260: ECON Quiz 2 In-class
Example Solutions Below are discussions that look like full credit answers. Obviously, these are just samples, there are other ways to state essentially the same points. 1) Renewable resources, such as timber or fish, should be used no faster than they are able to be renewed. Assumptions: There are two key assumptions that are necessary for this argument to be valid: (a) People alive today are obligated to provide for the well-being of future generations (alternatively future generations have a right to a some standard of well being). (b) Providing for future generation's welfare requires providing them with the same levels of renewable resources that we have today. That is, we cannot substitute other forms of capital for renewable resources and still meet our obligations to future generations.
Discussion (a) While many people agree that we shouldn't enrich ourselves at the expense of future generations, meeting these supposed obligations requires foregoing consumption today. We have many poor people today, and some would argue that we have obligations to improve their welfare as well. It is not obvious how we should balance the needs of the future against the needs of the present, but it may be that our obligations to the future are much lower than those implied by the statement. (b) The second assumption suggests that it is imperative to provide future generations with natural resources (and ecosystems) similar to those available to us. Their welfare depends on these specific resources. Many argue that this is not true. The historical record suggests that substitutability is pervasive. Certainly, its plausible that future generations will not be devastated by the loss of a particular fish species or stand of trees as long as they have something else "good" to replace the welfare they "lost." Furthermore, it's possible that we can extract resource rents from natural resources today and invest them in producing new capital that more than replaces the welfare lost by not having a particular fish. That is, if high return investments are available, by extracting resources today, we it is possible to leave future generations better off than they would have been had we conserved the resource.
ECON 260: Quiz 2 In-class
2) Negative externalities do not require government intervention. The market can produce the right level of pollution without government interference. Assumptions: There are three necessary assumptions for this to hold. (a) The right level of pollution is defined by the efficiency standard. That is, pollution levels should be set be equating marginal benefits and marginal costs. (b) Property rights are well defined. (c) Transactions costs are zero.
Discussion (a) Some people reject the idea that the right level of pollution is found by equating MB and MC. Instead, these people believe that people have a right to their health, so pollution that leads to involuntary harm to human health violates individual rights and should be banned (this is the safety standard). Alternatively, some people believe that we owe future generations an ecosystem similar to that available to us (an ecological standard). It is very difficult to imagine that the market would produce the much lower levels of pollution by required these standards on its own. There is, to my knowledge, no Coaseian solution for these standards. (b) An essential part of the Coase Theorem which demonstrated that markets can reach the efficient level of pollution under certain conditions is well defined property rights. It is easy to imagine that in many instances property rights are not well defined or non-existent. For instance, who owns the atmosphere or who owns the oceans, or the ocean floor? At a smaller level, who owns the air you breathe or the sound waves within your earshot? These are just a few examples, one can imagine many more. The point, though, is that property rights are frequently not well defined, and without well defined property rights Coasian bargaining cannot take place because it is not clear which party should be offering and which party accepting "bribes." (c) The second essential element of the Coase Theorem is zero transactions costs. If transactions costs are not-zero than the maximum bribe offered is equal to willingness to pay minus transactions costs and the maximum bribe accepted is equal to the willingness to accept minus transactions costs. Coasian bargaining with transactions costs produces pollution greater than the efficient amount. There are several reasons why bargaining does not occur at zero cost. E.g., negotiations require lawyers, clearly identifying whose to blame for what, coordinating
ECON 260: Quiz 2 In-class
potentially many affected parties (which introduce additional problems like the freerider problem or the hold out problem).
ECON 260: Quiz 2 In-class
3) The government should ban all lawn fertilizers currently on the market because many dogs that come into sufficient contact with them develop rashes and become sick. Assumptions: There are two distinct sets of sufficient (but not necessary) assumptions that, if true, make this statement valid. (1) If one believes that dogs have a right to their health and that the threat to dog health from lawn fertilizers is sufficiently high to violate dog rights (that is, the safety standard applies to dogs), then this policy is not unreasonable. Discussion of this assumption Many people do not accept the safety standard, or, at least, they may not believe that it extends to dogs. For instance, many people accept that the efficiency standards is a better guide to determining regulation, and it seems very likely that the MB of this policy are dramatically lower than the marginal benefits. (2) This statement would also be valid if one assumes a. that the efficiency standard is correct way to determine pollution regulation b. that the MB to dogs and dog owners (and society) of the ban exceed the MC to lawn owners (and society). Discussion People, of course, may debate whether or not the policy should be justified on efficiency grounds (as opposed to safety or ecological grounds), but given that the efficiency standard, in this case, is leading to the same conclusion as, say, the safety standard, the most likely counter argument to this regulation is the same as discussed above, it seems likely that MB does not exceed MC. Banning the fertilizer essentially suggests that the losses to society from dog illness are enormous and this seems unlikely.
ECON 260: Quiz 2 In-class