Module 1 (Part 2)

Question 1

(also known as spillover effects, side effects, or third-party effects) arise when some benefits or costs of an action affect individuals who are not part of the decision-making process.

Answer 1

Externality

Question 2

This results in inefficiencies, as the total costs or benefits are not fully captured by the decision-maker.

Answer 2

Externality

Question 3

a cost or benefit caused by a producer that is not financially incurred or received by that producer

Answer 3

Externality

Question 4

Benefits that others enjoy without being part of the original transaction.

Answer 4

Positive Externality

Question 5

Costs imposed on third parties who are not part of the decision-making.

Answer 5

Negative Externality

Question 6

Externalities are not the main objective of the activity, but are by-products.

Answer 6

Incidental or Unintentional Effects of Externality

Question 7

a way to deal with the tragedy of the commons
problem surrounding common resources such
as the environment (by suggesting that clear property rights can lead to negotiated solutions for the management of common resources, such as the environment. )

Answer 7

Coase Theorem

Question 8

If the actions of one party (Party A) harm another party (Party B), then Party B can incentivize Party A to reduce or stop the harmful action.

Answer 8

Coase Theorem

Question 9

asserts that those who cause pollution should bear the costs associated with managing that pollution to prevent damage to human health and the environment.

Answer 9

Polluters Pays Principle

Question 10

also known as cap and trade

Answer 10

Emission Trading System (ETS)

Question 11

a market-based approach to controlling
pollution by providing economic incentives for achieving reductions in the emissions of pollutants

Answer 11

Emission Trading System (ETS)

Question 12

It operates as a tradable-permit system for greenhouse gas (GHG) emissions.
A cap is set on the total GHG emissions allowed, and companies must hold permits for their emissions.

Answer 12

Emission Trading System (ETS)

Question 13

is a UN-run carbon offset scheme that allows countries to invest in GHG emissions-reducing projects in other countries and claim those reductions as part of their own emissions targets.

Answer 13

Clean Development Mechanism (CDM)

Question 14

developing nations receive investment and support for sustainable development, while developed nations gain a flexible and cost-effective way to meet their emission reduction targets. This mechanism exemplifies how international cooperation can address global challenges like climate change while promoting sustainable development.

Answer 14

Clean Development Mechanism (CDM)

Question 15

Incidental by-products can be turned into useful products.

Answer 15

Transforming External Effects into Joint Products

Question 16

Resources can be protected by placing a price on their usage, ensuring more efficient and sustainable use.

Answer 16

Assigning Market Prices to Underpriced Resources

Question 17

Firms can include external costs in their internal accounting by providing compensation or investing in public goods.

Answer 17

Substituting Internal Accounting Prices for Market Prices

Question 18

Governments may impose taxes, fees, or grants to internalize externalities.

Answer 18

Using Fees, Charges, or Subsidies

Question 19

Challenges in Internalizing Externalities

Answer 19

Property Rights Complexity and Difficult to Demarcate (set boundaries) Affected Areas

Question 20

Three Ways on Evaluating External Effects

Answer 20

Compensating Variation (CV)
Equivalent Variation (EV)
Monetary Value of Externalities

Question 21

-Sacrificing one or more things to gain something else.
-Involves considering all possible alternatives given up.

Answer 21

Trade-off

Question 22

the loss of value or benefit that would be
incurred by engaging in that activity,
relative to engaging in an alternative
activity offering a higher return in value or
benefit;

Answer 22

Opportunity Cost

Question 23

The value or return lost by choosing one option over the next best alternative.
Focuses on the specific benefit that could have been gained.

Answer 23

Opportunity Cost

Question 24

the value of the next-highest-valued
alternative use of that resource

Answer 24

Opportunity Cost

Question 25

Trade-offs emphasize the balance between competing options, while opportunity cost quantifies the value of the next best alternative that is sacrificed.

Answer 25

True

Question 26

Scenario 1: Vacation Planning
Trade-Off: You have $3,000 to spend on a vacation. You must decide between a week-long trip to Europe or a two-week road trip across the country. Choosing Europe means sacrificing the longer road trip experience.

Opportunity Cost: If you choose the Europe trip, the opportunity cost is the experiences, memories, and additional time spent traveling that you would have gained from the two-week road trip. Conversely, if you choose the road trip, the opportunity cost is the unique cultural experiences and sights of Europe that you would have missed.

Scenario 2: Time Management
Trade-Off: You have a limited amount of time in a day. If you spend two hours studying for an exam, you might not have time to hang out with friends or pursue a hobby. The trade-off is between studying (potentially improving your grades) and socializing or relaxing.

Opportunity Cost: If you decide to study for the exam, the opportunity cost is the fun and relaxation you would have experienced with friends during that time. If you choose to hang out instead, the opportunity cost is the potential benefits of improving your knowledge and performance on the exam.

Answer 26

Example of Opportunity Cost vs Trade Off

Question 27

Illustrates the relationship between economic growth and income inequality in the form of an inverted U-shaped graph

Answer 27

Kuznets Curve

Question 28

It describes how, as a country’s degradation/inequality increases, adversities initially rises, reaches a peak, and then declines.

Answer 28

Kuznets Curve

Question 29

Formula of Opportunity Cost

Answer 29

= (returns on Forgone
Option) - (returns on Chosen Option)

Question 30

• hypothesized relationship between economic development and environmental degradation
• as economies grow, environmental
  impacts may rise, but eventually they fall

Answer 30

Kuznets Curve

Question 31

Levels in Kuznets Curve

Answer 31

Pre-industrial economies (early stage; rising)
Industrial Economies (peak)
Post-Industrial (economic growth; public awareness; decline of environmental degradation)