Question 1

-The figure above illustrates the gasoline market.There is no external benefit from gasoline.If a pollution tax equal to the marginal external cost is imposed on gasoline,then the quantity of gasoline produced and consumed equals
A) 0 gallons.
B) 5 million gallons.
C) 10 million gallons.
D) 20 million gallons.
E) None of the above answers is correct.

Accepted Answer

The answer of 
-The figure above illustrates the gasoline market.There...

Question 2

Transactions costs are the
A) costs of using the Coase theorem.
B) opportunity costs of conducting a transaction.
C) external marginal costs of the externality.
D) reason why taxes cannot affect the inefficiency resulting from an external cost.
E) external costs when a firm pollutes.

Accepted Answer

Transactions costs refer to the costs associated with conducting a transaction, such as search costs, bargaining costs, and enforcement costs. These costs are a type of opportunity cost, as they represent the trade-offs that must be made in order to complete a transaction. Choices A, C, D, and E are incorrect as they do not accurately describe transactions costs.

Question 3

To eliminate the inefficiency resulting from pollution that creates an external cost,the government can impose a pollution tax on producers that is equal to the
A) MSB.
B) MC.
C) marginal external cost.
D) MSC.
E) price.

Accepted Answer

The government can impose a pollution tax on producers that is equal to the marginal external cost of production. By doing so, it will force producers to internalize the externality, making them pay for the damages they have caused. This will increase the cost of production, reducing the quantity and increasing the price, hence reducing pollution. Therefore, the pollution tax must be equal to the marginal external cost to correct the market failure caused by the externality.

Question 4

If the government taxes producers that create pollution,the government's policy
A) allows the producers to pollute more by increasing their costs.
B) results in less production because the producers' costs have risen.
C) eliminates pollution entirely by shifting the supply curve leftward.
D) allows the firms to pass along higher costs but doesn't cut pollution.
E) forbids the firms from passing along higher costs.

Accepted Answer

The tax on producers will increase their cost of production and reduce their profits. This will result in a decrease in production as firms will not be able to afford to produce as much output as before. The tax will also incentivize firms to reduce their pollution as they will want to avoid the tax and the associated costs. However, it is unlikely that the tax will completely eliminate pollution.

Question 5

A tax on a polluting industry
A) is not desirable because it reduces efficiency.
B) leads to less output in this industry.
C) causes more resources to be used in the polluting industry.
D) shifts the marginal social benefit curve leftward.
E) shifts the marginal social benefit curve rightward.

Accepted Answer

A tax on a polluting industry is a form of a Pigovian tax, which is intended to internalize the negative externality caused by pollution. By increasing the cost of production for the polluting industry, output in this industry will decrease as it becomes less profitable to continue producing at the same level. This reduction in output is desirable because it leads to less pollution being emitted into the environment. Therefore, choice B is the best answer as it accurately describes the intended effect of a tax on a polluting industry.

Question 6

In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution,the pollution tax must be set equal to the
A) marginal private cost.
B) marginal external cost.
C) marginal social cost.
D) marginal benefit of polluting.
E) price of the good.

Accepted Answer

The pollution tax should be set equal to the marginal external cost, which is the cost imposed on society due to pollution that is not accounted for by the polluter. By setting the tax at this level, the polluter will be incentivized to reduce their pollution output to the socially optimal level, where marginal private cost equals marginal social cost. This will eliminate the deadweight loss resulting from pollution and lead to an efficient allocation of resources.

Question 7

Which of the following is a common method used by government to cope with the situation in which production of a good creates an external cost?
A) removing property rights
B) subsidizing production
C) marketable permits
D) lottery
E) vouchers

Accepted Answer

Marketable permits, also known as cap and trade, allow the government to set a limit on the amount of pollution that can be produced and then issue permits for businesses to pollute up to that limit. Businesses that are able to reduce their pollution can sell their unused permits to other businesses who may exceed their limit. This incentivizes businesses to find cost-effective ways to reduce their pollution and creates a market for the permits.

