Deck 16: External Costs and Environmental Policy

Question 1

What is acid rain?

Answer 1

Acid rain is precipitation with an acidic combination of sulfur dioxides and nitrogen oxides.

Question 2

Once a firm is forced to consider an external cost,the price of its product will:

A)increase and output will decrease.
B)increase and output will increase.
C)decrease and output will decrease.
D)decrease and output will increase.

Answer 2

A

Question 3

Water pollution is not an example of an external cost.

Answer 3

False

Question 4

Consumers,not producers,gain from pollution abatement.

Question 5

The optimum level of pollution abatement is where the marginal benefit is greater than the marginal cost.

Question 6

The government imposes taxes on firms which generate external costs in an effort to:

A)make it easier for economists to measure external costs.
B)lead to a zero level of output.
C)force decision makers to consider the full costs of their actions.
D)lower the firms' costs of production.

Question 7

Based on society's perspective,what are the benefits from pollution abatement?

A)better health
B)increased enjoyment of the natural environment
C)lower production costs
D)all of the above

Question 8

Economically speaking,it would be socially optimal to chose the level of pollution where the marginal abatement cost is considerably less than the marginal benefit.

Question 9

Pollution abatement results in benefits that exceed the costs to society.

Question 10

Which of the following would be classified as an external cost?

A)As more firms began hiring computer programmers,the salaries of computer programmers increased and therefore the firm's cost of production increased.
B)You eat too much pizza and end up with a stomachache.
C)You are not able to study at night because there is so much noise coming from the dorm room next to yours.
D)When you purchase a prescription drug you are not made fully aware of all the possible side effects that may result from taking the drug.

Question 11

Comment on the following statement: "The socially optimal amount of pollution is zero."

Question 12

Which of the following is an example of an external cost?

A)a loud,crying baby in a public restaurant
B)emissions of methane into the atmosphere
C)a homeowner who likes to mow the lawn at 7 a.m.on Saturday morning
D)all of the above

Question 13

If,while producing goods and services,a factory is producing pollution and not incurring the cost of this pollution,then a(n)________ exists.

A)government failure
B)market failure
C)acceptable outcome
D)none of the above

Question 14

An external cost of production is:

A)a cost incurred by someone other than the producer.
B)the production cost borne by a producer.
C)the result of the sum of private and social cost.
D)another word for a tax.

Question 15

Markets which have external costs will produce ________ output than the socially efficient level whereas markets which have external benefits will produce ________ output than the socially efficient level.

A)less;less
B)more;more
C)more;less
D)less;more

Question 16

Give an example of an external cost and explain why the outcome is inefficient.

Question 17

Suppose that a paper producer dumps its waste into a local river.Explain why this situation is inefficient.

Question 18

If a producer is imposing an external cost on society,the best response would be to:

A)lower the producer's taxes to offset pollution.
B)increase the production.
C)internalize the externality.
D)subsidize the producer.

Question 19

Recall the application about the marginal cost and marginal benefit of reducing methane emissions.What does the optimal level of methane abatement depend on?

A)the level at which the polluting firms are able to maximize their profits
B)the total cost of abatement
C)the marginal benefit of abatement
D)It is not possible to determine an optimal level of methane.

Question 20

Reductions in pollution from a specific starting level of existing pollution is called:

A)abatement.
B)the EPA.
C)command and control.
D)usage tax.

Question 21

The social cost of production is the sum of the private cost and external cost.

Question 22

If a tax is placed on the output of perfectly competitive firm that imposes external costs on society,the firm's marginal cost curve will shift ________ and the market supply curve will shift to the ________.

A)down;left
B)down;right
C)up;right
D)up;left

Question 23

A company earns $200,000 in profit.The total costs paid by the firm are $800,000.Production of the goods contaminate the by river and small lakes,which reduces the profits of the salmon fishermen by $90,000.The external cost to society of the company's production is ________.

