ECON 207: Externalities and Govt Policy

-ve externality + mc of production

benefit to the consumer

true or false: cs + ps + tax = externality

true

true or false: for any q greater than qs, marginal cost of production + externality < utility gained by consumers

false, for any q greater than qs, marginal cost of production + externality > utility gained by consumers

true or false: for any q less tha qs, utility gained by the consumer > cost of production + externality

true

gross external damages

calculates the total monetary cost of environmental harm unaccounted for in market prices

what are the two requirements for an effective command and control policy?

• solution is well-known

• strong compliance

why are command and control policies difficult to implement?

• information is dispersed

• hard for govt to know if it is worth it (e.g. value produced > social cost of emissions)

what is the main advantage of a cap and trade system?

firms have an incentive to reduce emissions so they don’t have to buy as many credits

true or false: the market outcome is the same for an input tax and a cap and trade system

true, loss of surplus < loss of externality

what happens to the supply curve if permits are given away?

stays at s = pmc, ps is read off original supply curve

true or false: the market is more efficient when permits are given away

false, the two market outcomes have the same total surplus and are indifferent

on an msb diagram, what do the demand curves represent?

willingness to pay, except the consumers do not have to pay due to non-excludability

on an msb diagram, where is the efficient quantity?

msb = msc