10

10
Student: ___________________________________________________________________________
1. When people can negotiate with each other to come up with mutually satisfactory ways to deal with
environmental externalities with little or no involvement of the government this is referred to as
________.
A. moral suasion
B. an incentive-based approach
C. a decentralized approach
D. a centralized approach
2. ________ suggest(s) that in the presence of an externality bargaining can achieve the socially efficient
equilibrium regardless of the initial allocation of property rights.
A. Liability laws
B. The Coase theorem
C. The legal doctrine of standing
D. The burden of proof
3. Suppose both a chemical company and a commercial fishery operate on the same river. According to the
Coase theorem the socially efficient level of emissions can be reached through bargaining between the
two parties if ________ has the right to use the river.
A. just the chemical company
B. just the fishery
C. either the chemical company or the fishery
D. the regulator
4. Which of the following is NOT a reason why private bargaining can fail to achieve the socially optimal
level of emissions?
A. The resource is an open-access good making it difficult to assign property rights.
B. Net social gains depend on the initial assignment of property rights.
C. Restrictions on use prevent property owners from capturing social values.
D. Transaction costs are too high due to the necessity to include many parties in the negotiations.
5. Goods that give the same level of pleasure as ordinary goods but that involve less environmental damage
in either their production, use or disposal are known as ________.
A. generic goods
B. luxury goods
C. green goods
D. environmental goods
6. If the MAC and MD curves do not change based on who has the property rights, the same socially
efficient equilibrium will be reached independent of who holds the rights to pollute.
True False
7. Net social gains are independent of who has the property rights to environmental resources.
True False
8. The Coase theorem states that social efficiency can be obtained through bargaining and that the gains to
each party involved will be identical regardless of who has the rights.
True False
9. Coase proposed that in the case of an externality if transactions costs are low, bargaining can achieve the
socially efficient outcome regardless of the initial allocation of property rights.
True False
10. The more public an environmental good is, the more likely private property rights can be used to achieve
the socially optimal level of emissions.
True False
11. When a good is an open-access resource, the free-rider problem effectively defeats the chances that a
socially efficient equilibrium can be achieved through property rights assignments and bargaining.
True False
12. Production and consumption of green goods shifts the marginal abatement cost curve downward.
True False
Suppose a chemical factory discharges waste products into a river resulting in significant damages to a
local fishery. The marginal damage to the fishery (measured in terms of the value of lost fish stocks) is
represented by the equation:
MDC = 10E
The chemical factory can reduce its effluent flows by treating its waste products. Its marginal abatement
cost (MAC) function is given by the equation:
MAC = 1,200 - 5E.
13. What level of emissions will occur if the chemical factory is not regulated? What would the total
abatement costs for the chemical factory be if emissions are controlled and reduced to zero?
14. If no liability laws are in place, what damages will the chemical factory inflict on the fishery?
15. If the government puts in place a liability law that requires the chemical factory to compensate the
fishery for the damages it causes, what level of emissions will take place and what are the total costs of
compliance for the chemical company?
16. If the chemical factory has the property right to use the river what bargaining will result in the socially
efficient equilibrium? What are the net gains experienced by each party?
17. If the fishery has the property right to use the river what bargaining will result in the socially efficient
equilibrium? What are the net gains experienced by each party?
18. List and very briefly explain the three problems encountered with the use of property rights as a technique
to internalize externalities.
19. Define green goods and give two examples of green goods.
20. Illustrate graphically and very briefly explain how the production and consumption of green goods results
in lower emissions.
10 Key
1. When people can negotiate with each other to come up with mutually satisfactory ways to deal with
environmental externalities with little or no involvement of the government this is referred to as
________.
A. moral suasion
B. an incentive-based approach
C. a decentralized approach
D. a centralized approach
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 10 #1
Learning Objective: 10-01 Explain how liability laws can reduce pollution and lead to a socially efficient equilibrium.
2. ________ suggest(s) that in the presence of an externality bargaining can achieve the socially efficient
equilibrium regardless of the initial allocation of property rights.
A. Liability laws
B. The Coase theorem
C. The legal doctrine of standing
D. The burden of proof
Difficulty: Easy
Learning Objective: 10-03 Describe the Coase theorem and why it is important for environmental policy.
3. Suppose both a chemical company and a commercial fishery operate on the same river. According to
the Coase theorem the socially efficient level of emissions can be reached through bargaining between
the two parties if ________ has the right to use the river.
A. just the chemical company
B. just the fishery
C. either the chemical company or the fishery
D. the regulator
Difficulty: Easy
4. Which of the following is NOT a reason why private bargaining can fail to achieve the socially
optimal level of emissions?
A. The resource is an open-access good making it difficult to assign property rights.
B. Net social gains depend on the initial assignment of property rights.
C. Restrictions on use prevent property owners from capturing social values.
D. Transaction costs are too high due to the necessity to include many parties in the negotiations.
Difficulty: Easy
Learning Objective: 10-04 Describe the factors that inhibit private bargaining from reaching a socially efficient equilibrium.
5. Goods that give the same level of pleasure as ordinary goods but that involve less environmental
damage in either their production, use or disposal are known as ________.
A. generic goods
B. luxury goods
C. green goods
D. environmental goods
Difficulty: Easy
Learning Objective: 10-05 Explain how recycling and green goods can reduce pollution and illustrate grapically the potential impacts.
6. If the MAC and MD curves do not change based on who has the property rights, the same socially
efficient equilibrium will be reached independent of who holds the rights to pollute.
TRUE
Difficulty: Easy
Learning Objective: 10-02 Explain and show graphically how private property rights and bargaining between parties can lead to a socially efficient" equilibrium
and how the gains to each party differ depending on the starting point and who has the property rights.
7. Net social gains are independent of who has the property rights to environmental resources.
FALSE
The net gains to society differ depending upon who holds the property rights to pollute.

