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economics test 1 > final > Flashcards

final Flashcards

1
Q

all market based instruments for enviroment work by

A

forcing the relevant parties to internalize the external costs

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2
Q

market-based approaches to negative externalities

A

reduce deadweight loss

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3
Q

a characteristic of an efficient property right structure is

A

enforceability and exclusivity

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4
Q

the Coase theorem

A

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

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5
Q

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

A
  • 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
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6
Q

place a fee or tax on a negative externality

A

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

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7
Q

the creation of efficient property right strucutres

A

may achieve the efficient outcome under limited circumstances

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8
Q

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

A

MAC = 5 for all emitters

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9
Q

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

A

MDF = 5

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10
Q

4 categories of market failure

A
  1. lack of competition
  2. asymmetric information - incognizant market
  3. public goods
  4. externalities
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11
Q

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

A

economic efficiency

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12
Q

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

A

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

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13
Q

two market-friendly approaches toward and externality

A
  1. mimicking a market
  2. establishing or energizing “efficient property rights”
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14
Q

coase theorem

A

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.

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15
Q

limitations to applying the coase theory to remedy and externality.

A
  1. victims and perpetrators have to recognize the effects
  2. small number of relevant participants
  3. liquidity impediment
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16
Q

property right

A

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

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17
Q

characteristics of good property rights

A
  1. exclusivity
  2. transferability
  3. enforceability
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18
Q

exclusivity

A

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

19
Q

transferability

A

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

20
Q

enforceability

A

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

21
Q

characteristics of a pseudo market

A

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

22
Q

direct encroachment on a price

A

charging of fee or levying a tax

23
Q

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

A

nothing

24
Q

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

A

nothing

25
Q

two general sources of uncertainty

A
  1. MDF
  2. MAC
26
Q

advantages of an externality tax or fee

A
  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
27
Q

1st dividend

A

tax or fee reduces the dead weight loss from externality

28
Q

2nd dividend

A

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

29
Q

Advantages of a tax or fee for an externality

A
  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
  4. minimize economic cost of reaching the target level of an externality
30
Q

cap and trade

A
  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
31
Q

total MAC

A

MAC== MACa + MACb

32
Q

when MACa > MACb

A

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

33
Q

When MACb > MACa

A

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

34
Q

advantages of cap and trade

A
  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
35
Q

disadvantages of cap and trade

A
  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
36
Q

characteristics of good economic policy

A
  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
37
Q

legislative burden

A

who is legally required to remit the tax

38
Q

economic burden

A

who ends up paying the tax

39
Q

regulation

A

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

40
Q

issues with cap and trade

A
  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
41
Q

possible distribution strategies

A
  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
42
Q

possible distributions strategies 2

A

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

43
Q

guidelines for a carbon tax in the USA

A
  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
44
Q

us official social cost of carbon is

A

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

economics test 1 (2 decks)

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