Economics of Social Issues Study Set 2

Business

Quiz 4 :

Pollution Problems: Must We Foul Our Own Nests

Quiz 4 :

Pollution Problems: Must We Foul Our Own Nests

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Show graphically and explain why polluters face an incentive to overproduce their product.
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When the social costs of production are able to be passed on to the consumers or to society, polluters are given an incentive to overproduce their product without facing many financial consequences.
These producers are not required to bear the full cost of production. They are thus able to meet or exceed the demand for the product and to receive a profit while keeping their marginal private costs relatively low. As shown in the graphic below, it would be advantageous for producers to operate products at the highest price and production rate; this causes a reduction in marginal social benefits but a rise in marginal social costs for the resources used to make the product.
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Show graphically and explain why those who bear the burden of pollution face an incentive to under-produce their products.
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When companies are faced with negative financial effects directly or indirectly related to pollution, they are given an incentive to under produce their own products or services to minimize their marginal private cost.
As with overproduction, this comes at a cost to the consumer but in the opposite direction; supply for the product or service is not met and tends to stay at a level below what would be ideal for the consumers. Basically, as shown in the graphic below, consumers are paying more for less to cover the costs of production. By not producing optimal levels of the product and charging a high price for what is produced, the company still receives its profit and keeps the marginal private cost low.
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Discuss: "The goal for pollution control should be the complete elimination of all polluting discharges."
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The sentiment of completely wiping out pollution is a common and noble reaction to what many of us see as a never-ending problem. However, it is often forgotten that such endeavors are not without their costs. A water-treatment facility, for example, incurs the cost of ensuring that a population's water supply is sufficiently filtered and made potable for consumption.
If the treatment plant has the added burden of cleaning waste pollution from surrounding factories, then its cleanup costs will increase proportionate to the amount of pollution that is has to neutralize. Once the treatment exceeds a certain point in its cleanup endeavors, the costs may begin to outweigh the benefits. For the treatment plant to bankrupt itself in its cleaning efforts would not be beneficial to the plant or its many customers.
This is true of pollution in general. There is no doubt that many, if not all, people would like to eradicate it. Initially, reducing the amount of pollution increases social well being and over time, reduces marginal social cost. However, to mindlessly continue to spend money on cleaning up pollution would eventually cause the marginal social cost to increase beyond the marginal social benefit. This is the opposite of what we want to happen by reducing pollution.
The ideal goal for pollution control would be to reduce pollution levels to a point that is as close as possible to equilibrium between the marginal social cost and the marginal social benefit.

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From an economic perspective, explain why pollution takes place.
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Define and give examples of externalities in consumption. Be sure to list externalities which have both positive and negative effects.
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Suppose the government is using a tax on polluting discharges to reach the socially optimal level of pollution control. If, over time, it is decided that the optimal level of control is greater than originally thought, should the government raise or lower the tax?
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Define and list both explicit and implicit costs associated with your taking this class.
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Explain how the creation of a pollution rights market might work. Suppose, after a few years, it was decided that too much pollution was being allowed under the plan. What could be done?
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Define and give examples of externalities in production. Be sure to list externalities which have both positive and negative effects.
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Relative to using a tax on polluting discharge as a means of pollution control, what advantages does the creation of a market for the right to pollute offer? Are there disadvantages?
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Explain how polluting firms effectively force other firms to bear part of their legitimate production costs.
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Under what circumstances would it make economic sense to eliminate all of a particular type of pollution?
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The equilibrium reached by a market typically reflects a resource allocation that maximizes social well-being. Explain why this will not be the case when externalities in production exist.
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Recent research indicates that secondhand smoke from cigarettes endangers the health of those who are in sustained contact with smokers. Show graphically and explain why the market, operating on its own, will lead to an overproduction and overconsumption of cigarettes.
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In the Clean Air Act of 1990, the federal government created a market for the "right to pollute." How successful has this program been both in terms of reducing air pollution and in terms of the cost of doing so?
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Who should pay the cost of disposing of the packaging of products, the consumer or the producer?
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Show graphically and explain how taxes can be used to cause polluting firms to voluntarily cut their polluting discharges to the socially optimal level.
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Is concern for the environment a normal good? Discuss in the context of the destruction of rain forests in particularly poor parts of the world.
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When no one owns a given piece of property, it is often used as a dumping ground. Does this mean that the pollution could be effectively controlled simply by providing someone with an ownership right to the property?
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Distinguish between economic and accounting costs. Which is a better measure of the true cost to society of producing a particular good or service?
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