Managerial Economics Study Set 11
Quiz 19 :
Government in the Market Economy
B. True Externality is a benefit or cost which results from an economic activity and which affect an otherwise unrelated party. A negative externality exists when a voluntary market transaction between two parties imposes involuntary costs on a third party. C. True The major aim of prices is to encourage buyer to economize on products and services that are relatively costly to produce and to raise their purchases of goods and services that are in comparison cheap to produce. A key benefit of free-market is that it usually leads to a scenario in which incremental production cost equals price. Therefore, we can conclude that, efficiency requires the price of goods and services reflect all incremental costs of production, including the cost of inputs, the value of the producer time and effort, and any spillover effects. D. True Pigou taxes are imposed to enhance the allocation of resources. They hold the consumers and producers accountable for the full costs of production. Therefore, with an appropriate Pigou tax the costs that pollution imposes on the public will be considered when the firm decides where to locate a plant, which technologies to use, or how much to produce. E. False In few cases introducing property rights is costly. Moreover, it is not certain with clearly defined property rights, affected parties will agree on a mutually beneficial outcome. In such a scenario, other forms of government intervention are used including subsidies, taxes, and direct command-and-control regulation. Therefore, in many cases the best remedy for externalities is not to define property rights and allow the affected parties to transact privately to attain a mutually beneficial outcome.
Remember, Pigou taxes are supported based on the notion that they can enhance the allocation of resources by holding the consumers and producers accountable for the full costs of production. But, opponents of Pigou taxes argue that they add to those mark-up prices which create pollution. This additional increase in prices brings down consumer purchasing power. Given the income taxes if labor market is distorted, Pigou taxes can wider the amount of distortion.
During production, companies sometimes harm the environment by adding noise, water and air pollution without suitable charges for such damages firms economic incentives are not properly reflected. B. Under rules and regulations, producers generally have an incentive to involve in legal procedure to avoid regulatory costs. Under a scheme of payments, producers generally have an incentive to reduce the flow of pollution and enhance economic performance. Under imposition of penalties or fines, firms have an economic incentive to reduce the flow of pollution to avoid charges. C. Under rules and regulations and imposition of penalties or fines, producers, consumers, employees and stockholders all pays for a clean environment. Under a scheme of payments, to encourage flow of pollution reduction society pays to a firm for a clean environment. D. On the basis of efficiency consideration, a scheme of payments is preferred over imposition of penalties or fines and rules and regulations because from efficiency point of view, cost of clean-up environment must be paid by those who derive maximum benefit from it. On the basis of equity consideration, imposition of penalties or fines and rules and regulations over rules a scheme of payments because from an equity viewpoint all parties treated to be equal.