Question 8

-Producing leather creates external costs in the form of water pollution.The figure above illustrates the market for leather.In the absence of any government regulation,how many tons of leather will be produced?
A) 0 tons
B) 200 tons
C) 300 tons
D) more than 300 tons
E) None of the above answers is correct.

Accepted Answer

In the absence of government regulation, the market will produce leather up to the point where supply equals demand, which typically exceeds the socially optimal level due to external costs like water pollution not being accounted for in the production decisions. This results in production levels of more than 300 tons, as lower quantities would be at points where demand still exceeds supply.

Question 9

-The figure above illustrates the gasoline market.There is no external benefit from gasoline.If this market is left unregulated and no pollution tax is imposed,the equilibrium quantity of gasoline is
A) 0 gallons.
B) 5 million gallons.
C) 10 million gallons.
D) 20 million gallons.
E) 15 million gallons.

Accepted Answer

The answer of 
-The figure above illustrates the gasoline market.There...

Question 10

The Coase theorem deals with the problem of pollution by
A) giving the government regulatory power over polluters.
B) making all polluters stop polluting.
C) establishing and enforcing private property rights.
D) having the government take over ownership of all polluting processes.
E) allowing the government to set the proper emission charge.

Accepted Answer

The Coase theorem suggests that assigning property rights for pollution and allowing parties to negotiate and trade those rights can lead to an efficient resolution of the problem without the need for government regulation. By establishing and enforcing private property rights, parties can negotiate the optimal level of pollution and minimize transaction costs. The other choices involve government intervention, which is not the focus of the Coase theorem.

Question 11

If the government taxes an industry that creates pollution,the tax
i.decreases the pollution.
ii.increases the price of the product produced by the firms.
iii.decreases the quantity of the good produced.
A) i only.
B) ii only.
C) ii and iii.
D) i and iii.
E) i, ii, and iii.

Accepted Answer

Taxing an industry that creates pollution incentivizes firms to reduce pollution to lower their tax burden (i), likely leads to higher production costs that are often passed on to consumers in the form of higher prices (ii), and may reduce production as it becomes more costly, leading to a decrease in the quantity of the good produced (iii).

Question 12

When using pollution charges to improve efficiency in a market with an external cost,regulators attempt to set the pollution charge equal to the
A) marginal social cost of production.
B) marginal external cost of production.
C) marginal private cost of production.
D) marginal private benefit of consumption.
E) marginal external benefit minus the marginal external cost.

Accepted Answer

Regulators aim to set the pollution charge equal to the marginal external cost of production to internalize the externalities, ensuring that producers account for the costs their pollution imposes on society, thus aligning private costs with social costs for more efficient market outcomes.

Question 13

Suppose a firm pollutes a river when it produces a product.To achieve the efficient amount of output,a government could impose a ________ that equals the ________ of the pollution.
A) pollution charge; marginal social cost
B) pollution charge; marginal external cost
C) pollution tax; marginal social cost
D) pollution tax; marginal external cost
E) pollution subsidy; marginal social cost

Accepted Answer

To achieve efficient output, the government must impose a tax on the firm equal to the marginal external cost of pollution. This will shift the firm's supply curve upward and result in the optimal quantity of output that takes into account the negative externality of pollution. Choice A and B are incorrect because they refer to the marginal social cost, which includes the private cost of production plus the external cost of pollution. Choice C and E are incorrect because they suggest a charge or subsidy, rather than a tax, which would not be sufficient to achieve the efficient output level.

Question 14

When government levies pollution taxes on sellers to eliminate the inefficiency from the cost of pollution,the result is
A) a lower price.
B) a smaller quantity produced.
C) a smaller cost of production.
D) a rightward shift of the supply curve.
E) leftward shifts of the supply and demand curves.

Accepted Answer

When the government levies pollution taxes on sellers, it increases the cost of production and reduces the profit margin for producers. This, in turn, reduces the quantity of goods produced as it becomes less profitable to produce them. Therefore, the correct option is B - a smaller quantity produced.

