Chapter 18: Environmental Protection & Negative Externalities

Question 1

How much did the US population increase by from 1970 to 2010?

Answer 1

About 1/3
Population 1970: 205 million
Population 2010: 310 million

Question 2

How much did the US economy increase by from 1970 to 2010?

Answer 2

Doubled

Question 3

Externality

Answer 3

Effect of a market exchange on an outside third party

Question 4

Market Failure

Answer 4

When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits. Externalities, such as pollution, are an example of market failure.

Question 5

Additional external cost

Answer 5

Additional costs incurred by third parties outside the production process when a unit of outreach is produced

Question 6

When did the United States generally begin passing comprehensive environmental laws?

Answer 6

Late 1960s-early 1970s

Question 7

Command-and-Control Regulation

Answer 7

Laws that specify allowable quantities of pollution and detail pollution-control technologies.
Generally, firms are required to increase their costs, and therefore bear the social costs of pollution,

Question 8

When was the EPA created?

Answer 8

1970

Question 9

When was the Clean Air Act passed?

Answer 9

1970

Question 10

When was the Clean Water Act passed?

Answer 10

1972

Question 11

What are problems with command-and-control regulation (3)?

Answer 11

1. No incentive to improve environment beyond the law
2. Inflexible, requiring the same standards for all polluters
3. Controlled by legislators and EPA, and therefore political and subject to lobbyists. Full of loopholes and fine print.

Question 12

What would market-oriented environmental policies do?

Answer 12

Create incentives to allow firms flexibility in reducing pollution

Question 13

What are the 3 main categories of market-oriented environmental control?

Answer 13

1. Pollution charges
2. Marketable permits
3. Better-defined property rights

Question 14

Pollution Charge

Pollution Tax

Answer 14

Tax imposed on the quantity of pollution that a firm emits. Incentivizes firms to reduce emissions, a long as marginal cost of doing so is less than the tax

Question 15

Marketable Permit Program

Cap-and-Trade

Answer 15

Permit that allows a firm to emit a certain amount of pollution. Firms with more permits than pollution can sell the remaining permits to other firms.

Question 16

Property Rights

Answer 16

Legal rights of ownership on which others are not allowed to infringe without paying compensation

Question 17

Ronald Coase

Answer 17

Nobel Prize winner in economics, who illustrated the importance of defining property rights with the train-emitting-sparks-by-a-farmer’s-field analogy

Question 18

What is the advantage of market-oriented environmental tools?

Answer 18

Their incentives and flexibility can achieve any desired reduction in pollution at a lower cost to society
(examples: cap-and-trade permits that shrink each year, gasoline taxes, can/bottle refundable charges)

Question 19

4 Benefits of a Cleaner Environment

Answer 19

1. Human health and lifespan
2. Healthy industries that rely on clean air/water (farming, fishing, tourism)
3. Higher property values
4. Human satisfaction & enjoyment

Question 20

Ecotourists

Answer 20

Tourists who hope to appreciate the ecology of their destination

Question 21

What is the benefit of ecotourism?

Answer 21

Provides an incentive for low-income people in poor countries to conserve their local environment, rather than destroying it to survive

Question 22

As the extent of environmental protection expands, will marginal costs of environmental protection rise or fall?

Answer 22

Rise, because the least expensive and easiest reductions can be made first, leaving the more expensive solutions for later

Question 23

As the extent of environmental protection expands, will marginal benefits of environmental protection rise or fall?

Answer 23

Fall, because the most effective changes can be made first, leaving the lesser effective solutions for later

Question 24

What is a major problem internationally in addressing environmental problems?

Answer 24

Even if most nations individually took steps to address their environmental issues, no national acting alone can solve certain problems that spill over borders (CO2 emissions)

Question 25

Biodiversity

Answer 25

Full spectrum of animal and plant genetic material

Question 26

International Externality examples

Answer 26

Global warming

Diminishing of biodiversity

Question 27

Production Possibility Frontier (PPF)

Answer 27

Tradeoff curve between economic output and the environment.
X Axis: Environmental Protection
Y Axis: Economic Output
Quarter-circle PPF curve down. As environmental protection increases, economic output decreases. Inefficient to be “inside” the curve.

Question 28

Allocative Efficiency

position on the PPF

Answer 28

The choice between economic output and environmental protection along the production possibility frontier (not efficient if country gets “off” the frontier, below the curve)

Question 29

Productive Efficiency

position on the PPF

Answer 29

Somewhere on the production possibility frontier rather than inside it