Mia Ha - Problem Set 1 .docx

Mia Ha - Problem Set 1 .docx - Mia Ha Professor Robert...

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Mia Ha Professor Robert Halvorsen ECON 436 June 25, 2019 Problem Set 1 I. The materials balance model suggests that one way of reducing pollution would be to reduce the ratio of residuals to GDP. Briefly discuss the technical alternatives available for doing so and why the private benefits from undertaking these activities are generally less than the social benefits. Residuals are created in both the production and consumption of goods and services. Some of the residuals are recycled back into production, which reduces both the amounts of residuals disposed of in the environment and the amount of inputs required. Reducing pollution would be to reduce the ratio of residuals to GDP and the technical alternatives available for doing so include reducing through-put inputs in, residuals out (like reducing the residuals intensity of inputs, increasing technical efficiency, increasing recycling, and change the composition of GDP) and reducing the amount of environmental damage per unit of residuals (like treating residuals to make them less harmful, change the place or time of discharge, and invest in assimilative capacity). The technical alternatives give companies/private firm benefits from technical efficiency and recycling b y decrea sing the cost of their inputs. However, the benefit s that they will receive is less than the total benefit s to society because it will
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not reflect the resulting reduction in environmental damage. In addition, reducing residuals intensity or changing the composition of output would benefit society by reducing residuals but provide no benefits to firms. II. What is the most general definition of externality? Explain why technological externalities may result in economic inefficiency but pecuniary externalities do not. The most general definition of externality is a side effect/consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved. An externality exists whenever an economic activity affects people not directly participating in it (called third-party effects). Pecuniary externalities affect
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