ECON1101 Chapter Notes - Chapter 9: Coase Theorem, Externality, Overfishing

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22 Jul 2018

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9. 2 negative production externality: negative production externality a negative production externality represents a cost incurred by someone who is not involved in the production of a given good. Other examples of negative production externalities: harmful production activities: by adopting inadequate production technologies, firms impose a cost on society by increasing air, water, and noise pollution. What is fundamentally different in this market is that the coase"s conditions no longer apply. The sheer number of buyers and sellers creates high transaction costs as those involved in the market struggle to negotiate with all the relevant parties. Government intervention is then necessary to fix what the market cannot handle on its own. A simple set of policies (taxes and subsidies) can achieve this objective. 9. 4 negative consumption externality: negative consumption externality a negative consumption externality represents a cost incurred by someone who is not involved in the consumption of a given good.

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

A contentious issue is brewing between dog lovers and wetland lovers in Bozemans 100-Acre Park (also known as The Dinosaur Park located between Oak and Baxter). The issue goes something like this:

The park contains two manmade ponds, whose purpose was to fulfill a wetlands permit within the city limits. The Corps of Engineers was promised 1.3 acres of lake wetlands within the park. In 2008 the total wetland area within the park was 1.2 acres. In October 2010 total wetland acreage decreased to .76 acres.

The two stakeholders involved each express different claims as to why the total wetland acreage has decreased and advocate for different outcomes. The following table summarizes each stakeholders claims and demands on the city. Medium to hard

The parties involved	Wetland lovers	Dog lovers
The claim:	Wetland lovers claim that the loss of wetland acreage is the result of vegetation lost along the water's edge primarily as a result of off leash dogs that are damaging the riparian area.	Dog lovers claim that there is no credible evidence to suggest that dogs swimming in the lake water are the cause of the wetland shrinkage.
The demands:	Wetland lovers, like Lynn Bacon (a biologist and wetland's specialist for the County), are demanding that the 100-Acre Park be converted from an off leash dog walking park to a leash only Park with limited access for both humans and dogs to the trail around the lakes in order to allow the riparian vegetation to reestablish itself.	Dog lovers who use the Park's facilities believe there aren't enough off leash dog park areas left in town and that the Park should remain dog and human friendly. This should be done by leaving the park off leash and continuing to allow dogs to swim in the lake.

As the consultant hired by the Bozeman County Commissioners, it is your job to analyze the situation and make recommendations based on sound economic reasoning.

(a) First you must analyze the nature of the good at the center of the controversy: the public park. What type of good is the 100-Acre Park and how does the nature of the property rights associated with this good lead to its overuse? (3 pts)

(b) If Wetland lovers were to obtain ownership of the park, why might inefficient park regulations prevail? Assume the case in which transaction costs are high. (2 pts)

(c)If transaction costs are low and the Wetland lovers have clear ownership of the Park, what solutions might fall out of the negotiation process between the two parties? Hint: Your discussion should include something about relative values in uses. Extra credit for a discussion of possible low cost workarounds. (4 points)

Are there low cost workarounds? What are they?

(d) Knowing that the local government owns the Park and that payments to the government by wetland lovers or dog lovers are prohibited by law because they are seen as bribes rather than market transactions, would you expect the efficient outcome to be reached? If not, what stands in the way of efficiency? (4 points)

ivorybadger373

PART A

1. In which of the following situations is the Coase theorem likely to apply? Explain.

a. The neighbor who lives below you in the apartment building loves to play old John Denver records at loud volume early in the morning. In fact, his favorite song seems to be âThank God Iâm a Country Boy.â You hate old John Denver songs and this one in particular.

b. You have just moved to Beijing and quickly discover that you are allergic to smog. It causes you great pain in breathing and limits your ability to work. Furthermore, you have medical expenses related to treatment for its health effects on you.

c. Medical research in the 1990s has revealed a specific cause of birth defects related to a certain drug prescribed for pregnant women in the 1960s (thalidomide).

d. The water in the huge underground Ogalalla aquifer in the Great Plains region of the United States is being nitrate contaminated due to agricultural fertilizer use throughout the region. As a homeowner in this region, you find that your water must be treated in order to be safe for drinking.

