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When prices miss shared costs and benefits

Civics & Economics · Economics · ages 15-16

Name ______________________ Date ____________

In a competitive market with no other market failures, firms ignore uncompensated pollution harm. Why is output above the socially efficient level?
- Buyers love dirty rivers
- Outside harm is unpriced
- Taxes always raise pollution
A factory pays its production costs but leaves damage from its river pollution uncompensated. How do private and social costs compare?
- Social cost includes outside harm
- Private cost is higher, adding the harmed neighbours
- Both costs are always equal
Why might a town use taxes to fund street lighting that passers-by can use without paying?
- Because bulbs are too heavy to sell
- Shared light is hard to charge for
- Because councils enjoy darkness
A family benefits from patrols paid for by its neighbours but chooses not to contribute. What is the family doing?
- Free riding
- Funding a public good
- A binding price floor
A town enforces a cap on dumping equally harmful units of one pollutant. Firms have different cleanup costs and can freely trade permits. What does this tool do?
- It bans every factory at once
- It pays polluters to pollute more
- Caps harm; directs cuts to lower costs
Unpaid pollination benefits a neighbouring orchard. No private payment agreement is possible, and beekeeping is below the socially efficient level. Which policy could encourage more beekeeping?
- A subsidy for beekeeping
- A tax on the orchard's apples
- A ban on all bees
A town chooses pollution charges to make all factories account for their harm. It fines one factory once but leaves the others' dumping uncharged. What is missing from this plan?
- The fine ends all pollution forever
- Charges covering all sources
- Rivers clean themselves instantly
In a competitive model with no other market failures, excess pollution caused by unpriced harm occurs because every polluter already bears the full social cost.
Circle one: True False

Answer key

For grown-ups. Fold this page away before handing over the rest.

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Outside harm is unpriced · Private decisions omit damage that belongs in the social cost of extra output.
Social cost includes outside harm · Social cost includes the factory's own costs plus the uncompensated damage to others.
Shared light is hard to charge for · Nonrival, nonexcludable light invites free riding, so collective funding can address a shortfall.
Free riding · The family receives the shared service while leaving its cost to others.
Caps harm; directs cuts to lower costs · The enforced limit caps these equally harmful units. Permit trade rewards cheaper cleanup.
A subsidy for beekeeping · A subsidy can reward the outside pollination benefit missing from the beekeeper's return.
Charges covering all sources · Uncovered polluters still have no charge for their outside harm, so the stated pricing plan is incomplete.
False · Unpriced outside harm means a cost is omitted, not fully borne by each polluter.