Economics of the environment

Question 1

External costs

Answer 1

Has an effect on someone other than the consumer.

E.g. second hand smoke from people smoking in public places.

Question 2

Negative externality

Answer 2

Externality = a cost or benefit that arises from production/consumption and falls on someone other than the producer/consumer.
Negative externality = imposes an external cost.

Question 3

Cost externalities

Answer 3

Cause social costs to be underappreciated by resource allocation decision makers in the market, causing too much of the activity creating the externality to be produced.

Question 4

Benefit externalities

Answer 4

Cause social benefits to be underappreciated by resource allocation decision makers in the market, causing to little of the activity creating the externality to be produced.

Question 5

Private cost of production

Answer 5

Borne by the producer.

Question 6

Marginal private cost

Answer 6

The private cost of producing one more unit of a good/service.

Question 7

External cost of production

Answer 7

Is borne by others, not the producer.

Question 8

Marginal external cost

Answer 8

The cost of producing one more unit of a good/service that falls on people other than the producer.

Question 9

Marginal social cost

Answer 9

The marginal cost incurred by the whole society.

MSC = MC + marginal external cost

Question 10

The marginal external cost is represented on a graph as…

Answer 10

the vertical distance between the MC and MSC curves

Question 11

Efficient quantity

Answer 11

MSC=MSB

Question 12

The competitive market…

Answer 12

overproduces and creates a deadweight loss

Question 13

Externalities arise because…

Answer 13

of the absence of property rights.

Question 14

Property rights

Answer 14

legally established titles to the ownership, use, and disposal of factors of production and goods and services. These rights are enforceable in court.

Question 15

The role of property rights in the market

Answer 15

The owner of well-defined property rights receives the social benefit and bears the social cost of using that resource.
Property rights “internalise” the externality.

Question 16

Coase theorem

Answer 16

The proposition that, if property rights exist, only a small number of parties are involved; and, if transactions costs are low, then private transactions are inefficient.
There are no externalities because all parties take into account the externalities involved.
The outcome is independent of who has the property rights.

Question 17

Transactions costs

Answer 17

The cost of conducting a transaction.

E.g. the transactions costs of buying a home include: fees for an estate agent, mortgage advisor, and legal assistance.

Question 18

3 methods used by government to cope with external costs:

Answer 18

1. taxes
2. emissions charges
3. cap-and-trade

Question 19

Tragedy of the commons

Answer 19

The overuse of a common resource that arises when its users have no incentive to conserve it/use it sustainably.

Question 20

Emissions charges

Answer 20

Government sets a price per unit of pollution - the more a firm pollutes, the higher are its emissions charges.

Question 21

Taxes

Answer 21

The government can set a tax equal to marginal external cost for the producers of pollution.

Question 22

Cap-and-trade

Answer 22

Each firm has a permitted level of pollution per period. Firms trade permits. The market price of a permit confronts polluters with the marginal cost of their actions and leads to an efficient outcome.

Question 23

Renewable resource

Answer 23

One that replenishes itself by birth and growth of new members of the population.

Question 24

Sustainable catch

Answer 24

the amount of fish that can be caught year after year without depleting the stock.

Question 25

Individual transferrable quotas (ITQs)

Answer 25

A production limit that is assigned to an individual who is free to transfer the quota to someone else.