Not clear whether firm has right to pollute or if

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Chapter 18 / Exercise 4
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Not clear whether firm has right to pollute or if cottages have right to clean lake. Pollution Abatement: Economic Perspective Question: Is Pollution Free Environment appropriate Goal of Policy ? To reduce pollution (abatement) - creates benefits - imposes costs Pollution abatement initiatives
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Chapter 18 / Exercise 4
Exploring Economics
Sexton
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High benefit taken first marginal benefit (MB) declines Low cost taken first marginal cost (MC) increases Quantity of pollution Abatement MC MB qe qf (pollution free environment) 1. Pollution free invest in pollution abatement until MB = 0 (at qf) 2. Economicly efficient investment in pollution abatement at MC > MB inefficient at MC = MB efficient Wednesday, January 20, 2009 The Role of Government Role of Market in a Market Economy 1. Improve Efficiency if “Market Failure” 1) Monopoly 2) Externalities 3) Public Goods
2. Alter Distribution of Income Tax/Transfer programs Public and Private Good. 1. Two Characteristics of Goods Excludability : a person can be excluded from using a good Rivalness: one person‟s use of good diminishes other person‟s use Pure Private good (1) excludable (3) rival example: ice cream sundae Pure public goods (1) non excludable (3) non-rival Example: national defense Criminal justice system Example: Lighthouse Public good: non-excludable, non-rival Value to each ship owner: $5000 Number of ship owners: 2000 Total value: $10 million Cost: 1 million Total value> Cost efficient to build 1. Private market 1) Entrepreneur requires $500 (1 million/2000) from each owner 2) Yet no owner will pay, since cannot excluded from benefit of lighthouse, once built
Free rider problem 2. Government 1) Builds lighthouse, charges $500 to each owner 2) Each owner enjoys surplus of $4500 (5k - 500) How to determine efficient amount of public good? Marginal Benefit (all individuals) = marginal cost MB of Public Good: Vertical Sum of Individual MB Schedules Efficient production of Public Good MC MB At q<q*, MB > MC increase quantity of public good Atq>q*, Mb< MC reduce quantity of public good
Police Officer Public Good? Answer: Yes Non-excludable Non rival True? False? If a town hires no police officers, the social cost of crive is 200 00 per year/ If the town hires four police officers (at a salary 50 000) per year, there will be no crime. Therefore, the town should hire four police officers Answer: Uncertain Suppose that, of town has one police officer, that social cost of crime drops to $25 000 1* Officer MB = 175 000 MC = 50 000 = hire 1* Officer 2* Officer MB < 25000 MC = 50000 not hire 2 officer Taxes, which raise revenues for government, create “deadweight” or welfare loss Input into governamtn policy: (1) design of the tax system (2) tradeoff between redistribution and economic efficiency
SS+t SS= MC t DD At q1 price(value to the buyer) > marginal cost not efficient Intuition: market shrinks and gains from trade are not fully realized Extreme Example: Excise Tax Eliminates Gains from Trade 1. Example: House painting Painter and homewoner agree to wage of @25 per hor 1. Homeowner values at 30 cons surplus 5 2. Opportunity cost of painter is 20 per hour producer surplus is $5 per hour 3.

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