Difficulty: Moderate
8. The Coase theorem states that social efficiency can be obtained through bargaining and that the gains
to each party involved will be identical regardless of who has the rights.
FALSE
The net gains to each party depend on the initial allocation of property rights.

9. Coase proposed that in the case of an externality if transactions costs are low, bargaining can achieve
the socially efficient outcome regardless of the initial allocation of property rights.
TRUE
Difficulty: Easy
10. The more public an environmental good is, the more likely private property rights can be used to
achieve the socially optimal level of emissions.
FALSE
Public goods tend to be non-exclusionary making it difficult to assign property rights.

Difficulty: Easy
11. When a good is an open-access resource, the free-rider problem effectively defeats the chances that a
socially efficient equilibrium can be achieved through property rights assignments and bargaining.
TRUE
Difficulty: Easy
12. Production and consumption of green goods shifts the marginal abatement cost curve downward.
TRUE
Difficulty: Easy
Suppose a chemical factory discharges waste products into a river resulting in significant damages to a
local fishery. The marginal damage to the fishery (measured in terms of the value of lost fish stocks) is
represented by the equation:
MDC = 10E
The chemical factory can reduce its effluent flows by treating its waste products. Its marginal
abatement cost (MAC) function is given by the equation:
MAC = 1,200 - 5E.
Field - Chapter 10
13. What level of emissions will occur if the chemical factory is not regulated? What would the total
abatement costs for the chemical factory be if emissions are controlled and reduced to zero?
In the absence of regulation, marginal abatement costs will equal zero:

MAC = 0 = 1,200 - 5E
E = 1,200/5 = 240
In the absence of regulation, emissions will equal 240 units. The total abatement cost if all 240 units
of emissions were abated will be equal to the area under the MAC curve:
TAC = (240 1,200) = $144,000
Total abatement costs if all emissions are required to be abated would be $144,000.
14. If no liability laws are in place, what damages will the chemical factory inflict on the fishery?
With no liability laws, the chemical company will emit 240 units of emissions (level of emissions
corresponding to MAC = 0). At this level of emissions, the total damage cost will be equal to the area
under the MDC curve:
TDC = (240 2,400) = $288,000
With no liability laws in place, total damage costs from the chemical company will be $288,000.
15. If the government puts in place a liability law that requires the chemical factory to compensate the
fishery for the damages it causes, what level of emissions will take place and what are the total costs
of compliance for the chemical company?
The chemical factory will minimize their total compliance cost which equals total damage
compensation to be paid plus total abatement cost if they reduce emissions to the socially efficient
level. This corresponds to the level of emissions that equates MAC and MDC:
1,200 - 5E = 10E
E = 1,200/15 = 80
The socially efficient level of emissions is 80 units. The total compliance cost (TCC) of the chemical
factory will equal the total abatement cost to reach emissions of 80 units, plus the total damages
payable to the fishery which will equal the TDC when emissions are 80 units.
TCC = TAC + TDC = (160 800) + (80 800) = 64,000 + 32,000 = $96,000
The total compliance cost of the chemical factory will be $96,000.
16. If the chemical factory has the property right to use the river what bargaining will result in the socially
efficient equilibrium? What are the net gains experienced by each party?
Since the chemical factory has the right to pollute, the fishery will need to pay the factory to get it to
reduce its emissions. The socially efficient level of emissions is equal to 80 units of emissions. At this
level of emissions, the MDC = MAC = $800. The fishery will need to pay the chemical factory $800
per unit of emissions it abates to get it to emit 80 tonnes. This "bribe" is equal to $128,000. The net
gain to the fishery is equal to the reduction in total damage costs moving from unregulated emissions
of 240 units to 80 units minus the bribe it pays to the chemical factory which equals $288,000 - 32,000
- $128,000 = $128,000. The net gain to the chemical factory is equal to the bribe it receives from the
fishery less its total abatement costs which equals 128,000 - 64,000 = $64,000.
Difficulty: Hard
17. If the fishery has the property right to use the river what bargaining will result in the socially efficient
equilibrium? What are the net gains experienced by each party?
Since the fishery has the right to clean water, the factory will need to pay the fishery to allow it to
emit the socially efficient level of emissions which is equal to 80 units of emissions. At this level
of emissions, the MDC = MAC = $800. The factory will need to pay the fishery $800 per unit of
emissions it discharges into the river. This "bribe" is equal to $64,000. The net gain to the fishery is
equal to the bribe it receives from the factory minus the damages resulting from 80 units of emissions
which equals $64,000 - 32,000 = $32,000. The net gain to the chemical factory is equal to the
reduction in total abatement cost it has to undertake from moving from zero emissions to the socially
efficient level of emissions minus the bribe it pays to the fishery which equals 144,000 - 64,000 -
64,000 = $16,000.
Difficulty: Hard
18. List and very briefly explain the three problems encountered with the use of property rights as a
technique to internalize externalities.
Property rights fail to result in the socially efficient level of emissions when: 1) transactions costs are
too high due to the presence of numerous parties to be involved in the negotiating process; 2) property
rights cannot be assigned due to the good being a public good such as an open access fishery; and
3) some other laws prevent property owners from capturing the full social value of the resource in
question.
Difficulty: Easy
19. Define green goods and give two examples of green goods.
Green goods are goods that give the same level of pleasure as ordinary goods but they involve less
environmental damage in their production, use or disposal. Examples of green goods could include
no-phosphate laundry detergent, mercury-free batteries, recycled paper products and energy-efficient
appliances.
Difficulty: Easy

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Public goods tend to be non-exclusionary making it difficult to assign property rights.

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In the absence of regulation, marginal abatement costs will equal zero:

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