Deck 3: Externalities and Government Policy

Question 1

When negative externalities exist, perfectly competitive markets produce less than the efficient output.

Answer 1

False

Question 2

If a negative externality exists for sales of gasoline in a competitive market, more than the efficient amount of gasoline will be sold per year.

Answer 2

True

Question 3

Pollution rights can be used to price the right to emit pollutants and to provide incentives to reduce emissions by profit-maximizing firms.

Answer 3

True

Question 4

If a negative externality is associated with the sale of wood stoves, then the marginal private cost of those stoves is less than their marginal social cost.

Question 5

Assuming no externalities and a competitive environment, the marginal private cost is equal to the marginal social cost.

Question 6

When a positive externality exists, benefit to third parties other than the buyers and sellers of a good will result from market exchange of the good.

Question 7

Assuming a negative externality, the price of a good will be lower than if the price was set in a competitive environment without an externality.

Question 8

The efficient amount of pollution abatement is likely to be 100 percent.

Question 9

Emissions standards allow businesses to emit waste at zero cost until the limits set by the standards are reached.

Question 10

According to the Coase theorem, corrective taxes are necessary to internalize negative externalities when the transactions costs of exchanging property rights to use resources are zero.

Question 11

When a negative externality exists, the marginal social cost of annual output sold in a competitive market will exceed the marginal social benefit of that output in equilibrium.

Question 12

At the current level of annual supply of inoculations against polio, the marginal external benefit of an inoculation is zero. To achieve efficiency, a corrective subsidy must be provided to those being inoculated.

Question 13

If the marginal external cost of pollution increases with the annual output of polluting goods, then the total external cost will increase at a constant rate with annual output.

Question 14

If a positive externality is associated with college enrollment, then when college instruction is pro?vided in a competitive market, the marginal social benefit of enrollment will exceed its marginal social cost in equilibrium.

Question 15

Command-and-control regulation to reduce emissions is likely to be a less costly way of reducing a given amount of emissions than tradeable emissions permits.

Question 16

To internalize an externality, a corrective tax must be set equal to the marginal external cost.

Question 17

The marginal external benefit of the sale of smoke detectors in a city declines with annual output. The total external benefit of smoke detectors will therefore eventually become zero.

Question 18

A negative externality results from the sale of firewood in competitive markets. Then it follows that:

A) the marginal private cost of firewood is less than its marginal social cost.
B) the marginal private cost of firewood exceeds its marginal social cost.
C) the marginal private benefit of firewood is less than its marginal social benefit.
D) the marginal private benefit of firewood exceeds its marginal social benefit.

Question 19

A toll road used to subsidize public transportation in an effort to reduce pollution is an example of a corrective tax.

Question 20

The market for sulfur dioxide allowance trading has lowered the cost of achieving a given reduc?tion in sulfur dioxide emissions by electric power-generating plants.

Question 21

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,500 units and an efficient price of $50.00 per unit, what efficient quantity-price combination would be consistent with a positive externality?

A) 1,500 units, $60.00 per unit price.
B) 1,300 units, $45.00 per unit price.
C) 1,600 units, $40.00 per unit price.
D) 1,700 units, $56.00 per unit price.

Question 22

Which of the following is true if a negative externality is associated with the sale of gasoline?

A) Third parties other than the buyers and sellers of gasoline receive benefits.
B) Third parties other than the buyers and sellers of gasoline bear costs.
C) The marginal social cost of gasoline exceeds its marginal private cost.
D) both b and c

Question 23

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,000 units and an efficient price of $100.00 per unit, what efficient quantity-price combination would be consistent with a negative externality?

A) 1,000 units, $95.00 per unit price.
B) 950 units, $102.00 per unit price.
C) 900 units, $90.00 per unit price.
D) 1,100 units, $105 per unit price.

Question 24

Regulations require that emissions of carbon monoxide be limited to 1,000 tons per 100 square miles for all regions of the nation. If the marginal external cost of the emissions varies among regions in the nation, then the regulations will:

A) achieve the efficient amount of pollution abatement.
B) achieve more than the efficient amount of pollution abatement.
C) achieve less than the efficient amount of pollution abatement.
D) be likely to achieve more than the efficient amount of abatement in some regions, but less than the efficient amount in others.

Question 25

The marginal external cost associated with the emissions of sulfur dioxide is estimated to be $30 per pound of this chemical per year. Assume that each ton of steel produced per year results in 5 pounds of sulfur dioxide emissions. Suppose that the supply of steel is infinitely elastic at a price of $500 per ton. The current equilibrium output of steel produced by a competitive industry is 10,000 tons.

A) Show how a corrective tax can be used to achieve efficiency. Predict the impact of the tax on the equilibrium price and quantity of steel. Explain how steel companies will react to the tax. Indicate the amount of tax revenue that will be collected.
B) Discuss the political support for the tax. In your discussion, show the net gain in well-being possible from the tax and indicate which groups will gain and which groups will lose as a result of its imposition.

Question 26

The effect of a negative externality is similar to:

A) A supply curve marginal social cosT) shifting to the left.
B) A supply curve marginal social benefiT) shifting to the right.
C) A demand curve marginal social cosT) shifting to the left.
D) A demand curve marginal social benefiT) shifting to the right.

