ECON1101 Chapter Notes - Chapter 9: Coase Theorem, Externality, Overfishing
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Question 1
An externality
enhances market efficiency. |
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is a private cost or benefit that results from the production or consumption of a good or service that is external to a market. |
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is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. |
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refers to production or consumption that occurs outdoors. |
5 points
Question 2
Externalities can be produced by:
the high price of goods and services |
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individuals; firms |
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market prices; market incomes |
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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. |
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the price of the product is too high, and production should be expanded to lower the price. |
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the level of output is optimal, and there should be no change in the supply curve. |
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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 |
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MPC = MSC + MD |
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MSC = MPC + MD |
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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. |
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the supply curve will shift to the right. |
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the demand curve will shift to the right |
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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. |
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assigning property rights is the only thing the government should do in a market economy. |
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if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. |
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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. |
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the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo. |
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cattle existing in Europe also while buffalo were specific to North America. |
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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. |
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raise the production costs of all firms. |
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cause firms to generate more pollution than their allowed limits. |
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lower the production costs of all firms. |
5 points
Question 9
A cap-and-trade policy
has a set number of permits. |
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allows polluters to trade permits. |
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caps the total level of pollution allowed. |
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all of the above. |
Question 10
A Pigouvian tax corrects for
market congestion. |
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market losses. |
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inefficient sales. |
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low market prices. |
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)