Question 1

If a market for tradeable allowances exists, a company thathas used up its own allowances can:

Accepted Answer

In a market for tradeable allowances, companies that do not use up their pollution limits can sell their excess allowances to companies that exceed their limits. This system incentivizes companies to reduce pollution and allows for flexibility in meeting environmental targets. Options A, B, and C do not accurately describe the typical operations of a tradeable allowance system.

Question 2

Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxideestablishes property rights to pollute and helps reducetransaction costs by distributing allowances, maintainingdatabases, and monitoring emissions
II.One criticism of tradeable allowances is that they prohibitnon-businesses and environmental groups from purchasingthe allowances
III. The tradeable allowances for sulfur dioxide haveperformed poorly because electricity output has increased,causing a rise in sulfur dioxide levels.

Accepted Answer

Statement I is true as the EPA's tradeable allowances program for sulfur dioxide does establish property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. Statement II is false as non-businesses and environmental groups can purchase allowances. Statement III is also false as the tradeable allowances program has been successful in reducing sulfur dioxide levels.

Question 3

In a market with external costs, suppose the efficient level ofoutput is 1,000 units. Which of the following statements isTRUE?

Accepted Answer

To achieve the efficient level of output in a market with external costs, the government can either set a tax equal to the external cost or issue enough tradeable allowances to restrict the output to the efficient level. Both options would create a price incentive for firms to internalize the external costs and reduce their output to the efficient level. Therefore, option B is the best choice.

Question 4

Which of the following statements is TRUE?
I. Taxes may reduce consumption by exactly the same amountas government regulations
II.Taxes typically cost more than government regulationsbecause taxes raise prices whereas regulations simply limitquantity
III. Command-and-control policies effectively reduceconsumption; but may not be the lowest cost method for doingso.

Accepted Answer

Statement I is false because taxes and government regulations are not necessarily equivalent in their ability to reduce consumption. Statement II is partially true, as taxes do raise prices and can be more costly than regulations. However, it is possible for regulations to also raise prices, and the cost of implementing regulations can vary. Statement III is true, as command-and-control policies can effectively reduce consumption but may not be the most cost-effective approach. Overall, only statement III is unequivocally true, while statements I and II are more nuanced. Therefore, the best choice is B.

Question 5

Which of the following answers best explains how the marketfor tradeable allowances in pollution works?

Accepted Answer

Firms are given a certain amount of pollution allowances, and they can trade these allowances with other firms if they fall below or surpass their allotted targets.

Question 6

Which of the following statements is TRUE?

Accepted Answer

Allowing the burden of reducing pollution to vary by industry ensures that the reduction is achieved at a lower cost, as each industry has different costs associated with reducing pollution. This maximizes social surplus by reducing pollution at the lowest cost possible. Mandating a fixed amount of emissions for all firms could result in some firms having to incur high costs to meet the emissions limit, while others could reduce emissions at a lower cost. A system of tradeable allowances creates a market for pollution reduction, where firms with high costs of reducing pollution sell their allowances to firms with lower costs of reducing pollution, resulting in an overall reduction in pollution. Lastly, ignoring the impact of pollution reduction on the profitability of firms ignores the fact that the costs of pollution reduction are ultimately passed on to consumers through higher prices, reducing consumer surplus.

Question 7

Tradeable allowances:

Accepted Answer

Tradable allowances are an efficient way to reduce pollution at lower costs because they enable firms to buy and sell pollution permits based on their individual pollution levels. This creates a market-based system where the total pollution is reduced to the pre-determined cap, while allowing firms to find the most cost-effective means of complying with regulations. This results in reduced pollution at a lower cost compared to traditional command-and-control regulations.

Question 8

Which of the following explains the difference betweencommand and control policies and tradeable allowances?

Accepted Answer

Command-and-control policies mandate specific actions or limits on pollution for all regulated entities, ensuring a uniform approach to reducing pollutants. In contrast, tradeable allowances introduce flexibility by allowing firms to buy and sell pollution rights, enabling those that can reduce pollution more cost-effectively to do so, while others may choose to buy allowances if it's less expensive than reducing their own emissions. This system creates a market for pollution rights, encouraging overall cost efficiency in achieving pollution reduction goals.

Question 9

The problem with using command-and-control policies toeliminate external costs is that there are typically manymethods to achieve a goal and:

Accepted Answer

The answer of The problem with using command-and-control policies toeliminate...

Question 10

The Clean Air Act of 1990:

Accepted Answer

The Clean Air Act of 1990 established a tradeable allowances program for sulfur dioxide, which is an application of the Coase theorem. This allows firms to profit by selling their unused pollution allowances. Therefore, all of the answers are correct.

Question 11

Why are taxes on pollutants and tradeable allowancesconsidered to have similar effects in solving externalityproblems?

Accepted Answer

Both taxes on pollutants and tradeable allowances create a market-based incentive for firms to reduce their pollution levels. They both internalize the external costs of pollution, bringing the market closer to the efficient quantity of pollution. Therefore, they are considered to have similar effects in solving externality problems. Option A and D are incorrect because there is a fundamental difference between taxes and allowances, and they cannot be traded interchangeably. Option B is incorrect because taxes and allowances can be applied to different types of pollutants, which can have different environmental impacts.

