COMM 171 Lecture 7

Question 1

private cost, social cost/ private beenift and social benefit

Answer 1

Social benefit is the sum of all private benefits
* Social cost is the sum of all private costs

Question 1

what are exteranlities

Answer 1

Externalities (spillovers): the impact on
third parties of a transaction between
others

Question 2

Positive externalty vs negative externality

Answer 2

-if private benefits < social benefits: positive externality
– If private costs < social costs: negative externality

The marginal social cost of pollution is the additional
cost imposed on society as a whole by an additional unit
of pollution.
– Acid rain, smog, contaminated water, etc.
* The marginal social benefit of pollution is the additional
gain to society as a whole from an additional unit of
pollution.
– Goods and services, jobs, etc.
* The socially optimal quantity of pollution is the quantity
society would choose if all costs and benefits were fully
accounted for.

Question 3

how to make Q marekt closer to Q optimal if negative externality

Answer 3

By pigouvian tax of the differnce between msc and mpc.

Question 4

Coase theorm

Answer 4

Coase theorem, even in the presence of
externalities an economy can always reach an efficient
solution provided that the transaction costs are sufficiently
low

Question 5

Goverment policy and pollution

Answer 5

3 ways:

1. Environmental standards: limits the amount of pollution a producer is allowed to emit
2. Cap-and-trade : a government program designed to cap the total level of emissions from firms by creating a market for pollution permits

 Tradable emissions permits: licenses to emit limited quantities of pollutants; the licenses can be bought and sold by polluters

3. Emissions tax: cost depends on the amount of pollution a firm produces

 Pigouvian taxes: taxes designed to reduce external costs (example: an emissions tax designed to reduce coal production)

Question 6

Cap and trade how does it work

Answer 6

its ike each firm has the right to pollute 300 but is able to sell that right

So were going to have a vertical line where MPB of firm 1 = MPB of firm 2. so in this case firm 1 decreases pollution by 100 and gives it off to firm 2 as they make more money selling it off . and firm 2 buyes that and makes money

Question 7

Technology spillover , pigv

Answer 7

technology spillover is an external benefit that results
when knowledge spreads among individuals and firms

Question 8

Pigouvian subsidy

Answer 8

a payment designed to encourage
activities that generate positive externalities