A)$90,000
B)$200,000
C)$600,000
D)$110,000

Question 24

A tax or charge equal to the external cost per unit of pollution is called abatement.

Question 25

Recall the application about imposing a tax on the carbon content of energy sources that produce carbon dioxide.Which one of the following would NOT be a result of imposing the carbon tax?

A)People would seek more energy efficient homes.
B)The quantity demanded of electricity would decrease.
C)People would drive less.
D)The price of electricity would decrease.

Question 26

The biggest problem with using a tax as a way to solve an externality problem is that:

A)the tax sometimes increases the external cost.
B)damages must be estimated in financial terms to determine the correct level of the tax.
C)the firm will pass the entire tax onto the consumer.
D)the commerce clause forbids such taxes.

Question 27

In essence,a pollution tax places a price on the right to pollute.

Question 28

Taxes on a firm's external costs:

A)are designed to encourage more production.
B)are meant to force some firms out of business.
C)are simply meant to force decision makers to consider the full costs of their actions.
D)are designed primarily as a way to raise money so that the government can compensate the victims of the spillover.

Question 29

Jason and Lauren live in the countryside 30 minutes from a main city in Virginia.They moved there because they wanted to enjoy the fresh air.After a year of living in their house,the 200 acres that surround their neighbor were zoned for an industrial property.A paper mill was built in the zoning and now emits strong gases that can be smelt from miles away,the paper mill's emission of gases are an example of a (an):

A)public good.
B)good that imposes an external cost.
C)good that provides an external benefit.
D)efficient good.

Question 30

What is an external cost?

Question 31

The idea behind the pollution tax equal to the external cost per unit of pollution is to:

A)increase the social benefit to be above the marginal cost.
B)internalize the externality.
C)allow the firm to evade external costs.
D)drive polluting firms out of developed countries.

Question 32

If the government taxes a firm that is generating an external cost,the price of the firm's product will:

A)increase and output will decrease.
B)increase and output will increase.
C)decrease and output will decrease.
D)decrease and output will increase.

Question 33

When the government taxes a firm that generates an external cost,the profit maximizing firm will produce:

A)more units of output than before the tax was imposed.
B)the same number of units of output as before the tax was imposed.
C)fewer units of output than before the tax was imposed.
D)either more or fewer units of output than before the tax was imposed.

Question 34

A power plant is emitting nitrogen oxides,a contributing factor in acid rain and in urban smog.If the power plant is taxed on the emission of nitrogen oxides then we can expect the amount of energy produced by the power plant to decrease.

Question 35

When will firms produce an output level that is above the socially efficient level?

A)There are external costs of production equal to marginal benefits.
B)There are internal costs of production and firms do not have to account for them.
C)There are external costs of production and firms do not have to account for them.
D)There are external costs of production and firms have account for them.

Question 36

When the government imposes a tax on a firm that generates external costs,the tax is:

A)always borne entirely by the firm.
B)always borne entirely by the consumer.
C)usually borne by both the firm and the consumer.
D)borne only by the government.

Question 37

The study of external costs is a major concern of:

A)labor economics.
B)international economics.
C)environmental economics.
D)macroeconomists.

Question 38

In a market characterized by external benefits,the market equilibrium is not socially optimal.

Question 39

For which of the following goods would the imposition of a tax most likely improve the efficiency of the market outcome?

A)the production of a good with external benefits
B)the production of a rival good with no external costs
C)the production of a good with external costs
D)the production of a public good

Question 40

A pollution tax lowers the price of the good or service produced by the polluting firm in a competitive market.

Question 41

In most cases pollution taxes are more efficient than command-and-control policies at achieving a desired reduction in the level of pollution because:

A)they can reduce the level of pollution at a lower cost to society.
B)the market price and quantity are not affected.
C)they make the firm pay for the pollution that they generate.
D)all of the above.

Question 42

Command-and-control policies mandate:

A)the use of a particular abatement control technology.
B)the level of output that the firm can produce.
C)the price that the firm can charge for its output.
D)the level of output and the price the firm can charge for its output.

