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Chapter 12: Q.21 (page 297)
What is a marketable permit and what incentive does it provide for a firm to account for external costs?
A marketable permit is one that allows an organization to emit a specified amount of pollutants.
Without the cost of permits, it gives an incentive to the corporation for externalizing costs.
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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?
Refer to Table 12.2. The externality created by the refrigerator production was \(100. However, once we accounted for both the private and additional external costs, the market price increased by only \)50. If the external costs were \(100 why did the price only increase by \)50 when we accounted for all costs?
Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant. What information or data would you obtain to measure the external [not social] cost?
A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals
to clear some of Sherwood鈥檚 forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection.
a. 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.
b. Which choices display productive efficiency? How can you tell?
c. Which choices show allocative efficiency? How can you tell?
d. In the choice between T and R, decide which one is better. Why?
e. In the choice between T and S, can you say which one is better, and why?
f. 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?
In a market without environmental regulations, will the supply curve for a firm account for private costs, external costs, both, or neither? Explain.
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