Chapter Review: Key Points

Date: 2015-10-07; view: 539.

Chapter Objectives

ENVIRONMENTAL ECONOMICS

Chapter 2 (34) Module 5

After you have read and studied this chapter you should be able to describe how both positive and negative externalitiescause inefficiency; the advantages that cause individuals and firms to pollute; and alternative policies to overcome pollution

1. Goods that are purely rival and exclusive are pure private goods. Such goods (e.g., ice cream or umbrellas) are usually efficiently provided in a private market system. Goods that are nonrival but exclusiveentail excess capacity, and are also efficiently provided by marketsunlesselements of natural monopoly are present. A good that is both nonrival and nonexclusive is я pure public good. Public goods will be less than optimally provided by the market system, if provided at all, because of attempts to free ride,

2. A rival but nonexclusive good embodies externalities that often hinders the efficiency of market solutions. Pollution may be the problem if externalities are negative (costly); underproduction may result if externalities are positive (beneficial).

3. The four stages in the development of property rights are (a) common access/nonscarcity, (b) common access-scarcity, (c) agency restrictions, and (d) fee-simple property rights. The term fee-simple property rights means that you can do anything you want with your property so long as you do no physical damage to the property of others.

4. Positive externalities occur when an activity confers benefits onexternal third parties. Too few of such activities are undertaken because private decision makerstend to ignore the external benefits.

5. Pollution situations in which damaged third parties are uncompensated, and hence unconsidered, are examples of negative externalities. Negative externalities impose costs on third parties. Too many activities generating negative externalities are undertaken because private decision makers weigh the costs imposed on others too lightly, if at all.

6. Environmental quality is a public good, and controlling environmental pollution is costly. There are trade-offs between protecting the environment and producing goods that generate pollution, so the optimal pollution level is greater than zero.

7. Pollution abatement may occur through negotiation, moral suasion (jawboning and bad publicity), effluent charges, subsidies, lawsuits, the assignment of pollution rights, and government regulation. No single solution applies to all situations of negative externalities; they must generally be resolvedon a case by case basis.

8. Pollution rights might be auctioned and then made transferable. The Environmental Protection Agency initially relied heavily ondirect regulation through pollution ceilings, but is increasingly using property rights solutionsto control environmental deterioration.

9. The bubble concept sets a pollution performance standard for a plant. A firm can transfer rights to pollute within or between plants inside the "bubble" as long as the standard is met.

10. The offset policy allows new firms that wish to produce in a polluted area to operate if they can induce existing firms to reduce air pollutantsto "offset" the newcomer's emissions.