Question 43

List three alternative ways in which the government can correct for pollution generated by a firm.

Question 44

Why would a firm continue to pollute even when it is fined (taxed)for doing so?

Question 45

What is the greatest difficulty associated with using a tax to correct for an external cost? Explain.

Question 46

Command and control policies are more effective than pollution taxes.

Question 47

If we compare the effects of a pollution tax with those of a command-and-control policy,production cost will be:

A)the same under a command-and-control policy and a pollution tax.
B)higher under a command-and-control policy than they would be under a pollution tax.
C)less under a command-and-control policy than they would be under a pollution tax.
D)none of the above

Question 48

Suppose that a paper producer is dumping waste into a nearby river.The government imposes a tax to correct for this external cost.What will be the effects of this pollution tax on the market for paper in a competitive market?

Question 49

According to the application regarding options for reducing CO2 emissions from international shipping,3% of global CO2 emissions come from international shipping.What tool did the policy analysts use for comparing the cost of alternative reduction methods?

A)compute the average marginal cost of each method
B)compute the marginal abatement cost of each method
C)compute the total marginal cost of each method
D)The analysts were unable to compare the cost of alternative reduction methods.

Question 50

Taxes on external costs are unlike other taxes because they:

A)distort the incentives of the firms being taxed.
B)move the allocation of resources closer to the social optimum.
C)lead to a large deadweight loss.
D)raise revenue for the government.

Question 51

A command-and-control policy causes firms to use inefficient abatement technologies,so production costs will be higher than they would be under a pollution tax.

Question 52

If the government were to limit the release of air pollution produced by a chemical company to 20,000 units,this policy would be considered a:

A)command-and-control policy.
B)subsidy.
C)market-based solution.
D)tax.

Question 53

Comment on the following statement: "When an external cost is present,and a firm does not factor this cost into its decisions,the firm is likely to produce a level of output that is lower than the efficient level."

Question 54

One advantage that a command-and-control policy has over a pollution tax is that:

A)we will be able to accurately predict the amount of pollution that will occur.
B)it generates a lower level of pollution at a lower cost.
C)it encourages firms to use the most efficient abatement methods possible.
D)it will lower the prices of products produced by polluting firms.

Question 55

Suppose there are only two manufacturers of in an area that and generate the same amount of carbon emission pollution per hour.The only difference is that firm 1 is a low cost firm and firm 2 is a high cost one.What would we expect if the government were to use a uniform abatement policy?

A)the demand for tires to increase
B)the quantity of tires produced to increase
C)The uniform abatement policy is likely to be inefficient.
D)The uniform abatement policy is likely to be efficient.

Question 56

In most cases,taxation is more likely to be inefficient than regulation because taxation corrects for only external costs at a higher overall cost to society.

Question 57

What role can the government play in correcting for external costs?

Question 58

Comment on the following statement: "Taxes on pollution are typically used to eliminate the pollution generated."

Question 59

The least costly method for reducing pollution would be to have all firms lower their levels of emissions by the same amount.

Question 60

Which of the following is a problem that occurs with command-and-control policies?

A)lead to increased pollution
B)decrease the firm's incentives to develop more efficient abatement technologies
C)An abatement technology that is efficient for one firm may be inefficient for others.
D)B and C are correct.

Question 61

Under a system of marketable pollution permits,the ________ amount of permits supplied,the ________ the equilibrium price charged for each permit:

A)higher;higher
B)higher;lower
C)lower;lower
D)It cannot be determined.

Question 62

How does the outcome of a command-and-control policy compare with the outcome of a pollution tax?

Question 63

Table 16.1
Producers X and Y dump waste into a local river.Table 16.1 shows the production costs each firm faces at different levels of waste.The government in the area has created a set of pollution permits.Each permit allows a producer to dump 100 gallons of waste.If the government issues an equal number of pollution permits to each producer:

A)neither producer will want to sell its permits at a price of $300.
B)Producer X will be more willing to sell its permits than will Producer Y.
C)both producers would be willing to sell all permits at a price of $50.
D)Producer Y will be more willing to sell its permits than will Producer X.

