Question

2. Wind turbines generate energy, but they also make noise that disturbs and even affects the health of people living within a mile of a turbine. Currently the amount of noise generated is determined by how many kilowatts the windmill generates. Two policies have been proposed to address this situation:

(i) A pigouvian tax on each kilowatt generated by a windmill, to be paid by windmill owners.

(ii) A tradable permit program, in which windmill owners are given permits allowing them to generate a certain number decibel-hours of noise, where “decibel hour” output is determined by multiplying the number of hours the windmill operates by the average number of decibels of noise it makes while operating. Windmill owners may buy and sell these permits.

T          F          a. The noise generated by the wind turbines is an example of a negative

externality.

T          F          b. Any policy that reduced the amount of noise generated by the windmills would

improve social welfare, although some policies would improve it more than others.

T          F          c. From the point of view of social efficiency, an advantage of the pigouvian tax

policy is that it would generate revenue for the government.

T          F          d. Both the pigouvian tax policy and the permit program would raise the price of

energy generated by the windmills.

T          F          e. Both the tradable permit program and the Pigouvian tax policy would

incentivize the discovery of technologies for reducing the noise generated by

windmills.

Answer 1

The statements and their explanations are discussed below. It is assumed that only these two policy options exist for the government:

a. The noise generated by the wind turbines is an example of a negative externality.

True.

The noise generated by the wind turbines causes disturbance and health problems to society at large. Hence, it is an example of a negative externality.

b. Any policy that reduced the amount of noise generated by the windmills would improve social welfare, although some policies would improve it more than others.

False.

While any policy that reduces noise will improve social welfare, it also depends on the type of policy. Not every policy will have the same effect. For example, a complete ban will not raise any revenue. Further, reduction of noise also means less wind energy is produced.

However, market based policies like taxes or permits will improve government revenues in the same manner. They give the same result.

c. From the point of view of social efficiency, an advantage of the pigouvian tax policy is that it would generate revenue for the government.

False.

The statement is false, in the sense that a pigouvian tax will generate revenue for the government; but a permits based system will also generate the same revenue initially, when permits are allocated. Hence, it is not that the tax policy has a higher revenue associated with it.

d. Both the pigouvian tax policy and the permit program would raise the price of energy generated by the windmills.

True.

In the pigouvian tax, the per unit price of energy will be raised directly.

In the permit program, permits will be allocated initially, but at a price. This price will raise the overall cost of generating energy.

e. Both the tradable permit program and the Pigouvian tax policy would incentivize the discovery of technologies for reducing the noise generated by windmills.

True.

In both cases, the cost of generating energy rises. Firms have to find a way to reduce noise, so that they end up paying fewer taxes, or they end up needing fewer permits.