9.25 Chapter 10 - Econ 101 Introduction to Microeconomics...

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Click to edit Master subtitle style Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 10 Externalities
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Econ 101 – Professor Burkhauser Key Concepts Externality, p. 204 Internalizing an externality, p. 207 Coase theorem, p. 210 Transaction costs, p. 211 Pigovian tax, p. 213
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Econ 101 – Professor Burkhauser Figure 10.1 Pollution and the Social Optimum Equilibri um Quantity of Aluminu m 0 Price of Aluminu m Dema nd (private value) Sup ply (private cost) Soc ial c o st Q OPTI MUM Optim um Cost of polluti on Q MA RKET Dema nd Ta x
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Econ 101 – Professor Burkhauser Question 10.1: Beneficiaries of a Pollution Tax The major beneficiaries of a tax on the output of sulfur dioxide in the production of plastic dolls are: a) consumers of dolls b) producers of dolls c) workers in doll factories d) those who value clean air
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Econ 101 – Professor Burkhauser Question 10.2 Market for Pollution The table below gives the cost schedule for reducing sulfur dioxide emissions: Per Unit Cost of Eliminating Firms A B C D First unit $100 $200 $500 $800 Second unit $200 $400 $550 $1,000 Third unit $300 $600 $700 $2,000 Fourth unit $600 $700 $900 $4,000
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Econ 101 – Professor Burkhauser Question 10.2 (continued) If the federal government wanted to reduce pollution from 16 to 12 units, it should charge a pollution fee of: a. $250 b. $350 c. $650 d. $950 e. $1,050
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Econ 101 – Professor Burkhauser $ 0 $1,0 00 $1,5 00 $2,0 00 $2,5 00 $3,0 00 $3,5 00 $4,0 00 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 Figure 10.2 Market for Pollution MC to society of pollution MB to firm of polluting If firms do not bear the cost of the pollution they produce, they will generate 16 units of pollution. Is this optimal? No, because the marginal cost to society of the 16th unit of pollution is greater than its marginal benefit.
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