Question 1

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

Accepted Answer

Emissions standards typically set limits on the amount of pollution that businesses can emit, and businesses are not allowed to emit waste at zero cost until the limits are reached.

Question 2

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.

Accepted Answer

According to the Coase theorem, if property rights are clearly defined and the transactions costs of exchanging them are low, then private parties can negotiate efficient outcomes without the need for government intervention. Only when property rights are not well-defined or transactions costs are too high, making negotiation difficult, that corrective taxes or other regulatory measures may be necessary to internalize negative externalities.

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.

Accepted Answer

Pollution rights, also known as emissions allowances or tradable permits, are a market-based approach to controlling pollution. They allow firms to buy and sell the right to emit a certain amount of pollutants. By putting a price on pollution, firms are incentivized to reduce their emissions to avoid the cost of buying additional permits. This system is based on the idea that allowing companies to pollute up to a certain limit, while also providing them with a financial incentive to reduce their emissions, is more effective than simply imposing penalties for exceeding pollution limits.

Question 4

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

Accepted Answer

It is unlikely that the efficient amount of pollution abatement would be 100 percent, as the cost of such abatement would likely outweigh the benefits. The efficient amount of abatement is determined by comparing the marginal cost of abatement to the marginal benefit of reducing pollution. A point is reached where further abatement would cost more than the benefit it provides, so the efficient amount is less than 100 percent.

Question 5

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

Accepted Answer

Positive externalities are benefits that are enjoyed by third parties as a result of market exchange between buyers and sellers. For example, if a person installs solar panels on their roof, not only do they benefit from the electricity savings but also the local community benefits from reduced pollution and carbon emissions.

Question 6

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

Accepted Answer

A positive externality means that there are social benefits to college enrollment that are not fully captured by the individual student enrolling. In a competitive market, each college will offer instruction until their marginal cost equals the price they can charge for their instruction. However, since the social benefits of enrollment are not reflected in the price, the marginal social benefit can exceed the price that students pay. This means that there is a net social benefit to enrollment, and society as a whole would be better off if more students enrolled in college.

Question 7

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.

Accepted Answer

Tradeable emissions permits create a market for emissions, which can lead to cost-saving innovations and more efficient use of resources. Command-and-control regulation can lead to businesses simply meeting the minimum standards without seeking ways to reduce costs or emissions further. Therefore, tradeable emissions permits are likely to be a less costly way of reducing a given amount of emissions than command-and-control regulation.

Question 8

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.

Accepted Answer

The marginal external benefit being zero implies that the social benefit of additional inoculations is fully captured by the private benefit, meaning there's no additional societal benefit to subsidize for. Efficiency is already achieved without a subsidy.

Question 9

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.

Accepted Answer

In a competitive environment without an externality, the price is determined by the intersection of the demand and supply curves. If there is a negative externality, the social cost is higher than the private cost, and the demand curve shifts leftward. This results in a higher equilibrium price and lower quantity demanded than in a competitive market without an externality.

Question 10

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.

Accepted Answer

A negative externality leads to a difference between the private cost to producers and the social cost to society. As a result, the equilibrium quantity of output in a competitive market will exceed the socially optimal level, leading to a situation where the marginal social cost of production (private cost plus external cost) exceeds the marginal social benefit (private benefit plus external benefit) of consumption.

Question 11

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

Accepted Answer

The sulfur dioxide allowance trading allows power plants to buy or sell allowances for sulfur dioxide emissions, which has created a market-based incentive for reducing emissions at a lower cost. Therefore, it has lowered the cost of achieving a given reduction in sulfur dioxide emissions.

Question 12

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

Accepted Answer

In a competitive environment, firms will produce where marginal cost equals price. Since the market price is equal to the marginal social benefit, and assuming no externalities, the marginal private cost is equal to the marginal social cost. Therefore, the statement is true.

Question 13

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

Accepted Answer

When negative externalities exist, perfectly competitive markets produce more than the efficient output, as they do not account for the external costs imposed on society.

Question 14

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

Accepted Answer

Setting a corrective tax equal to the marginal external cost is the optimal solution for internalizing an externality. It ensures that the party responsible for the externality, such as a polluter, is paying the full cost of their actions and is incentivized to reduce their negative impact on society.

Question 15

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.

Accepted Answer

If the marginal external cost of pollution increases with the annual output of polluting goods, the total external cost will not increase at a constant rate with annual output. Instead, it will increase at an increasing rate, since the marginal external cost is rising.

Question 16

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.

Accepted Answer

When a negative externality exists, such as pollution from gasoline consumption, the market price of gasoline does not reflect the full social cost. As a result, consumers are more likely to purchase gasoline than they would if the social cost was fully reflected in the price. This leads to a quantity of gasoline consumed that is greater than the efficient amount.

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.

Accepted Answer

The total external benefit may continue to increase even if the marginal external benefit declines, as long as the marginal external benefit remains positive. The total external benefit only stops increasing when the marginal external benefit becomes zero or negative.

Question 18

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.

Accepted Answer

A negative externality means that there are costs associated with the production or consumption of a good that are borne by society as a whole, rather than just by the buyer and seller. In the case of wood stoves, these costs could include the pollution caused by burning wood, which harms the environment and public health. Since the marginal private cost only reflects the cost to the individual buyer and seller, it would be less than the marginal social cost, which includes the external costs to society. Therefore, the statement is true.

Question 19

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

Accepted Answer

A corrective tax is a type of tax that is intended to correct negative externalities. In this scenario, the toll road is acting as a corrective tax by charging drivers for using the road and using the revenue to fund public transportation, which can help reduce pollution.

Question 20

A negative externality results from the sale of firewood in competitive markets.It then follows that the marginal private:

Accepted Answer

A negative externality occurs when the actions of an economic agent impose costs on third-party individuals who are not involved in the original transaction. In this case, the sale of firewood is likely to result in pollution and damage to the environment, which imposes costs on society as a whole. The marginal private cost of firewood is the cost of production and supply borne by the seller, whereas the marginal social cost includes the additional costs imposed on society. The fact that firewood has a negative externality means that the marginal private cost is less than the marginal social cost, hence the correct answer is A.

Quiz 3: Externalities and Government Policy