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foundations of microeconomics

Questions and Answers of Foundations Of Microeconomics

To see how government actions can change the outcome in a market with external costs, let’s return to the example of paint factories and the river.Assume that the government has assessed the
By setting the tax equal to the marginal external cost (or marginal abatement cost if it is lower), firms can be made to behave in the same way as they would if they bore the cost of the externality
Governments can use taxes as an incentive for producers to reduce the pollution they create. Taxes used in this way are called Pigovian taxes,(named for Arthur Cecil Pigou, the British economist who
Governments use two main methods of confronting polluters with the costs of their decisions:Taxes Cap-and-trade Taxes
A Supreme Court decision says greenhouse gas emissions are pollution—the EPA must regulate them.Tax or Cap and Price Pollution
And lawmakers are subject to lobbying by the polluters whose actions they seek to control. The third approach for dealing with pollution directly addresses these three concerns.
Although command-and-control regulation provides clean water and has improved air quality, economists see three problems with this approach.It doesn’t confront individual producers with incentives
Command-and-control regulation works particularly well for keeping water resources clean because even a small breach of safety standards can bring a large catastrophic consequence. An example is what
The EPA has issued thousands of regulations that require chemical plants, utilities, and steel mills to adopt best-practice pollution-abatement technologies and to either eliminate or limit their
Clean Water Act of 1972. These Acts give the Environmental Protection Agency (EPA) the authority to issue regulations that limit emissions and achieve defined air and water quality standards.
Command-and-control environmental regulation in the United States is conducted under the provisions of the Clean Air Act of 1970 and the
The governments of most countries regulate what may be emitted into the atmosphere and dumped in rivers and lakes. The direct regulation of what is and is not legally permitted is called
The Coase property rights solution works only when the cost of reaching an agreement between property owners is low. In many situations, these negotiation costs are high, so this solution is not
If the forgone rent is less than the abatement cost, the factories will still create some pollution, but it will be the efficient quantity. If the abatement cost is lower than the forgone rent, the
Watch Property Rights Achieve an Efficient Outcome Market equilibrium occurs at a price of $1.50 per gallon and 2 million gallons of paint per month. This outcome is efficient.
(3) Market equilibrium is at a price of $1.50 a gallon and a quantity of 2 million gallons of paint a month. The market outcome is efficient because(4) marginal social cost equals marginal
(1) With property rights, the marginal cost curve that excludes the cost of pollution shows only part of the producers’ marginal cost.The marginal private cost curve includes (2) the cost of
Figure 10.3 illustrates the efficient market outcome with property rights in place. The paint producers face the pollution costs or the abatement costs, whichever is lower.• The MSC curve includes
Efficient Market Equilibrium With Property Rights
Suppose that the residents own their homes and the river. Now the factories must pay a fee to the homeowners for the right to dump waste into the river. The greater the quantity of waste dumped, the
The Coase theorem is the proposition that if property rights exist and the costs of enforcing them are low, then the market outcome is efficient and it doesn’t matter who has the property
Does it matter whether the polluter or the victim of the pollution owns the resource that might be polluted? The Coase theorem (named for British economist Ronald Coase who was the first to have this
An alternative to incurring the cost of using an abatement technology is to use the polluting technology but cut production, which will reduce pollution and result in higher income from renting homes
Abatement technologies are available to reduce carbon emissions from electricity generation and pollution from industrial processes and paint manufacture.
Use an Abatement Technology An abatement technology is a production technology that reduces or prevents pollution. The catalytic converter in every U.S. car is an example of an abatement technology.
The forgone rental income from homes alongside a polluted river is an opportunity cost of producing paint. It is part of the paint producers’marginal private cost and the paint producers must now
To see how property rights work, suppose that the paint producers have property rights on a river and the homes alongside it—they own the river and the homes. The rental income that the paint
Property rights are legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. Establishing property rights
Tax or cap and price pollution Establish Property Rights
and the residents of the riverside homes—can gain. So what can be done to fix the inefficiency? Three methods are available and we’ll examine each of them. They are Establish property rights
The equilibrium outcome is one of inefficient overproduction and the gray triangle shows the deadweight loss that arises in this situation.If some method can be found to get paint factories to create
because marginal social cost exceeds marginal benefit.The efficient outcome is when marginal benefit equals marginal social cost. In Figure 10.2 , the efficient quantity is 2 million gallons of the
The demand curve and marginal benefit curve for paint is (see Chapter 6 , here ). The supply curve and marginal private cost curve of producers of the paint is (see Chapter 6 , here ). The supply
(5) The area of the gray triangle shows the deadweight loss created by the pollution externality.Watch Inefficiency with an External Cost
(4) The efficient quantity of paint is 2 million gallons a month where marginal benefit equals marginal social cost.
