8.12: Self-Check Questions

Questions to Test Your Understanding

1. Identify the following situations as an example of a negative or a positive externality:
   1. You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds.
   2. Your neighbor paints his house a hideous color.
   3. Investments in private education raise your country’s standard of living.
   4. Trash dumped upstream flows downstream right past your home.
   5. Your roommate is a smoker, but you are a nonsmoker.

2. Identify whether the market supply curve will shift right or left or will stay the same for the following:
   1. Firms in an industry are required to pay a fine for their carbon dioxide emissions.
   2. Companies are sued for polluting the water in a river.
   3. Power plants in a specific city are not required to address the impact of their air quality emissions.
   4. Companies that use fracking to remove oil and gas from rock are required to clean up the damage.
3. For each of your answers to the previous exercise, will equilibrium price rise or fall or stay the same?
4. Table \(\PageIndex{1}\) provides the supply and demand conditions for a manufacturing firm. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the firm is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.

Table \(\PageIndex{1}\): Cost of Pollution

Price	Quantity Demanded	Quantity Supplied without paying the cost of the pollution	Quantity Supplied after paying the cost of the pollution
$10	450	400	250
$15	440	440	290
$20	430	480	330
$25	420	520	370
$30	410	560	410

5. Consider two approaches to reducing emissions of CO₂ into the environment from manufacturing industries in the United States. In the first approach, the U.S. government makes it a policy to use only predetermined technologies. In the second approach, the U.S. government determines which technologies are cleaner and subsidizes their use. Of the two approaches, which is the command-and-control policy?
6. Classify the following pollution-control policies as command-and-control or market incentive based.
   1. A state emissions tax on the quantity of carbon emitted by each firm.
   2. The federal government requires domestic auto companies to improve car emissions by 2020.
   3. The EPA sets national standards for water quality.
   4. A city sells permits to firms that allow them to emit a specified quantity of pollution.
   5. The federal government pays fishermen to preserve salmon.

7. An emissions tax on a quantity of emissions from a firm is not a command-and-control approach to reducing pollution. Why?
8. Four firms called Elm, Maple, Oak, and Cherry, produce wooden chairs. However, they also produce a great deal of garbage (a mixture of glue, varnish, sandpaper, and wood scraps). The first row of Table \(\PageIndex{2}\) shows the total amount of garbage (in tons) that each firm currently produces. The other rows of the table show the cost of reducing garbage produced by the first five tons, the second five tons, and so on. First, calculate the cost of requiring each firm to reduce the weight of its garbage by one-fourth. Now, imagine that the government issues marketable permits for the current level of garbage, but the permits will shrink the weight of allowable garbage for each firm by one-fourth. What will be the result of this alternative approach to reducing pollution?

Table \(\PageIndex{2}\): Cost of reducing Garbage

	Elm	Maple	Oak	Cherry
Current production of garbage (in tons)	20	40	60	80
Cost of reducing garbage by first five tons	$5,500	$6,300	$7,200	$3,000
Cost of reducing garbage by second five tons	$6,000	$7,200	$7,500	$4,000
Cost of reducing garbage by third five tons	$6,500	$8,100	$7,800	$5,000
Cost of reducing garbage by fourth five tons	$7,000	$9,000	$8,100	$6,000
Cost of reducing garbage by fifth five tons	$0	$9,900	$8,400	$7,000

9. The rows in Table \(\PageIndex{3}\) show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.

Table \(\PageIndex{3}\): Market oriented tools for reducing Pollution

	Incentives to Go Beyond	Flexibility about Where and How Pollution Will Be Reduced	Political Process Creates Loopholes and Exceptions
Pollution Charges
Marketable Permits
Property Rights

10. Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table \(\PageIndex{4}\) shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)
    1. Using the information in Table \(\PageIndex{4}\), calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs.
    2. What is the optimal level of sewage for this city?
    3. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero emissions exceed the total costs.

Table \(\PageIndex{4}\): Costs and Benefits of Cleaning Sewage

	Total Cost (in thousands of dollars)	Total Benefits (in thousands of dollars)
16 million gallons	Current situation	Current situation
12 million gallons	50	800
8 million gallons	150	1300
4 million gallons	500	1650
0 gallons	1200	1900

11. The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table \(\PageIndex{5}\) shows the total cost and total benefits (in dollars) of this policy.
    1. Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs and benefits.
    2. If we apply marginal analysis, what is the optimal amount of land to be restored?

Table \(\PageIndex{5}\): Land Restoration Cost and Benefit

Land Restored (in acres)	Total Cost	Total Benefit
0	$0	$0
100	$20	$140
200	$80	$240
300	$160	$320
400	$280	$380

12. Do market demand curves reflect positive externalities? Why or why not?
13. Suppose that Sony's R&D investment in digital devices has increased profits by 20%. Is this a private or social benefit?
14. The Gizmo Company is planning to develop new household gadgets. Table \(\PageIndex{6}\) shows the company’s demand for financial capital for research and development of these gadgets, based on expected rates of return from sales. Now, say that every investment would have an additional 5% social benefit—that is, an investment that pays at least a 6% return to the Gizmo Company will pay at least an 11% return for society as a whole; an investment that pays at least 7% for the Gizmo Company will pay at least 12% for society as a whole, and so on. Answer the questions that follow based on this information.
    1. If the going interest rate is 9%, how much will Gizmo invest in R&D if it receives only the private benefits of this investment?
    2. Assume that the interest rate is still 9%. How much will the firm invest if it also receives the social benefits of its investment? (Add an additional 5% return on all levels of investment.)

Table \(\PageIndex{6}\): Estimated Rate of Return & Private Profits for an R& D Project

Estimated Rate of Return	Private profits of the firm from an R&D project (in $ millions)
10%	$100
9%	$102
8%	$108
7%	$118
6%	$133
5%	$153
4%	$183
3%	$223

15. The Junk buyers Company travels from home to home, looking for opportunities to buy items that would otherwise end up with the garbage, but which the company can resell or recycle. Which will be larger, the private or the social benefits?
16. When residents in a neighborhood tidy it and keep it neat, there are a number of positive spillovers: higher property values, less crime, happier residents. What types of government policies can encourage neighborhoods to clean up?
17. Education provides both private benefits to those who receive it and broader social benefits for the economy as a whole. Think about the types of policies a government can follow to address the issue of positive spillovers in technology and then suggest a parallel set of policies that governments could follow for addressing positive externalities in education.
18. Which of the following goods or services are nonexcludable?
    1. police protection
    2. streaming music from satellite transmission programs
    3. roads
    4. primary education
    5. cell phone service
19. Are the following goods non-rival in consumption?
    1. slice of pizza
    2. laptop computer
    3. public radio
    4. ice cream cone