Externalities
1. Which of the following describes an externality and which does not? Explain your answer (1
point)
a) A policy of restricted coffee exports in Brazil causes the US price of coffee to rise – an
increase which in turn also causes the price of tea to rise.
b) An advertising blimp distracts a motorist who then hits a telephone pole.
c) Planting flowers in your front garden.
2. Compare and contrast the following three mechanisms for treating pollution externalities
when the costs and benefits of abatement are uncertain: a) an emission fee; b) an emissions
standard; c) a system of transferable emissions permits (1.5 points)
3. Suppose a clothing factory is located downwind from a copper smelting plant. The copper
smelting plant emits particulates into the air that cause $100,000 in damage per year to the
clothing factory in terms of fabric discoloration. The plant could eliminate its emissions by
installing a superior scrubbing technology at a cost of $50,000 per year. Existing regulations
do not prohibit the emission of these particulates. The only way to remedy this inefficiency is
through government intervention. True or false? Explain your answer (1 point)
4. The United Nations Kyoto Protocol of1997 requires most industrial nations to reduce their
carbon dioxide and other greenhouse gas emissions during the ensuing decade to about 5% of
1990 levels. Explain why such a policy is inefficient. (1 point)
5. Using an example, explain why free access to a common resources generates an inefficient
outcome (1 point)\
6. Public television is funded in part by private donations even though anyone with a TV set can
watch for free? Can you explain this phenomenon in light of the free rider problem? (1 point)
7. Assume that scientific studies provide you with the following information concerning the
benefits and costs of sulfur dioxide emissions, where A is the quantity abated in millions of
tons (1.5 points):
Benefits of abating (reducing) emissions: MB = 400 – 10A
Costs of abating emissions: MC = 100 + 20A
a) What is the socially efficient level of emissions abatement?
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