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Chapter 16/Externalities, the Environment, and Natural Resources
CHAPTER 16
EXTERNALITIES, THE ENVIRONMENT, AND
NATURAL RESOURCES
TEST YOURSELF
1. Production of Commodity X creates 10 pounds of emissions for every unit of X
produced. The demand and supply curves for X are described by the following table:
Price Quantity
Demanded
Quantity
Supplied
$10 80 100
9 85 95
8 90 90
7 95 85
6 100 80
5 105 75
What is the equilibrium price and quantity, and how much pollution will be emitted?
2. Using the data in Test Yourself Question 1, if the price of X to consumers is $9, and the
government imposes a tax of $2 per unit, show that because suppliers get only $7, they
will produce only 85 units of output, not the 95 units of output they would produce if
they received the full $9 per unit.
When suppliers receive a price of $7, they produce 85 units. Consumers pay a price of $9
3. With the tax described in Test Yourself Question 2, how much pollution will be emitted?
There are now 850 pounds of emissions.
4. Compare your answers to Test Yourself Questions 1 and 3 and show how large a
reduction in pollution emissions occurs because of the $2 tax on the polluting output.
DISCUSSION QUESTIONS
1. What sorts of pollution problems would you expect in a small African village? In a
city in India? In the People’s Republic of China? In New York City?
A small African village may exist in a very delicate balance with its surrounding
environment. Thus increased intensity of animal grazing may lead to destruction of the
grasslands and encroachment of the desert. An increase the local population could have
2. Suppose you are assigned the task of drafting a law to impose a tax on smoke
emissions. What provisions would you put into the law?
a. How would you decide the size of the tax?
b. What would you do about smoke emitted by a municipal electricity plant?
c. Would you use the same tax rate in densely and sparsely settled areas?
What information will you need to collect before determining what you would do
about each of the preceding provisions?
(a) The tax per unit of emissions should equal the money value of the damage caused by
a marginal unit of those emissions. Of course this is easier said than done. It may be
Chapter 16/Externalities, the Environment, and Natural Resources
3. Discuss some valid and some invalid objections to letting rising prices eliminate
shortages of supplies of scarce resources.
Valid objections to a price increase of a scarce resource have to do with its impact upon
4. Why may an increase in fuel prices lead to more conservation after several years
have passed than it does in the months following the price increase? What does your
answer imply about the relative sizes of the long-run and short-run elasticity of
demand for fuel?
Initially when fuel prices rise, people are stuck with their existing equipment, and cannot
reduce fuel consumption unless they are prepared to reduce their output, consumption,
