ECO 2023 Lecture Notes - Lecture 10: Coase Theorem, Economic Equilibrium, Sulfur Dioxide

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Published on 6 Jul 2017
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Which of the following is a difference between corrective taxes and tradable pollution permits?
With a corrective tax the government sets the price of pollution; with tradable pollution
permits, demand and supply set the price of pollution.
Refer to Figure 10-11. Taking only private value and private cost into account, total surplus at
the market equilibrium amounts to
d.
$4,320.
Which of the following is an advantage of tradable pollution permits?
The initial allocation of permits to firms does not affect the efficiency of the market.
The difference between a corrective tax and a tradable pollution permit is that
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
Refer to Figure 10-4. This market is characterized by
c.
a negative externality.
Most taxes distort incentives and move the allocation of resources away from the social
optimum. Why do corrective taxes avoid the disadvantages of most other taxes?
d.
Because corrective taxes correct for market externalities, they take into consideration the well-
being of bystanders.
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What economic argument suggests that if transactions costs are sufficiently low, the
equilibrium is economically efficient regardless of how property rights are distributed?
b.
the Coase theorem
Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate
units of pollution from their production processes. For example, for Firm A to eliminate one
unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would
cost a total of $103.
Refer to Table 10-6. If the government charged a fee of $85 per unit of pollution, how many
units of pollution would the firms eliminate altogether?
b.
12
For the purpose of protecting the environment, upon which of the following approaches do we
rely more and more as time goes by?
a.
the requirement that decision makers bear the full costs of their actions
If we know that the demand curve for good x fails to reflect the total value to society of that
good, then we know that
a.
the market for good x is characterized by a positive externality.
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Figure 10-1
Refer to Figure 10-1. This graph represents the tobacco industry. Without any government
intervention, the equilibrium price and quantity are
d.
$1.60 and 42 units, respectively.
Refer to Figure 10-6. Which price represents the equilibrium price of the product in this
market?
c.
P
A local manufacturing plant that emitted sulfur dioxide was forced to stop production because
it did not comply with local clean air standards. This decision provides an example of
c.
a direct regulation of an externality.
A corrective tax
a.
places a price on the right to pollute.
One reason that private solutions to externalities do not always work is that
d.
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Document Summary

With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to. The difference between a corrective tax and a tradable pollution permit is that a corrective tax sets the price of pollution and a permit sets the quantity of pollution. This market is characterized by a negative externality. Most taxes distort incentives and move the allocation of resources away from the social optimum. Because corrective taxes correct for market externalities, they take into consideration the well- being of bystanders. What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? the coase theorem. The following table shows the total costs for each of four firms (a, b, c, and d) to eliminate units of pollution from their production processes.

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