Answers to Pause-for-Thought Questions
Chapter 6
p210 
Is it likely that the MSB curve will be parallel to the MB curve in each of the diagrams of Figure
6.2?
No. It is likely that the marginal external costs of consumption will increase as more is consumed,
and thus the curves will get further apart (making the MSB curve steeper than the MU = MB curve).
For example, the marginal pollution costs of cars gets progressively greater as more and more cars
come onto the roads and the environment becomes less and less able to absorb the additional
quantities of pollutants.
p210 
Which of the following have the property of non-rivalry: (a) a can of drink; (b) public transport;
(c) a commercial radio broadcast; (d) the sight of flowers in a public park?
(a) No. (b) No (passengers take up seats). (c) Yes. (d) Yes (unless I get in your way!).
p213 
Assume that a monopoly existed in an industry where there were negative externalities. Could the
socially efficient output be Qm in Figure 6.4? If so, would this make monopoly socially efficient?
The socially efficient output would be Qm if the negative externalities were such that the marginal
social cost curve passed through point b. Monopoly would not, however, be socially efficient in
the sense that the profit would be supernormal. To counteract this problem, a lump-sum tax could
be imposed on the monopoly. This would reduce the monopoly’s profits but, being unrelated to
output, would not affect the output that the monopoly would choose (i.e. output would stay at Qm.)
p216 
How do merit goods differ from public goods?
They could be provided by the market (albeit with too little consumed). The problem of nonexcludability does not apply.
p222 
Why is it easier to use taxes and subsidies to tackle the problem of car exhaust pollution than to
tackle the problem of peak-time traffic congestion in cities?
Because with car exhaust pollution, a single tax can apply to all motorists: e.g. so many pence per
litre of petrol. This encourages people to drive less and to buy cars with high fuel economy. With
peak-time congestion in cities, however, if people were not to be discouraged from using cars at
other times, differential taxes would have to be used: e.g. meters fitted to cars that would be triggered
by roadside devices at peak times, (such schemes are being tried in many cities throughout the world:
see page 368). Subsidies for public transport are easier to administer, but would probably have to be
combined with a system of bus lanes and other ‘anti-car’ measures in order to encourage sufficient
people to switch to public transport (unless the subsidies were very large).
p226 
What other forms of intervention are likely to be necessary to back up the work of regulatory
bodies?
Clear laws to which the regulatory body can appeal; an inspectorate to ensure that decisions of the
regulatory body were being adhered to.
Answers to pause-for-thought questions in Essentials of Economics (3rd edition), John Sloman
p227 
Would it be a good idea to extend countries’ territorial waters in order to bring key open seas
fishing grounds within countries’ territory? Could it help to solve the problem of over fishing?
It could help to solve the problem of over fishing provided fishing in territorial waters was
regulated and effectively policed. There is a problem of equity, however. Fishing boats from other
countries might claim that the extension of territorial waters was unfair on them if preference were
given to fishing boats from the domestic country.
p230 
Are there any features of free-market capitalism that would discourage innovation?
The fear that inventions and innovations will be copied by other firms and that sales will therefore
not increase sufficiently; the fear that competition will break out too quickly (thus bringing down
prices and profits) to make it worthwhile investing in research and development; the risks that the
product will not be as popular as was hoped, and that therefore the costs of development will not be
recouped; the fear that the development costs will escalate once a programme of research and
development has been embarked on; the difficulties in persuading banks to lend money for pure
research (because of the risks entailed).
p233 
Look through the categories of possible market failings in sections 6.1 to 6.3. Are there any
others, in addition to the four we have just identified, that will result in a socially inefficient use of
the environment?
If firms have market power, they may be in a stronger position to resist pressure from employees,
consumers or the government to introduce cleaner technology or greener products. Some of the large
multinationals have a poor record in terms of meeting safety or environmental standards, especially
in developing countries. On the other hand, to the extent that market power leads to lower output
(and higher prices) this could result in less pollution than in a more competitive market.
Sometimes people may underconsume ‘green’ products, not simply because the external
benefits, by definition, are not experienced by the consumer (a problem of externalities), but because
people may not do what is in their own interests. Thus the government might want to encourage
people to use their cars less, not only because of the benefits to other people, but because of the
direct health benefits to car owners if they drove less and walked or cycled more. Thus bicycles
could be seen as a merit good.
Firms may be slow to respond to green taxes or subsidies. There is a problem of factor
immobility, especially in the short run.
p237 
To what extent will the introduction of tradable permits lead to a lower level of total pollution (as
opposed to its redistribution)?
It will depend on the total level of pollution permitted (i.e. the addition of all the tradable permits).
The lower the permitted level of pollution, the lower will be the actual level of pollution. If the
system merely permits the previous total level of pollution, clearly there will be no reduction in
pollution, merely a more efficient level of production: i.e. total output will be higher for a given
level of pollution as the lower-polluting firms expand and the higher polluting firms contract.
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