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Chapter_05_v2 - Part 2 Public Expenditure Public Goods and...

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Part 2 – Public Expenditure: Public Goods and Externalities Chapter 5 - Externalities 1. Classical economics explicitly requires that all costs and benefits be taken into account when assessing the desirability of a given set of resources, so Gore’s statement is false. The notion that rescuing the environment should be “the central organizing principle for civilization” provides no practical basis for deciding what to do about automobile emissions (or any other environmental problem), because it provides no framework for evaluating the tradeoffs that inevitably must be made. 2. The disposal of waste may impose some negative externalities on others, for example, through the creation of unsightly, smelly landfills. Economic theory says that an efficient amount of recycling occurs when the marginal social benefit of recycling, which may come from reduced need for landfills, just equals the marginal social cost of recycling, which may come from the hassle of sorting through one’s garbage. In order to judge whether recycling is a “good thing,” one must evaluate whether the benefit of recycling exceeds the cost on a case-by-case basis. 3. It is the case that a carbon tax would be passed on to the consumer. The tax raises costs to the producer for producing the final good. These increased costs would decrease supply, which will increase the price of that final good. In a cap and trade system, businesses must purchase permits in order to emit carbon. If the cost of purchasing and using abatement equipment is less than the cost of buying a permit, the business will use abatement equipment. In either case (buying a permit or using abatement equipment) costs for the producer increase, decreasing supply and increasing the price of the final good. If the carbon tax and the number of permits issued in the cap and trade system were set appropriately, the outlays for both programs would be the same. 4. a. The number of parties per month that would be provided privately is P. b. See schedule MSB p. c. P*. Give a per-unit subsidy of $b per party to induce the correct number of parties. d. The optimal subsidy is $b. The total subsidy= abcd . “Society” comes out ahead by ghc , assuming the subsidy can be raised without any efficiency costs.
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Chapter 5 - Externalities (Cassanova’s friends gain gchd ; Cassanova loses chd but gains abcd , which is a subsidy cost to government.) 5.
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