(1) Market equilibrium at a price of $1.00 a gallon and 4 million gallons of paint a month is inefficient because• (2) marginal social cost exceeds (3)marginal benefit.
A private cost of production is a cost that is borne by the producer of a good or service. Marginal cost is the cost of producing an additional unit of a good or service. So marginal private cost
We illustrate the economics of a negative externality with the example of a paint factory that dumps waste into a river. The people who live by the river use it for fishing and boating and bear the
This emphasis on costs and benefits does not mean that economists have the right answers. Rather, economics provides a set of tools and principles that help to clarify the issues.
Popular discussions about climate change and pollution focus on physical aspects of the problem and not on costs and benefits. A common assumption is that activities that damage the environment are
Although climate change from human actions is new, pollution and other environmental problems are not. Preindustrial towns in Europe had sewage disposal problems that brought cholera and plagues that
Climate change is a negative externality. It is the unintended consequence of production and consumption activities that create carbon emissions and global warming. We’ll address the challenge of
10.1 Negative Externalities:Pollution
use of the automobile? Should tuition be even lower to encourage even more people to enroll in school? Or have we got these incentives just right in the social interest?Watch Concept Video: Negative
Think about your attitude as a citizen–voter to these two externalities. Should the gas tax be higher to discourage the
You are responding to the huge incentive of subsidized tuition by being in school. Without subsidized college education, fewer people would attend college and university and with fewer college
You respond to the gasoline tax by buying a little less gas than you otherwise would. As you will see in Eye on Climate Change , this incentive is small compared to that in some other countries. With
MyEconLab Critical Thinking Exercise Think about the externalities, both negative and positive, that play a huge part in your life; and think about the incentives that attempt to align your
Positive consumption externality.EYE on YOUR LIFE Externalities in Your Life
Concert Hall in Los Angeles, an external consumption benefit flows to everyone who has an opportunity to view it.Education, which we examine in more detail in this chapter, is a major example of a
When the owner of a historic building restores it, everyone who sees the building gets pleasure. Similarly, when someone erects a spectacular home or other exciting construction or building such as
Noisy parties and outdoor rock concerts are other examples of negative consumption externalities. They are also examples of the fact that a simple ban on an activity is not a solution. Banning noisy
Negative consumption externalities are a source of irritation for most of us. Smoking tobacco in a confined space creates fumes that many people find unpleasant and that pose a health risk. So
Positive production externalities are a smaller problem than negative ones. But they pose interesting problems. A notable one arises in the production of fruit and vegetables and honey. To produce
All these activities are examples of production that brings negative externalities. The costs of these production activities are borne by everyone, and even by future generations.
Logging and the clearing of forests in California, Oregon, and Washington destroy the habitat of wildlife and also influence the amount of carbon dioxide in the atmosphere.Noise is another negative
Negative production externality.Power generators, airplanes, and road vehicles are the biggest polluters.Burning coal to generate electricity emits carbon dioxide that warms the planet and it emits
Negative production externalities are among the most serious challenges faced by the world today. Starting in the Industrial Revolution of the eighteenth century, humans have poured billions of tons
An externality is a cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or a benefit that arises from consumption and that falls on someone
Climate change is an externality, and a huge one. You will learn what economists say about limiting it in this chapter. But first we need to build a foundation. We begin by classifying and
Explain why negative externalities lead to inefficient overproduction and how property rights and pollution taxes can achieve a more efficient outcome.10.1
7. The people who support restricted international trade say that.A. protection saves jobs, in both the United States and foreign economies B. U.S. firms won’t be able to compete with low-wage
6. If Korea imposes an import quota on U.S. oranges, losers include Korean of oranges and U.S. of oranges.A. consumers; consumers B. consumers; producers C. producers; consumers D. producers;
5. The U.S. tariff on paper the U.S. price of paper, U.S.production of paper and the U.S. gains from trade.A. raises; increases; increases B. doesn’t change; increases; increases C. doesn’t
4. With free trade between China and the United States, the winners are and the losers are .A. U.S. consumers of U.S. imports; U.S. producers of the U.S. import good B. China’s consumers of
3. With free trade between the United States and Canada, the United States exports tomatoes and Canada exports maple syrup.U.S. consumers .A. of tomatoes gain and Canadian consumers of maple syrup
2. A country will export wheat if, with no international trade, .A. it produces a surplus of wheat B. its opportunity cost of producing wheat is below the world price C. its domestic price of wheat
Click here to open your MyEconLab Study Plan and work these interactive problems online.1. The fundamental force driving international trade is comparative.A. advantage: a country exports those goods
9. What argument might be used to encourage the government of Mexico to introduce a $2,000 tariff on car imports from the United States? Who will gain and who will lose as a result of Mexico’s
8. If the government of Mexico introduces an import quota of 4 million cars a year, what will be the price of a car in Mexico, the quantity of cars produced in Mexico, and the quantity imported?