Question 12

The main difference between tradable allowances and taxes is:

Accepted Answer

The answer of The main difference between tradable allowances and...

Question 13

When external benefits are present, the market price is________, however when external costs are present, themarket price is ________.

Accepted Answer

When external benefits are present, the market price is too low because the supply curve does not take into account the positive consequences the good/service has on third parties. On the other hand, when external costs are present, the market price is too high because the demand curve does not reflect the negative effects the good/service has on third parties. Therefore, the most appropriate choice is C - too high for external costs and too low for external benefits.

Question 14

Which of the following best creates incentives to reduce thepollution generated by washing machines?

Accepted Answer

Taxing the pollutants directly caused by washing machines creates a financial incentive for manufacturers to reduce the pollution generated, as they will want to avoid the cost of the tax. This can lead to them investing in technology or altering their production processes to reduce the amount of pollution generated, as it becomes more economically beneficial to do so. Options A and B may indirectly incentivize reduction of pollution, but they do not create a direct financial incentive like a tax does. The Coase theorem (option D) is a theoretical concept that may work in some markets, but it is not a practical or guaranteed solution to reducing pollution from washing machines.

Question 15

Command and control may be the best approach to handlingexternalities if:

Accepted Answer

Command and control is a strict regulatory approach, where rules and regulations are enforced to control the behavior that creates externalities. This approach requires strong compliance from the polluter or the producer. Hence, the best approach in handling externalities through command and control is when success requires strong compliance.

Question 16

What is the importance of the Clean Air Act of 1990?

Accepted Answer

The answer of What is the importance of the Clean...

Question 17

Under the Clean Air Act of 1990, the EPA distributespollution allowances to generators of electricity, and firmstrade allowances as they see fit. The EPA's tradeableallowances program has resulted in:

Accepted Answer

The tradeable allowances program incentivizes firms to reduce their pollution emissions in order to sell excess allowances to other firms, thus creating a market for pollution reductions. This has led to an overall improvement in air quality, as firms have been motivated to find more efficient and cleaner ways to generate electricity.

Question 18

Which of the following statements are TRUE?
I. Market prices do not correctly signal the true costs andbenefits to society when external costs are present
II.Market prices do not correctly signal the true costs andbenefits to society when external benefits are present
III. Taxes and subsidies can adjust prices so that they do sendthe correct signals.

Accepted Answer

All three statements are true. Market prices may not reflect the true societal costs and benefits when externalities (costs or benefits) are present, leading to market failures. Taxes and subsidies are tools that can help align market prices with the true societal costs and benefits, thereby correcting these market failures.

Question 19

The paper industry and brewery industry each emit 60 tons ofparticulates into the air. It costs the paper industry $1,000 toremove 1 ton of particulates and it costs the brewery industry$1,400 to remove 1 ton of particulates. In an effort to reduceparticulate pollution, the government gives each industrytradeable allowances worth 50 tons of particulates. We wouldexpect that:

Accepted Answer

Since it costs the brewery industry more ($1,400) to remove a ton of particulates compared to the paper industry ($1,000), it is more cost-effective for the brewery industry to buy allowances from the paper industry. The price would logically be between the two costs, making it cheaper for the brewery industry than removing the particulates themselves and still providing an incentive for the paper industry to sell.

Question 20

Assume an EPA official observes the following situation in asmall town on the banks of a river. The town depends heavilyon fish for its food and is heavily dependent on coal for itspower. A coal factory on the banks of the river emptiespollutants into the river causing health problems among theresidents and the fish to develop toxic residues in their liversand other organs. Which of the following solutions should theEPA choose to mitigate this negative externality problem (atleast in the short run)?
i. levy taxes on the coal factory's production of pollutantsII. levy taxes on the consumers' consumption of fishIII. create a market for tradeable allowancesIV. subsidize firms that produce clean fish

Accepted Answer

Levying taxes on the coal factory's production of pollutants will make the factory pay for the negative externality it is imposing on the town and the environment. This will also create an incentive for the factory to reduce its pollutant emissions, as it will be cheaper to emit less pollutants than to pay the tax.

Creating a market for tradable allowances will also create an economic incentive for the factory to reduce its pollutant emissions. The factory will be able to sell its allowances to other firms if it emits fewer pollutants than its allowance, or it will have to buy allowances from other firms if it emits more pollutants than its allowance. This will create a market-based solution to the negative externality problem and encourage efficient reduction of pollution.

Levying taxes on the consumers' consumption of fish or subsidizing firms that produce clean fish will not directly address the negative externality problem of the coal factory's pollutant emissions. These solutions may indirectly reduce the demand for fish and reduce the pressure on the river ecosystem, but they will not make the coal factory pay for the damage it is causing or create incentives for the factory to reduce its emissions.

Quiz 10: Monopolistic Competition and Oligopoly