The Trade-off of Simplicity in Externality Modeling
An economist is building a graphical model to recommend a policy for a factory whose pollution harms a local community. The economist decides to assume that the community members have preferences where their valuation of the harm from an additional unit of pollution is not affected by their income level. Critically evaluate this modeling choice. In your answer, discuss the primary analytical advantage this assumption provides for the graphical model and the main limitation or potential inaccuracy it introduces regarding the real-world applicability of the model's specific quantitative predictions.
0
1
Tags
Library Science
Economics
Economy
Social Science
Empirical Science
Science
CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
Evaluation in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
Graphical Representation of the Banana Market with Negative Externalities (Figure 10.3)
Effect of Quasi-Linearity on Payoff Maximization and Marginal Costs
Marginal External Cost in a General Utility Model
Generality of the Constrained Choice Method for Finding Pareto-Efficient Allocations
Evaluating a Modeling Assumption for Environmental Policy
Independence of Marginal External Cost from Wealth under Quasi-Linearity
Stability of the Marginal Social Cost Curve under Quasi-Linearity
Applying and Testing Concepts of Quasi-Linearity in Externality Models
An economist is modeling a negative externality where a chemical plant's pollution harms a downstream fishery. To simplify the analysis, the economist assumes the fishery owners have quasi-linear preferences. What is the most significant analytical consequence of this assumption for finding the single, socially optimal level of chemical production?
In economic models of externalities, the conclusion that a competitive firm's profit-maximizing output level is Pareto-inefficient is only valid if one assumes the affected parties have quasi-linear preferences.
Impact of Wealth Transfers on Social Cost Curves
In the context of modeling economic externalities, match each concept or assumption with its most accurate description.
The Trade-off of Simplicity in Externality Modeling
A key analytical simplification in externality models is the assumption of quasi-linear preferences. This assumption implies that an individual's willingness to pay to avoid a marginal unit of an externality does not change with their level of ____, which in turn prevents the social cost curve from shifting when wealth is redistributed.
Arrange the following statements into a logical sequence that explains why the assumption of quasi-linear preferences is useful for identifying a single, unique efficient outcome in a diagrammatic model of an externality.
Evaluating a Uniform Policy Recommendation
An economist is analyzing the negative externality of a factory's air pollution on a nearby residential community. Through surveys, the economist discovers that as the community's average household income increases, their collective willingness to pay for a one-ton reduction in emissions also increases. What is the primary implication of this finding for a standard graphical model that assumes quasi-linear preferences to identify a single, efficient level of production?