Deck 5: Externalities

Question 1

A Pigouvian tax corrects for

A) market congestion.
B) market losses.
C) inefficient sales.
D) low market prices.

Answer 1

low market prices.

Question 2

Congestion pricing

A) is a tax.
B) keeps nasal passages clear.
C) is never efficient.
D) all of these answer options are correct.

Answer 2

is a tax.

Question 3

Negative externalities cause loss of welfare not transmitted by market factors.

A) True
B) False
C) Uncertain

Answer 3

True

Question 4

Refer to the figure below.What is the total amount of tax paid by Bart?

A) 0
B) 50
C) 15
D) 750

Question 5

A Pigouvian subsidy

A) cannot exist with externalities.
B) is the same thing as a Pigouvian tax.
C) is measured in terms of Pigouvian dollars.
D) moves production to the socially optimal level of output.

Question 6

Marginal damages are hard to measure because

A) they can be generated from multiple sources.
B) they are hard to graph.
C) they happen over time.
D) no one cares about them.

Question 7

A tax levied on each unit of pollution is

A) an income tax.
B) a emissions fee.
C) a flat tax.
D) an international tax.

Question 8

Pollution rights may be traded if

A) polluters try to hide pollution.
B) administrators are uncertain about Pigouvian taxes.
C) there is no market for pollution.
D) pollution is harmless.

Question 9

Which of the following is correct?

A) SMC = PMC - MD
B) MPB = MSB + MEB
C) SMC = PMC + MD
D) MSC = MPB
E) MSB = MSC + MPB

Question 10

A cap-and-trade policy

A) has a set number of permits.
B) allows polluters to trade permits.
C) caps the total level of pollution allowed.
D) all of these answer options are correct.

Question 11

Externalities can be produced by ____________,as well as ____________.

A) individuals; firms
B) market prices; market incomes
C) oceans; streams
D) none of these answer options are correct.

Question 12

Marginal benefits are downward sloping when

A) there are no total benefits.
B) the slope of the marginal benefits curve is negative.
C) total benefits are increasing at a decreasing rate.
D) marginal costs are upward sloping.

Question 13

Command-and-control regulations

A) are less flexible than incentive based regulations.
B) come from the private sector.
C) have technology standards a type of control.
D) are less flexible than incentive based regulations and have technology standards a type of control.
E) are less flexible than incentive based regulations and come from the private sector.

Question 14

Marginal damages

A) must always be considered in social marginal costs.
B) must not be considered in social marginal costs.
C) must sometimes be considered in social marginal costs.
D) have nothing to do with social marginal costs.

Question 15

In the figure below,if the marginal damages line did not originate at 0,

A) it would mean that marginal damages did not exist.
B) there is no way to find MSC.
C) MSC would not originate at the same intercept as MPC.
D) all of these answer options are correct.

Question 16

Externalities can be positive because

A) marginal damages do not last over time.
B) utility can be impacted positively as well as negatively.
C) there is no concept for marginal benefit.
D) positive externalities are subsidies.

Question 17

As a general rule,zero pollution is not socially desirable because

A) there would be no production.
B) the Environmental Protection Agency (EPA)needs to have something to do.
C) no pollution would lead to global warming.
D) all of these answer options are correct.

Question 18

Technology standards work in reducing externalities of all kinds.

A) True
B) False
C) Uncertain

Question 19

Externalities require government intervention when

A) violence will result between disputing parties.
B) there are only a few sellers in the market.
C) property rights are not clearly established.
D) the government imposes sales taxes.
E) all of these answer options are correct.

Question 20

Refer to the following graphs.Which graph(s)represent(s)an externality?

A) graph A
B) graphs A and B
C) graph B
D) neither graph A nor graph B

Question 21

List and discuss three problems that might arise when using the Coase theorem.

Question 22

Externalities can be positive,as well as negative.

A) True
B) False
C) Uncertain

Question 23

Why are command- and -control regulations less flexible than incentive based systems?

Question 24

Incentive-based regulations provide polluters no incentive to reduce pollution and are thus not used often.

A) True
B) False
C) Uncertain

Question 25

The desire in the U.S.for owner-occupied housing led to subsidies that contributed to the recession which started in 2007.

A) True
B) False
C) Uncertain

Question 26

College education is an example of a positive externality.

A) True
B) False
C) Uncertain

Question 27

Pure public goods involve positive externalities.

A) True
B) False
C) Uncertain

Question 28

A steel factory has the right to discharge waste into a river.The waste reduces the number of fish,causing damage for fisheries.Let X denotes the quantity of waste dumped.The marginal damage,denoted MD,is given by the equation MD = 2 + 5Q.The marginal benefit (MB)of dumping waste is given by the equation MB = 34 - 3Q.
(a)Calculate the efficient quantity of waste.
(b)What is the efficient fee,in dollars per unit of waste,which would cause the firm to dump only an efficient quantity of waste?
(c)What would be the quantity dumped if the firm did not care about the fishery?

Question 29

Consider the case of two farmers,Tony and Hakim,depicted in the following figure.Both use DDT (a chemical pesticide)for their crops.The use of DDT causes an externality for swimmers down river from the farms.
(a)Show the amount of pesticides used if each uses the privately optimal level of pesticides.
(b)Show the amount of pesticides used if they are socially concerned.
(c)Why is a reduction back to X_H = H_T not socially desired?

Question 30

Market-oriented solutions to externalities rarely work.

A) True
B) False
C) Uncertain

Question 31

Pollution rights can be traded and are always efficient.

A) True
B) False
C) Uncertain

Question 32

A subsidy for pollution not produced can induce producers to pollute at the efficient level.

A) True
B) False
C) Uncertain

Question 33

The private marginal benefit for commodity X is given by 15 - X,where X is the number of units consumed.The private marginal cost of producing X is constant at 10.In the absence of any government intervention,how much X is produced? What is the gain to society involved in moving from the inefficient to the efficient level of production?

Question 34

Refer to the figures below to answer this question:
Cap-and-trade versus emissions fee when marginal social benefits are inelastic and costs are uncertain: Cap-and-trade versus emissions fee when marginal social benefits are elastic and costs are uncertain:
a)In case of an inelastic marginal social benefit curve,what type of pollution reduction system should the government employ? Why?
b)If the social benefit curve is elastic,do you answer change?
c)What are advantages and disadvantages of Cap-and-Trade systems over Emission Fee systems when the inflation and change in marginal costs are considered?

Question 35

Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?

Question 36

For market efficiency,MSC must be equated to MSB.

A) True
B) False
C) Uncertain

Question 37

An emissions fee is preferable to a cap-and-trade when MSB are elastic and costs are uncertain.

A) True
B) False
C) Uncertain

Question 38

In the 1970s,the U.S.relied on Command-and-Control models of pollution regulation.

A) True
B) False
C) Uncertain

Question 39

Suppose the factory Afro-Puffs Inc.produces wigs.As a by-product of this wig production,they also produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hair in place).The De-Lite car factory,down the road,experiences a negative externality from this production process.Suppose that the supply curve (private marginal costs)for the wig factory is X = (2/5)P - 2,and it faces a market demand of X_d = 15 - P/2.The marginal damages caused by the production of wigs can be written as X = P - 1/2.
(a)Find the equilibrium price and quantity in the market for wigs.
(b)Find the socially optimal level of wigs and the corresponding price.
(c)How much should the wig factory be taxed per wig?