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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Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?
Consider the case of global environmental problems that spill across international borders as a prisoner’s dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can choose whether to protect the environment, at a cost of , or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of , but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of , which is divided equally between the two countries.
a. In Table , fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.
Consider two ways of protecting elephants from poachers in African countries. In one approach, the government sets up enormous national parks that have sufficient habitat for elephants to thrive and forbids all local people to enter the parks or to injure either the elephants or their habitat in any way. In a second approach, the government sets up the national parks and designates villages around the edges of the park as official tourist centers that become places where tourists can stay and bases for guided tours inside the national park. Consider the different incentives of local villagers - who often are very poor - in each of these plans. Which plan seems more likely to help the elephant population?
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?
Would environmentalists favor command-and-control policies as a way to reduce pollution? Why or why not?
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