module 75 Externalities and Public Policy 741
Section 14 Market Failure and the Role of Government
Module 75 AP ReviewCheck Your Understanding
- Some opponents of tradable emissions permits object to them
on the grounds that polluters that sell their permits benefit
monetarily from their involvement in polluting the
environment. Assess this argument.
2. For each of the following cases, explain whether an external
cost or an external benefit is created and identify an
appropriate policy response.
a. Trees planted in urban areas improve air quality and
lower summer temperatures.
b. Water-saving toilets reduce the need to pump water from
rivers and aquifers. The cost of a gallon of water to
homeowners is virtually zero.
c. Old computer monitors contain toxic materials that
pollute the environment when improperly disposed of.
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- Which of the following policy tools is inefficient even when
correctly administered?
a. environmental standards
b. emissions taxes
c. tradable emissions permits
d. Pigouvian taxes
e. cap and trade programs - An efficient Pigouvian subsidy for a good is set equal to the
good’s
a. external cost.
b. marginal social benefit.
c. marginal external cost.
d. marginal external benefit.
e. price at which MSC=MSB. - Which of the following is true in the case of a positive
externality?
a. MSC> MSB
b.MPB> MSC
c. MSB> MPB
d.MPB> MSB
e. MSC> MPC
4. One example of a source of external benefits is
a. technology spillover.
b. traffic congestion.
c. pollution.
d. subsidies for polluters.
e. taxes on environmental conservation.
5. Marginal social benefit equals marginal private benefit plus
a. marginal external benefit.
b. marginal private cost.
c. total external benefit.
d. total external cost.
e. marginal social cost.