Week 9: In-class Externalities
17) According to the Coase Theorem,
A) government intervention is always necessary to address
externality problems.
B) the free market can always solve externality problems without
intervention.
C) property rights, low bargaining costs, and adequate information
can help parties reach an efficient outcome without government
intervention in the case of externalities.
D) free markets are incapable of addressing externality problems.
E) bargaining is never an appropriate approach to dealing with
externality problems.
17) ______
18) Suppose a smoker and a non-smoker share an office. Suppose the
smoker values being able to smoke in the office at $10.00 per day.
Suppose the non-smoker values not being exposed to smoke in the
office at $5.00 per day. If the company declares that non-smokers own
office air in shared offices and bargaining costs are low,
A) no smoking will occur and no money will change hands.
B) smoking will occur and the smoker will give the non-smoker an
amount greater than $5 but no greater than $10 per day.
C) no smoking will occur and the non-smoker will give the smoker an
amount greater than $10 per day.
D) no smoking will occur and the non-smoker will give the smoker an
amount less than $5 per day.
E) no smoking will occur and the non-smoker will give the smoker an
amount between $5 and $10 per day.
18) ______
1
Quantity of
Pollution Reduced
1
2
3
4
5
6
25
55
95
145
205
275
10
30
50
90
140
200
19) The table above shows the marginal cost of pollution reduction for two
firms. If both firms are legally required to reduce pollution by three
units each, what is the total cost of pollution abatement?
19) ______
20) The table above shows the marginal cost of pollution reduction for two
firms. If the EPA wishes to have pollution reduced by six units, what is
the most cost-effective way of doing this?
20) ______
What per-unit tax would achieve reducing pollution by 6 units at least
cost?
Suppose each firm was given 3 permits each and each permit allowed
the firm to emit 1 unit without penalties. Would either of the firms be
willing to sell a permit (or more) to the other firm? How many would
the selling form be willing to trade and at what price?
2
3