Chapter 1. Chapter 10
Step 1
Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.
Question
A local town is under pressure from voters to close a polluting factory. The head of the homeowner’s organization argues that the pollution is a menace, and if the full external costs of the pollution were included, the factory would be unprofitable. The homeowners calculate that the pollution generates an external cost of $3,000,000 per year in medical bills and $1,000,000 per year in suppressed property values (the difference in home prices with and without the pollution). The factory, on its books, makes a profit of $5,000,000 per year.
xWZ7bCmYDgR0+T0y9zMP4Gji4xYIDnQd/DBhhOdmDgq9djnHEgF9mHe4XK9KOV3bTCTZkgzi8nqcZw6cysJHCeZK4So+WqNgFiqmAP93SlDIB1uAS/cpsTdqEO5o+VFwuebwypmnhNAAabUjCorrect! External costs of pollution are those costs that are not incurred by the polluter, or alternatively, incurred by bystanders (homeowners in this case). In this example, external costs equal the sum of $3,000,000 in medical bills and $1,000,000 in suppressed property values.
Sorry! Are you considering all of the costs imposed by the polluting factory on homeowners? To review how to calculate external costs, please see the section “External Costs, External Benefits, and Efficiency.”
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Step 2
Question
zPDoeC0vgwpQ/lpz3nid0BbjaIyE5stMC/NkLJoXSEXo8F39bBhs4lBULcP85RQDKtboSZ7btP7pFppFcObM86ttSm1O2KrYQoEYMZ9xBvXVw/yYSholVQE6qwRYe/x+l6ylWTNs1HftDi61EZ8hcl0oWhYYgAjr5G/pv6TuumfBy6hBsu5pT6gvOlMe6hdxSmS2yQl5N3JLnTASyLLW/DSSmMSxQfzYZ1ERuLWyNsuzwSPAHrJeQlHA7/Muj1orrU5xowsFp0zpJvq6ouZOumLhOfOWYMPOSnjXbbzyk/QmS+t4/AHoHxMBCT0slOBihHXi6PlT6qlBaS6P7zt9/bOykT9QEGKM7wvMQVNecLp/FxW2e3DzwZ1k3EXzwM+AODOuqg==Correct! It currently has $5,000,000 in profit but after paying the external costs of $4,000,000, the firm would see profits reduced to $1,000,000.
Sorry! Think about the factory’s current level of profit and how that would change if it were forced to consider the total social costs of pollution. To review taxes, please see the section “Government Solutions to Externality Problems.”
Step 3
Question
7D65hEH+rwqyGTCoFbW3yzLUWWJ5RfT6NvFH6NyvUxidZN3G2V4yNv96MqwhRXMrqOiP/HFvyBIbMLt3M1UhaIN341wOkHnSDqGySj/lGXhbSedicv84S5WwS/NYgJ0Dr6kc3++afhCe0c6g85uIxPOzETcLXUAAieF1bNW/7eICd3hZCorrect! Given that factory profits are currently at $5,000,000, then a tax of $5,000,000 would lower those profits to zero.
Sorry! Think about the factory’s current level of profit and what it would take to lower that value down to zero. To review taxes, please see the section “Government Solutions to Externality Problems.”