Chapter 4

Question 1

What does the term efficient mean?

Answer 1

A situation where no resources are wasted.

Question 2

What is a Perot-efficient situation?

Answer 2

A situation in which it is impossible to make one person better off without making anyone else worse off.

Question 3

What is an efficient outcome?

Answer 3

When the net monetary benefits produced by the economy are maximized.

The total of all benefits that can be given monetary value (human-made and generated by nature) minus all costs of production (private and external) will be as large as possible at the efficient point.

Question 4

Does efficiency need to be fair?

Answer 4

No. Something that maximizes society as a whole even if it is unfair is efficient.

A move toward efficiency can be a win-win - it can make someone better off without hurting the other even if it is unfair.

Question 5

What is a Pareto-improving situation?

Answer 5

When a situation exists where it makes everyone better off.

Question 6

When we increase economic efficiency, what are the consequences?

Answer 6

There are almost always winners and losers from any changes in economic policy.

Question 7

How are efficiency and fairness different notions?

Answer 7

Efficient outcomes dont need to be equitable (or moral or fair), but they could be.

Equitable outcomes dont need to be efficient, but they could be.

Question 8

What is a marginal analysis?

Answer 8

Compares the marginal costs and the marginal benefits and is used to pinpoint the efficient pollution level.

At any point other than the efficient level, both polluters and victims can potentially be made better off through negotiation.

Question 9

What is the marginal unit?

Answer 9

The last unit of pollution reduced.

Question 10

What are marginal costs?

Answer 10

The costs of reducing a unit of pollution.

Question 11

What are marginal benefits?

Answer 11

The benefits from reducing a unit of pollution.

Question 12

How do we represent marginal values on a graph? Why?

Answer 12

It is conventional to graph marginal values between the units on the X axis because marginals represent changes in total values as we move from one unit to the next.

Question 13

Why does the slope of the marginal costs of pollution reduction go upwards?

Answer 13

It reflects that it becomes increasingly more difficult to get rid of each unit.

Example: the marginal cost for eliminating a cigaret will get higher and higher because of the smoking addiction.

Question 14

Why does the slope of the marginal benefits of pollution reduction go upwards?

Answer 14

The health risks of an environmental issue decrease as the number of pollution reduction is decreased - it is not worth as much as the last one.

Question 15

Where is the efficient level of pollution reduction? Why?

Answer 15

Where the marginal benefits equal the marginal costs.

At any other level of pollution, both parties can be made better off by trading either by decreasing pollution and compensating polluters or the reverse.

Question 16

Explain how the additional or marginal cost of each cigarette given up rises.

Answer 16

The total costs of pollution at an increasing rate rises, which generates an upward cuve.

Question 17

Explain why the marginal benefits of pollution reduction on a graph are falling.

Answer 17

The total benefits of cleanup rise at a decreasing rate, which produces a downward bowed curve.

Question 18

What does the marginal cost curve represent?

Answer 18

It represents the the change in total costs.

The marginal curves graph the slopes of the total curves.

Question 19

What does the area under the marginal cost curve represent?

Answer 19

Represent the total cost.

Question 20

Where does the efficient level of pollution not occur on a total marginal curve? Where does it occur instead?

Answer 20

The efficient pollution level does not occur where total costs equal total benefits. Because total benefits and costs are equal, the net monetary benefits to society are zero.

The efficient level occurs where the total benefit curve lies farthest above the total cost curve. The net monetary benefits here are maximized.

Question 21

What is the Coase Theorem?

Answer 21

The Coase Theorem states that in the absence of transaction costs and free riding, private negotiation will arrive at the efficient pollution level, regardless of whether the victims have the right to impose a ban or polluters have the rights to pollute.

If polluters and victims can bargain easily and effectively, private negotiation should arrive at an efficient outcome regardless of who has the initial right to pollute or prevent pollution.

it thinks that either if the polluter pays or if the victims pays, it will lead to an efficient outcome. However, the theorem holds only under certain circumstances.

Question 22

What is the polluter-pays principle?? Why is it efficient?

Answer 22

It leads to a more efficient outcome because it generally reduces transactions costs and free riding and does not distort the incentives for entry into the free market.

1. Requiring polluters to pay for the privilege of polluting is more likely to generate an efficient outcome than does a policy that legalizes pollution and requires victims to pay polluters to reduce emissions.
   - reduces transaction costs and free riding
2. Liability had significant long-term effects.
   - this practise encourages entry into the market and creates more pollution - people will pollute more to be paid.

Question 23

Explain the conditions of the social welfare function for the efficiency standard.

Answer 23

1. There are no equity weightings - everyone’s utility equally count in the overall social welfare.
2. No distinction if made between the utilities of victims and beneficiaries of pollution - the need to pollute holds as much weight as the need for a clean environment.

Question 24

How does the social welfare function illustrate the value judgements underlying the efficiency standard?

Answer 24

By treating victims and beneficiaries equally, efficiency proponents do not acknowledge a “right” to protection from harmful pollutants.

Question 25

Explain maximizing the economic pie

Answer 25

Conditional on the existing distribution of income, efficiency makes the economic pie as big as possible.

At the efficient point, the net monetary benefits produced by the economy are maximized.

Question 26

Explain societal’s standpoint on the polluter pays principle.

Answer 26

1. If you have to pay, you realize everyone else will free ride.
   - if the polluter has to pay to pollute, there is no free riding problem
2. Giving out money to pollute less - creates a disincentive to be truthful
   - peopel will lie and say that they are huge polluters, then reduce emissions to get money.
   - if you are the one paying, there will be no risk of over pollution because no one will pay for it.
3. It is easier to charge those who pollute than the whole world.
   - administrative issue

Question 27

What are the specific challenges that arise from uncertainty in benefit and costs estimates?

Answer 27

1. Importance of disclosure: any report needs to say not only who you work for but also who you are getting funding from
2. Politicians will try to control the political agenda:
   - they set the agenda about what they want to talk about
   - if you bring up the topic of environemnt, they will change the subject
3. Paralysis by analysis
   - paralyzingly you by picking at every word and every number - questioning everything