2. One of the most striking aspects of cities in the former Soviet Union is the poor condition of public places. Streets, parks, libraries, museums, concert halls, and public gathering places of every description are all in very poor condition, revealing years of neglect and lack of maintenance.

Explain this phenomenon in light of the definition of property rights and the transition from socialism to a market economy.

3. Suppose that the marginal benefit associated with corn production is MB = 2.5. The marginal private cost of production is MPC = 2 + 0.1Q, where Q measures bushels of corn produced in thousands. The marginal damages caused by pollution in corn production are given by MD = 0.05Q.

a. Compute the privately optimal output and the socially optimal output.

b. Compute new solutions for an increase in MB to MB = 3. Explain what has happened and why. c. Demonstrate the effects of an increase in MD to MD = 0.075 compared to the solutions in part a.

4. Policy analysts in the Department of Natural Resources have estimated that the marginal benefits from water pollution abatement are given by the function MB Â¼ 0.90 Ã 0.03A, where A is a measure of the abatement intensity. Industry experts have estimated that the marginal cost of abatement activity is MC = 0.30 + 0.09A.

a. Determine the optimal level of abatement activity.

b. Explain what happens when new technology reduces the marginal cost of abatement to MC = 0.25 + 0.06A. 5. Consider the pollution reduction mechanism known as emissions trading. a. What is the economic rationale for permitting emissions trading?

b. If the objective is to minimize the cost of emissions reductions, explain what economic principle should be followed in allocating emissions reductions between two countries.

c. Suppose the marginal cost curves for emissions reductions in countries A and B are MCA = 10 + 0.04qA and MCB = 5 + 0.02qB. What is the most efficient allocation of an emission reduction of q0 between the two countries? (Assume that the emissions reductions of the two countries must add up to the total emissions reduction: q0 = qA = qB.)

PART B

1. Which of the following do you consider pure public goods? Private goods? Why?

a. Wilderness areas

b. Satellite television

c. Medical school education

d. Public television programs

e. Automated teller machine (ATM)

2. Indicate whether each of the following statements is true, false, or uncertain, and justify your answer.

a. Efficient provision of a public good occurs at the level at which each member of society places the same value on the last unit.

b. If a good is nonrival and excludable, it will never be produced by the private sector.

c. A road is nonrival because one personâs use of it does not reduce another personâs use of it.

d. Larger communities tend to consume greater quantities of a nonrival good than smaller communities.

3. Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and currently spends 6 hours patrolling, 8 hours picking, and 10 hours sleeping.

a. What are the public and private goods in this example?

b. If Tarzan and Jane are each currently willing to give up one hour of patrol for 2 pounds of fruit, is the current allocation of Cheetahâs time Pareto efficient? Should he patrol more or less?

4. The aircraft company Airbus receives much of its funding from European governments. Airbus recently decided to build a new 550-seat mega-jetliner, with duty-free shopping courts and restaurants on board. The project has experienced production delays as well as cost overruns, and it now appears that there will be very few buyers. An industry expert says the idea from the start was ânonsenseâ

Is public sector production of aircrafts ever justified?

Explain why it could lead to the apparently ill-advised decision to build the mega-jetliner.

5. Suppose that there are only two fishermen, Zach and Jacob, who fish along a certain coast. They would each benefit if lighthouses were built along the coast where they fish. The marginal cost of building each additional lighthouse is $100. The marginal benefit to Zach of each additional lighthouse is 90 â Q, and the marginal benefit to Jacob is 40 â Q, where Q equals the number of lighthouses.

a. Explain why we might not expect to find the efficient number of lighthouses along this coast.

b. What is the efficient number of lighthouses? What would be the net benefits to Zach and Jacob if the efficient number were provided?

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ECON1101 Chapter Notes - Chapter 9: Coase Theorem, Externality, Overfishing

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