Chapter 17 : Environment Economics

Question 1

What is an externality?

Answer 1

Something produced (good or bad) when producing a product.

Question 2

What happens when there are negative externalities in terms of types of marginal costs?

Answer 2

Social marginal cost >private marginal cost

Question 3

What is pollution qualified as?

Answer 3

A negative externality

Question 4

How is the marginal external cost calculated?

Answer 4

MEC = MCs - MCp

Question 5

By producing where price = MC and ignoring the externality, firms are producing ________.

Answer 5

Too much output.

Question 6

What does the price that the consumer pays cover?

Answer 6

The private marginal cost, but it does not pay for the external damages.

Question 7

What is the allocatively efficient level of output?

Answer 7

Where social marginal benefit = social marginal cost. (Q*)

Question 8

What does it mean to “internalize the externality”?

Answer 8

To make polluting firms bear the entire social cost of their production (including the externalities)

Question 9

Is the optimal amount of pollution 0?

Answer 9

No. Then, the marginal cost of abatement exceeds the marginal benefit of abatement.

Question 10

When does the optimal amount of pollution abatement occur?

Answer 10

When marginal social benefit = marginal social cost. (Q*)

Question 11

What is the form of environmental regulation that is used the most often in Canada and in the US?

Answer 11

Direct regulatory control.

It is inefficient.

Question 12

Why is direct regulatory control inefficient?

Answer 12

Because the marginal cost of reducing pollution is not the same across all firms. In this graph, firm A has a lower cost of abatement than firm B.

Question 13

What are 2 efficient forms of environmental regulations on pollution?

Answer 13

Emission taxes and tradable pollution permits

Question 14

Since a firm saves t dollars for each unit of pollution it does not produce, t = ?

Answer 14

t = firm’s marginal benefit from pollution abatement

Question 15

2 advantages of emissions taxes

Answer 15

1. Forces firms to internalize the externality : efficient.
2. No knowledge required about firm’s technologies (regulators do not specify how polluters should abate pollution)

Question 16

How do tradable pollution permits work?

Answer 16

1. The government mandates a limit on the total amount of pollution allowed
2. Government distributes permits to firms allowing them to emit a specific amount of pollution, which can be traded in a free market.

Question 17

Here, which firm can abate more?

Answer 17

Firm A can abate more, from Q* to A
Firm B can abate less, from Q* to B

Question 18

What do governments need to decide in the 2 efficient environmental regulation strategies?

Answer 18

Cap and trade : total amount of permits
Emission tax : tax rate

Question 19

In economic growth, is there a higher or lower permit price?

Answer 19

Higher, because the demand increases due to new firms in polluting industries.

Question 20

What is a problem with the cap-and -trade system?

Answer 20

The idea that the government is condoning the “crime” of polluting the environment.

Question 21

What are 5 effects of global climate change?

Answer 21

1. Melting glaciers /loss of fresh water
2. Rising sea levels
3. Reduction in biodiversity
4. Reduced crop fields
5. Intense and volatile weather patterns

Question 22

Role of the UN in the global climate crisis

Answer 22

UN sponsored a set of international conferences, starting in the 1990s.

These conferences resulted in formal international agreements in which countries pledged to reduce their greenhouse gas emissions.

Question 23

Which agreement was important in the UN process?

Answer 23

The 2015 Paris agreement

Question 24

True or False? Canada has experienced significant increases in their annual emissions.

Answer 24

True.
On the other hand, France, Sweden and the UK have decreased their emissions and saw economic growth.

Question 25

What is the identity equation for greenhouse gas?

Answer 25

GHG = (GHG /energy) x (energy / GDP) x GDP

Question 26

What are 3 approaches to reducing GHG emissions?

Answer 26

1. Reducing global GDP
2. Reducing the energy intensity of GDP
3. Reducing the GHG intensity of energy

Question 27

What must any coherent and effective climate policy do?

Answer 27

1. Place a price on GHG emission such as an emission tax or a cap-and-trade system.
2. Provide strong public support for technological development.