Question

 

1. Command-and-control policies and market-based policies are policies used to deal with externalities. Provide a specific example of each policy in the economy today and explain how they work.

2. “Any public good is worth producing because it benefits so many people.” Do you agree with this statement? If not, how would you decide which public good should be produced and which should not?

3. Explain why there is excess environmental pollution in our society?

Answer 1

SOLUTION :

Question 1.

Command-and-control mechanisms have several drawbacks. It is very costly for regulators to gather necessary information, and they often have to collect it from the sources that they are regulating – creating the possibility for inaccurate or dishonest reporting. Polluters also have very little choice about how to meet the standards; therefore, there is no incentive to research new and creative ways to reduce their emissions. Finally, since they are often uniformly applied across broad categories of sources, it is unlikely that it can be the most cost-effective way to decrease emissions since marginal costs will vary among the sources.

Question 2.

Public goods have two defining characteristics: they are nonexcludable and non-rival. The first characteristic, that a public good is nonexcludable, means that it is costly or impossible to exclude someone from using the good. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. However, if national defense is provided, then it includes everyone. Even if you strongly disagree with America’s defense policies or with the level of defense spending, the national defense still protects you. You cannot choose to be unprotected, and national defense cannot protect everyone else and exclude you.The second main characteristic of a public good, that it is non-rival, means that when one person uses the public good, another can also use it. With a private good like pizza, if Max is eating the pizza then Michelle cannot also eat it; that is, the two people are rivals in consumption. With a public good like national defense, Max’s consumption of national defense does not reduce the amount left for Michelle, so they are non-rival in this area.

Question 3.

An externality, sometimes called a spillover, occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange. Externalities can be positive or negative.Despite the gradual reduction in emissions from fossil fuels, many important environmental issues remain. Along with the still-high levels of air and water pollution, other issues include hazardous waste disposal, destruction of wetlands and other wildlife habitats, and the impact of pollution on human health.Pollution is a negative externality. Economists illustrate the social costs of production with a demand and supply diagram. The social costs include the private costs of production incurred by the company and the external costs of pollution that are passed on to society.