Pigouvian Finance Assingment Help With Solution

Some observers have argued that importing oil makes the United States hostage to the policies of Saudi Arabia and other countries in the Middle East. This complicates US foreign policy.

a. Explain why an externality is present in this situation.

b. Propose a Pigouvian tax to deal with the externality

c. Some economists want to curb domestic gasoline consumption but are wary of giving the government substantially more revenues than it already has As an alteinative,'Feld-stein [20066, p. A10] suggested a system of tradable gasoline rights (TOR): “In a system of tradable gasoline rights, the government would give each adult a TOR debit card. The gasoline pumps at service stations that now read credit cards and debit cards would be modified to read these new TGR debit cards as well. Buying a gallon of gasoline would require using up one tradable gasoline right as well as paying money. The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. . . . To reduce total consumption by 5%, [government] would cut the number of TGRs to 104.5 billion” Draw a diagram to illustrate how the price of the tradable gasoline rights would be deter-mined. Suppose that the market price per voucher were 75 cents. How would this change the opportunity cost of buying a gallon of gasoline?

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For each of the following situations, is the Coase Theorem applicable? Why or why not?

a. A farmer who grows organic corn is at risk of having his crop contaminated by genetically modified corn grown by his neighbors.

b. In Brazil it is illegal to catch and sell certain tropical fisb. Nevertheless, in sonic remote parts of the Amazon River, hundreds of divers come to capture exotic fish for sale on the international black market. The presence of so many divers is depleting the stock of exotic fish.

c. In the state of Washington, many farmers burn their fields to clear the wheat stubble and prepare for the next planting season. Nearby city-dwellers complain about the pollution.

d. Users of the Internet generally incur a zero incremental cost for transmitting information. As a consequence, congestion occurs, and users are frustrated by delays.

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