supply curve will shift to the right.
		the demand curve will shift to the right
		the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

		government intervention is always needed if externalities are present.
		assigning property rights is the only thing the government should do in a market economy.
		if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
		a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

		the use of private property rights on cattle and common property rights on buffalo.
		the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
		cattle existing in Europe also while buffalo were specific to North America.
		the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

		cause firms to generate less pollution than their allowed limits.
		raise the production costs of all firms.
		cause firms to generate more pollution than their allowed limits.
		lower the production costs of all firms.

5 points

Question 9

A cap-and-trade policy

		has a set number of permits.
		allows polluters to trade permits.
		caps the total level of pollution allowed.
		all of the above.

Question 10

A Pigouvian tax corrects for

		market congestion.
		market losses.
		inefficient sales.
		low market prices.

harlequingoldfish8

1. What is meant by the Pareto Efficiency of an allocation of resources? How unique is it for an allocation of resources to be Pareto efficient? What consideration is overlooked by Pareto efficiency? What does the First Theorem of Welfare Economics assert?

2. What is the distinction between a pecuniary externality versus a real (or technical) externality? Give an example of an interaction that constitutes a pecuniary externality. Give an example of an interaction that constitutes a real externality.

3. Imagine a price-taking producer whose production causes a real, negative externality. Draw a diagram to depict the economic outcome in this case, and how this differs from what is the socially optimal outcome. Also, depict Pigou's tax proposal to correct the externality.

4. Acme Charcoal is a charcoal producing company in Cleveland. Its total cost function is

C(QA) = 5 + 20QA + 2QA2, where QA is charcoal production per week in thousands of tons.

a) What is the formula for Acme's marginal cost function?

b) This is the nineteenth century, and no pollution control laws have yet been passed in the US. If charcoal sells in Cleveland for $420 per thousand tons, how much charcoal will Acme produce?

Clearview is an eyeglass company located near Acme Charcoal in Cleveland. Clearview's production of eyeglasses is negatively affected by the smoke from Acme's production of charcoal. Clearview's total cost function to produce eyeglasses is

C(QE) = 60QE + 2QE2 + 1.5QA where QE is Clearview's weekly production of eyeglasses and QA is Acme's weekly production of charcoal in thousands of tons.

c) What is the extra cost to Clearview from an additional thousand tons of charcoal production by Acme?

d) Eyeglasses sell for $160 per eyeglass. How many eyeglasses would you predict that Clearview produces per week?

e) How much profit do Acme and Clearview each earn in this situation?

f) What is the socially optimal level of production of charcoal by Acme? Explain the reason for your answer.

g) If Acme produced the level of production given in your answer to (f), how much would Clearview choose to produce?

h) Given your answer to (f) and (g), how much profit would Acme and Clearview each earn in that situation?

i) How might the outcome in (f) and (g) be brought about according to Pigou?

j) How might the outcome in (f) and (g) be brought about according to Coase if (I) the law makes Acme legally liable for damages resulting from his pollution, or (II) the law imposes no liability on Acme for the consequences of his pollution?

5. The Burnbright Electric Power Company has a coal-fired power plant located in Northern Utah. Consider three alternative scenarios.

(i) The air pollution generated by burning coal at the Burnbright plant doesnâ't cause any pollution, but the trucks that ferry coal to the plant on a daily basis cause traffic congestion for the residents of a small town nearby.

(ii) The air pollution generated by burning coal at the Burnbright plant causes severe haze to occur at the Grand Canyon National Park during the summer season.

(iii) The air pollution generated by burning coal at the Burnbright plant contributes to worldwide greenhouse gas emissions, which contribute to global warming over the next fifty years.

a) Do you think it is likely that Coasian bargaining will take care of the externality and generate a Pareto-efficient allocation of resources without any need for government intervention to control the externality? Answer for each case separately, and explain the reasons for your answer.

b) What are transaction costs? How might they enter the picture in each case? How could they affect the outcome of Coasian bargaining?

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ECON-1006EL Lecture Notes - Lecture 1: Pigovian Tax, Coase Theorem, Marginal Cost

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