7. If the government of Mexico introduces a $2,000 tariff on car imports, what will be the price of a car in Mexico, the quantity of cars produced in Mexico, the quantity imported into Mexico, and
General Motors’ argument for the high tariff? Is the tariff the best way to achieve the goals of the argument?  Figure 1 shows the car market in Mexico when Mexico places no restriction on
6. In the 1950s, Ford and General Motors established a small carproducing industry in Australia and argued for a high tariff on car imports. The tariff has remained through the years. Until 2000, the
5. The United States exports services and imports coffee. Why does the United States gain from exporting services and importing coffee? How do economists measure the net gain from this international
4. Suppose that the world price of sugar is 20¢ a pound, Brazil does not trade internationally, and the equilibrium price of sugar in Brazil is 10¢ a pound. Brazil then begins to trade
Use Figure 1 and the following information to work Problems 7 to 9 .
3. The United States exports wheat. Draw a graph to illustrate the U.S. wheat market if there is free international trade in wheat. On your graph, mark the price of wheat and the quantities bought,
2. Draw a graph of the U.S. market for textiles and show how removing a tariff would change producer surplus, consumer surplus, and the deadweight loss from the tariff.
1. Explain who in the United States would gain and who might lose from dismantling trade barriers between the United States and India.
The United States also maintains barriers against Indian imports such as textiles. Mrs. Clinton, President Obama, and Anand Sharma, the Indian Minister of Commerce and Industry, say they want to
Use the following information to work Problems 1 and 2 .The future of U.S.–India relations When she was Secretary of State, Hillary Clinton gave a major speech covering all the issues in
11. Read Eye on Globalization and draw two graphs to show how U.S. consumers gain from iPads manufactured in China and why Chinese workers also gain.Source: www.state.gov Instructor Assignable
10. Explain what an antidumping tariff is. What argument might U.S.steelmakers use to get the government to raise the tariff on steel imports?
9. What is dumping? Who in the United States loses from foreign firms’ dumping of steel?
8. Explain who in the United States gains and who loses from restrictions on steel imports. How do you expect the prices of automobiles and office towers to be affected?
Steelmakers want the United States to put restrictions on imports from five nations, alleging unfair pricing of steel for the automobile and construction industries. 
. Suppose that the U.S. government puts an import quota on roses.Show on your graph the consumer surplus that is redistributed to producers and importers and also the deadweight loss created by the
6. Who in the United States loses from this trade in roses and would lobby for a restriction on the quantity of imported roses? If the U.S. government put a tariff on rose imports, show on your graph
5. The supply of roses in the United States is made up of U.S.-grown roses and imported roses. Draw a graph to illustrate the U.S. rose market with free international trade. On your graph, mark the
. Who in the United States loses from free trade in shoes with Brazil? Explain. 
3. The world price of a pair of shoes is $20. Explain how consumer surplus and producer surplus in Brazil change as a result of international trade. Show the change in Brazil’s consumer
2. The world price of a pair of shoes is $20. Explain how consumer surplus and producer surplus in the United States change as a result of international trade. On the graph, show the change in U.S.
Explain which country gains from this trade.
1. Which country has a comparative advantage in producing shoes?With international trade, explain which country would export shoes and how the price of shoes in the importing country and Use the
Use Figures 1 and 2 to work Problems 1 to 4 . Figure 1 and Figure 2 show the markets for shoes if there is no trade between the United States and Brazil.    
Figure 2 Brazil’s Shoe Market Study Plan Problems and Applications
Click here to open your MyEconLab Study Plan and work these interactive problems online.Figure 1 U.S. Shoe Market
Explain and evaluate arguments used to justify restricting international trade.9.4 Key Terms MyEconLab Key Terms Quiz Dumping Export subsidy Exports Import quota Imports Infant-industry argument Rent
9.3 Explain the effects of international trade barriers.
Trade is restricted because protection brings small losses to a large number of people and large gains to a small number of people.

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