Chapter 11. Environmental Protection and Negative Externalities

REVIEW QUESTIONS

  1. Table 11.5 provides the supply and demand conditions for a manufacturing firm. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the firm is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.
Table 11.5 Supply, Demand, and Pollution

Price

Quantity Demanded

Quantity Supplied without paying the cost of the pollution

Quantity Supplied after paying the cost of the pollution

$10

450

400

250

$15

440

440

290

$20

430

480

330

$25

420

520

370

$30

410

560

410
  1. Consider two approaches to reducing emissions of CO2 into the environment from manufacturing industries in the United States. In the first approach, the U.S. government makes it a policy to use only predetermined technologies. In the second approach, the U.S. government determines which technologies are cleaner and subsidizes their use. Of the two approaches, which is the command-and-control policy?
  2. An emissions tax on a quantity of emissions from a firm is not a command-and-control approach to reducing pollution. Why?
  3. Four firms called Elm, Maple, Oak, and Cherry, produce wooden chairs. However, they also produce a great deal of garbage (a mixture of glue, varnish, sandpaper, and wood scraps). The first row of Table 11.6 shows the total amount of garbage (in tons) that each firm currently produces. The other rows of the table show the cost of reducing garbage produced by the first five tons, the second five tons, and so on. First, calculate the cost of requiring each firm to reduce the weight of its garbage by one-fourth. Second, imagine that the government issues marketable permits for the current level of garbage, but the permits will shrink the weight of allowable garbage for each firm by one-fourth. What will be the result of this alternative approach to reducing pollution?
Table 11.6 Wood Chair Manufacturers and Cost Garbage Reduction

Elm

Maple

Oak

Cherry

Current production of garbage (in tons)

20

40

60

80

Cost of reducing garbage by first five tons

$5,500

$6,300

$7,200

$3,000

Cost of reducing garbage by second five tons

$6,000

$7,200

$7,500

$4,000

Cost of reducing garbage by third five tons

$6,500

$8,100

$7,800

$5,000

Cost of reducing garbage by fourth five tons

$7,000

$9,000

$8,100

$6,000

Cost of reducing garbage by fifth five tons

$0

$9,900

$8,400

$7,000
  1. The rows in Table 11.7 show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.
Table 11.7 Market-Oriented Tools for Reducing Pollution and Complaints

Incentives to Go Beyond

Flexibility about Where and How Pollution Will Be Reduced

Political Process Creates Loopholes and Exceptions

Pollution Charges

Marketable Permits

Property Rights

  1. Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table 11.8 shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)
Table 11.8 Costs and Benefits of Sewage Clean Up

Total Cost (in thousands of dollars)

Total Benefits (in thousands of dollars)

16 million gallons

Current situation

Current situation

12 million gallons

50

800

8 million gallons

150

1300

4 million gallons

500

1650

0 gallons

1200

1900
      1. Using the information in Table 11.8, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs, and Industry Structure if you need a refresher on how to calculate marginal costs.
      2. What is the optimal level of sewage for this city?
      3. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero emissions exceed the total costs.
  1. The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table 11.9 shows the total cost and total benefits (in dollars) of this policy.
Table 11.9 Fracking Land Restoration Cost and Benefits

Land Restored (in acres)

Total Cost

Total Benefit

0

$0

$0

100

$20

$140

200

$80

$240

300

$160

$320

400

$280

$380
      1. Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Production, Costs, and Industry Structure if you need a refresher on how to calculate marginal costs and benefits.
      2. If we apply marginal analysis, what is the optimal amount of land to be restored?
  1. A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwood’s forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 11.10 shows possible combinations of economic output and environmental protection.
Table 11.10 Combinations of Economic Output and Environmental Protection

Combos

Corn Bushels (thousands)

Number of Trees (thousands)

P

9

5

Q

2

30

R

7

20

S

2

40

T

6

10
      1. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis.
      2. Which choices display productive efficiency? How can you tell?
      3. Which choices show allocative efficiency? How can you tell?
      4. In the choice between T and R, decide which one is better. Why?
      5. In the choice between T and S, can you say which one is better, and why?
      6. If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice (Q) or (S)? Why?
  1. Identify whether the market supply curve will shift right or left or will stay the same for the following:
      1. Firms in an industry are required to pay a fine for their carbon dioxide emissions.
      2. Companies are sued for polluting the water in a river.
      3. Power plants in a specific city are not required to address the impact of their air quality emissions.
      4. Companies that use fracking to remove oil and gas from rock are required to clean up the damage.
  2. Give an example of a positive externality and an example of a negative externality.
  3. What is the difference between private costs and social costs?
  4. In a market without environmental regulations, will the supply curve for a firm account for private costs, external costs, both, or neither? Explain.
  5. What is a pollution charge and what incentive does it provide for a firm to take external costs into account?
  6. What is a marketable permit and what incentive does it provide for a firm to account for external costs?
  7. What are better-defined property rights and what incentive do they provide to account for external costs?
  8. As the extent of environmental protection expands, would you expect marginal costs of environmental protection to rise or fall? Why or why not?
  9. As the extent of environmental protection expands, would you expect the marginal benefits of environmental protection to rise or fall? Why or why not?

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