Question 64

Under a command-and-control policy,there is no incentive to develop better abatement techniques.

Question 65

A company earns $70,000 in profit if it is allowed to dump untreated waste in the river and only $40,000 in profit if it is forced to treat the waste before dumping it into the river.The local fishermen earn $35,000 in profit if the river is polluted and $55,000 in profit if the river is not polluted.The fishermen would be willing to pay the company up to ________ not to pollute the river,and the company would be willing to accept a minimum of ________ if it agrees not to pollute the river.

A)$15,000;$30,000
B)$20,000;$30,000
C)$30,000;$20,000
D)$20,000;$5,000

Question 66

Which of the following is a more efficient way to lower pollution than a command-and-control policy?

A)production subsidies
B)antitrust policy
C)marketable pollution permits
D)cost regulation

Question 67

Tradable pollution permits:

A)will be sold by firms that have relatively low abatement costs.
B)reduce the level of pollution to zero.
C)are likely to lead to a higher total level of pollution in an area.
D)cause each firm to reduce the level of pollution it generates by the same amount.

Question 68

Which of the following is a way of how the government runs a system of marketable pollution permits?

A)picks a target pollution level
B)oversupplies the market with permits
C)prohibits the trading of permits
D)all of the above.

Question 69

Table 16.1
Producers X and Y dump waste into a local river.Table 16.1 shows the production costs each firm faces at different levels of waste.The marginal cost of reducing waste:

A)is equal for both producers.
B)is higher for Producer Y.
C)falls as the level of waste dumped falls.
D)is higher for Producer X.

Question 70

Under a traditional pollution regulation,the government tells each firm how much pollution to abate and what abatement techniques to implement.

Question 71

When dealing with a pollution problem,pollution permits are more efficient than taxes or command-and-control policies because:

A)firms with low costs of abatement can buy more permits.
B)the government will generate more revenue from the sale of permits than through a pollution tax.
C)firms with high costs of abatement can buy more permits.
D)a pollution permit system will lead to all firms producing less pollution.

Question 72

Under the command-and-control regulation the supply curve for the polluting good will shift downward by a larger amount than with a tax regulation.

Question 73

List two reasons why command-and-control policies may be inefficient.

Question 74

When one firm sells its pollution permit to another:

A)the total amount of pollution generated rises.
B)both firms benefit.
C)the government determines the price of the permit.
D)all of the above

Question 75

Once the tradable pollution permits have been issued to firms:

A)each firm will reduce the level of pollution it generates.
B)the government determines the price of the permits.
C)firms with the highest cost of pollution abatement will have the greatest willingness to pay for the permits.
D)firms with very low pollution abatement costs can purchase more permits.

Question 76

One advantage of pollution permits over pollution taxes is:

A)pollution permits allow firms to choose their profit-maximizing level of pollution while taxes do not.
B)pollution permits generate more revenue for the government than do pollution taxes.
C)the government can set a maximum level of pollution using pollution permits.
D)none of the above.

Question 77

One advantage of command-and-control policy is its power to reduce the prices of the goods produced by polluting firms.

Question 78

Table 16.1
Producers X and Y dump waste into a local river.Table 16.1 shows the production costs each firm faces at different levels of waste.For Producer X,the marginal cost of reducing waste from 500 gallons to 400 gallons is:

A)$1,400
B)$300
C)$200
D)$240

Question 79

Table 16.1
Producers X and Y dump waste into a local river.Table 16.1 shows the production costs each firm faces at different levels of waste.For Producer Y,the marginal cost of reducing waste from 500 gallons to 400 gallons is:

A)$800.
B)$50.
C)$100.
D)$850.

Question 80

What is a command-and-control policy?