Question 27

According to the Coase theorem, externalities can be internalized when transactions costs are zero through:

A) corrective taxes and subsidies.
B) effluent fees.
C) assigning property rights to resource use but outlawing their exchange.
D) assignment of property rights to use resources and allowing free exchange of assigned property rights.

Question 28

The marginal external cost per unit of effluent discharged into a river by a perfectly competitive chemical industry is currently estimated to be $50 per ton per year. Which of the following state?ments is true?

A) Efficiency can be achieved with a $50 per ton annual effluent charge.
B) At the competitive equilibrium output, the marginal social benefit of discharging effluent is $50.
C) Efficiency can be achieved by banning discharge of effluent.
D) At the efficient output, the marginal social benefit of discharging effluent will be zero.

Question 29

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 500 units and an efficient price of $150.00 per unit, what efficient quantity-price net subsidy combination would be consistent with a corrective subsidy for a positive externality?

A) 500 units, $150.00 per unit price net subsidy.
B) 300 units, $120.00 per unit price net subsidy.
C) 600 units, $160.00 per unit price net subsidy.
D) 700 units, $100.00 per unit price net subsidy.

Question 30

The marginal external cost associated with paper production is constant at $10 per ton per year. The competitive market equilibrium for paper production is currently 10 million tons per year. A corrective tax on paper production:

A) will collect $100 million annually.
B) will collect more than $100 million annually.
C) will collect less than $100 million annually.
D) will reduce annual damages to those other than buyers and sellers of paper to zero.
E) both a and d

Question 31

If the marginal costs of reducing emissions varies among regions, then regulations requiring all regions in a nation to reduce emissions by the same amount will achieve:

A) the efficient amount of pollution abatement.
B) more than the efficient amount of pollution abatement.
C) less than the efficient amount of pollution abatement.
D) more than the efficient amount of pollution abatement in some regions, but less than the efficient amount in other regions.

Question 32

The marginal external cost associated with air pollution increases with the annual output of a pollut?ing industry. At the current competitive equilibrium level of output per year, the marginal external cost is $10 per unit of output. To achieve efficiency,

A) a corrective tax of $10 per unit of output is required.
B) a corrective tax of more than $10 per unit of output is required.
C) a corrective tax of less than $10 per unit of output is required.
D) a corrective subsidy of $10 per unit of output is required.
E) a corrective subsidy of less than $10 per unit of output is required
)

Question 33

A positive externality results from the purchase of smoke detectors. If smoke detectors are sold in a competitive market,

A) the marginal social benefit of smoke detectors is less than the marginal private benefit received by any consumer.
B) the marginal social benefit will exceed the marginal private benefit received by any consumer.
C) in equilibrium the marginal social cost of smoke detectors will equal the marginal social benefit.
D) in equilibrium the marginal social benefit of smoke detectors is zero.

Question 34

Electric power is produced by an unregulated monopoly in a certain region. The monopolistic elec?tric power company's production of electricity results in $10 per kilowatt hour of pollution damage to parties other than the buyers of electricity in the region. To achieve efficiency,

A) a $10 per kilowatt hour corrective tax is required.
B) more than $10 per kilowatt hour corrective tax is required.
C) a $10 corrective subsidy is required.
D) less than $10 per kilowatt hour corrective tax is required.

Question 35

The competitive market equilibrium price of sanitation services in a small town with no government-supplied sanitation services is $2 per trash pickup. There is a $1 marginal external benefit associated with each trash pickup. The elasticity of supply of trash pickups is infinite in the long run, implying a horizontal supply curve. To achieve the efficient output of sanitation services,

A) a corrective subsidy must increase the price received by suppliers to $3 per pickup.
B) a corrective subsidy must decrease the price paid by consumers of sanitation services to $1 per pickup.
C) a corrective tax of $1 per pickup is required.
D) a corrective subsidy must increase the price paid by buyers to $3 per pickup.

Question 36

If a negative externality prevails in a competitive market for air travel, then:

A) more than the efficient amount of annual air travel will be consumed in equilibrium.
B) less than the efficient amount of annual air travel will be consumed in equilibrium.
C) the marginal social cost of air travel will exceed its marginal social benefit in equilibrium.
D) both a and c
E) both b and c

Question 37

Which of the following is true about command-and-control regulation that allows businesses to emit pollutants up to a certain point and bans emissions after that limit is reached?

A) They are equivalent to emissions charges.
B) They make firms pay the marginal cost of the damages done by their emissions, no matter what the level.
C) They allow firms to emit some pollutants at zero charge.
D) They are likely to minimize the cost of achieving any given reduction in emissions.

Question 38

If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,

A) the marginal social benefit of smoke detectors exceeds the marginal social cost.
B) the marginal social cost of smoke detectors exceeds the marginal social benefit.
C) the marginal social cost of smoke detectors is equal to the marginal social benefit.
D) more than the efficient amount of smoke detectors is sold.

Question 39

The current competitive market price of fish is $3 per pound. A chemical producer emits effluent into a lake used by a commercial fishing firm. Each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm. Assuming that transactions costs are zero and the chemical firm has the legal right to dump effluent into the lake,

A) the fishing firm would be willing to pay up to $60 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
B) the fishing firm would be willing to pay up to $3 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
C) the chemical firm would never consider the damage caused by its effluent.
D) government intervention is required to achieve efficiency.