final

Question 1

all market based instruments for enviroment work by

Answer 1

forcing the relevant parties to internalize the external costs

Question 2

market-based approaches to negative externalities

Answer 2

reduce deadweight loss

Question 3

a characteristic of an efficient property right structure is

Answer 3

enforceability and exclusivity

Question 4

the Coase theorem

Answer 4

shows that participants may reach an economically efficient outcome in limited circumstances

Question 5

a potential barrier to achieving the efficient level of an externality through voluntary incentives is

Answer 5

• a large number of participants
• realization on the part of generators and victims that they are participants
• the willingness to bargain on the part of participants

Question 6

place a fee or tax on a negative externality

Answer 6

-provides an incentive to innovate
- reduces the deadweight loss from the externality
- provides for the potential for a double dividend

Question 7

the creation of efficient property right strucutres

Answer 7

may achieve the efficient outcome under limited circumstances

Question 8

a tax on emissions of 5 is instituted to achieve a target level of emissions Et. we know

Answer 8

MAC = 5 for all emitters

Question 9

a tax on emissions of 5 is instituted to achieve a target level of emissions Et. we know

Answer 9

MDF = 5

Question 10

4 categories of market failure

Answer 10

1. lack of competition
2. asymmetric information - incognizant market
3. public goods
4. externalities

Question 11

the ultimate goal is the economic approach to remedy market failure is to reach

Answer 11

economic efficiency

Question 12

economic remedy for externalities involves techniques for creating or mimicking a complete market which is

Answer 12

getting the participants to internalize external costs and benefits as much as possible

Question 13

two market-friendly approaches toward and externality

Answer 13

1. mimicking a market
2. establishing or energizing “efficient property rights”

Question 14

coase theorem

Answer 14

as long as all the relevant parties are willing and able to negotiate, an economically efficient outcome will be reached regardless of whether or when the property rights are assigned.

Question 15

limitations to applying the coase theory to remedy and externality.

Answer 15

1. victims and perpetrators have to recognize the effects
2. small number of relevant participants
3. liquidity impediment

Question 16

property right

Answer 16

bundle of entitlements defining the holders (owners) limitations and privileges in the use of assets (resource)

Question 17

characteristics of good property rights

Answer 17

1. exclusivity
2. transferability
3. enforceability

Question 18

exclusivity

Answer 18

all benefits and costs as a result of owning or using the assets should accrue only to the owner either indirectly or directly via the sale to others
-ownership is complete

Question 19

transferability

Answer 19

all property rights should be transferable from one owner to another through voluntary exchange

Question 20

enforceability

Answer 20

property rights should be secure from involuntary seizure or encroachment of others
-climate change = air pollutants that encroach on the lungs and affect you negatively

Question 21

characteristics of a pseudo market

Answer 21

a price that is established either directly or indirectly for the external cost

Question 22

direct encroachment on a price

Answer 22

charging of fee or levying a tax

Question 23

each generator of the externality faces the same charge tax or fee per unit of externality, each generator will abate until their MAC= the charge and then equals (MAC) are equalized across all generators

Answer 23

nothing

Question 24

charge in the fee or tax per unit generates the least cost achievement or the target level of the externalities

Answer 24

nothing

Question 25

two general sources of uncertainty

Answer 25

1. MDF 2. MAC

Question 26

advantages of an externality tax or fee

Answer 26

1. internalizes the cost of externalities (completes the market) 2. provides an economic incentive to innovate 3. provides economic incentive for the generators to find the best solution for themselves 4. raises revenue (double dividend) (raises revenue allows tax collector to use the revenue

Question 27

1st dividend

Answer 27

tax or fee reduces the dead weight loss from externality

Question 28

2nd dividend

Answer 28

sets a limit on the total externality allows trading (market activity) to establish the price

Question 29

Advantages of a tax or fee for an externality

Answer 29

1. completes the market 2. possibility of double dividend 3. provides incentives innovate 4.provides incentives for generators to find the best solution for them 5. minimize economic cost of reaching the target level of an externality

Question 30

cap and trade

Answer 30

1. establish an outcome 2. establish permits so the sum of P= Et 3. establish a mechanism for initially distributing there permits 4. enforce the use 5. allow permits to be traded

Question 31

total MAC

Answer 31

MAC== MACa + MACb

Question 32

when MACa > MACb

Answer 32

A has an incentive to purchase permits from B and B has incentive to sell

Question 33

When MACb > MACa

Answer 33

B has an incentive to offer to buy permits from A at a price that exceeds A's MAC has an incentive to sell

Question 34

advantages of cap and trade

Answer 34

1. w a thick market (participants are willing and able to trade) reach the target level of the externality at least cost 2. provide more certainty about the realized level of the externality 3. permit prices provide quick and readily available information 4. allows for non generators to participant 5. permits provided incentives for innovation - gives business owners a better reason to find less costly ways of doing business 6. persons are potential assets when reducing opposition

Question 35

disadvantages of cap and trade

Answer 35

1. permit prices fluctuate which adds uncertainty 2. caps are easily manipulated for political reasons 3. market may be thin if firms don't trade with each other

Question 36

characteristics of good economic policy

Answer 36

1. administrative aspects - simple to understand, simple to comply with, transparency (operation and effects) 2. economic aspects - minimize the costs of achieving the desired goal, provide incentives for innovation, limited scope for exceptions

Question 37

legislative burden

Answer 37

who is legally required to remit the tax

Question 38

economic burden

Answer 38

who ends up paying the tax

Question 39

regulation

Answer 39

mandating specific activities or technology - simple to comply with - do not minimize cost of achieving the desired goal - do not provide incentives for innovation

Question 40

issues with cap and trade

Answer 40

1. potential price volatility -in general, the price of an item is the result of the interaction between demand and supply 2. enforcement costs are probably higher under cap and trade 3. distribution of permits - permits are potential assets to the initial recipients - allows for experts to receive a rebate on carbon tax

Question 41

possible distribution strategies

Answer 41

1. auction them -eliminate the issue of handing them out potentially assets for free 2. possible stifling of competition by buying and holding permits 3. eliminates support

Question 42

possible distributions strategies 2

Answer 42

initial distribution of permits is based on historical emission patterns - viewed as fair or. reasonable by the historical emitters - biggest emitters benefit the most from this - enables the worst defenders - gives them less incentive to innovate if they get free permits

Question 43

guidelines for a carbon tax in the USA

Answer 43

1. simple to administer 2. low compliance tax 3. broad coverage 4. good signal to reduce emissions 5. avoid exemptions and different rates by user or use

Question 44

us official social cost of carbon is

Answer 44

51 per metric ton - recent studies in nature -cost of carbon = 180