Question 15

If transactions costs are low,then assigning property rights in a market with external costs
i.increases the deadweight loss.
ii.means private transactions are efficient.
iii.means that only consumers must pay the external costs.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i and ii

Accepted Answer

When transactions costs are low, assigning property rights in a market with external costs means private transactions are efficient. This efficiency means that private actors will internalize the external costs and only consumers must pay the external costs, reducing the deadweight loss.

Question 16

If a pollution tax in a market with an external cost changes the market so that it produces the efficient level of output,which of the following occurs?
i.the supply curve shifts leftward
ii.the price increases
iii.the quantity produced decreases
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii

Accepted Answer

A pollution tax internalizes the external cost, causing the supply curve to shift leftward (i), leading to an increase in price (ii) and a decrease in the quantity produced (iii) to reach the efficient level of output.

Question 17

Three methods the government can use to cope with the external cost from pollution are
A) pollution taxes, subsidies, and outright bans.
B) pollution taxes, regulations, and subsidies.
C) marketable permits, pollution subsidies, and pollution taxes.
D) pollution charges, marketable permits, and pollution limits.
E) vouchers, pollution subsidies, and pollution taxes.

Accepted Answer

The answer of Three methods the government can use to...

Question 18

-Producing leather creates external costs in the form of water pollution.The figure above illustrates the market for leather.If the government sets a pollution limit that achieves efficiency,how many tons of leather are produced?
A) 0 tons
B) 200 tons
C) 300 tons
D) more than 300 tons
E) more than 0 tons and less than 200 tons

Accepted Answer

The efficient level of production is where the social cost (including external costs like pollution) equals the social benefit. The question implies that with a pollution limit set to achieve efficiency, the market will still produce leather, but at a level that balances these costs and benefits. Without specific figures from the figure mentioned, the general principle suggests that production will not cease entirely (ruling out 0 tons) and will not exceed the level where external costs are not accounted for. Therefore, the answer that fits the description of achieving efficiency, given the options, is 300 tons, assuming this level aligns with the efficient balance between social costs and benefits.

Question 19

Which of the following is true regarding pollution charges?
i.They force a polluter to pay a price for its pollution.
ii.They are based on the marginal external cost of pollution.
iii.The fee that produces the efficient amount of pollution is easily determined.
A) i only
B) i and ii
C) ii and iii
D) i, ii, and iii
E) i and iii

Accepted Answer

Option i is true because pollution charges impose a cost on polluters and force them to pay for the pollution they generate.
Option ii is also true because pollution charges are typically set equal to the marginal external cost of pollution, which is the cost imposed on individuals or society by the polluter's emissions.
Option iii is not entirely true because determining the fee that produces the efficient amount of pollution can be challenging as it requires balancing the costs and benefits of reducing pollution.

Question 20

Which of the following is the best example of a transactions cost?
A) the value of the time spent negotiating a contract
B) the price of a new set of tires
C) the cost associated with producing a golf club
D) the price of labor and materials used to produce a house
E) the price of food

Accepted Answer

Transaction costs refer to the expenses incurred in making an economic transaction, and negotiating a contract involves costs such as legal fees, time spent on negotiations, and other associated costs. Therefore, option A is the best example of a transaction cost among the given options.

Quiz 10: Externalities

-The figure above illustrates the gasoline market.There is no external benefit from gasoline.If a pollution tax equal to the marginal external cost is imposed on gasoline,then the quantity of gasoline produced and consumed equals

Transactions costs are the

To eliminate the inefficiency resulting from pollution that creates an external cost,the government can impose a pollution tax on producers that is equal to the

If the government taxes producers that create pollution,the government's policy

A tax on a polluting industry

In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution,the pollution tax must be set equal to the

Which of the following is a common method used by government to cope with the situation in which production of a good creates an external cost?

-Producing leather creates external costs in the form of water pollution.The figure above illustrates the market for leather.In the absence of any government regulation,how many tons of leather will be produced?

-The figure above illustrates the gasoline market.There is no external benefit from gasoline.If this market is left unregulated and no pollution tax is imposed,the equilibrium quantity of gasoline is

The Coase theorem deals with the problem of pollution by

If the government taxes an industry that creates pollution,the tax i.decreases the pollution. ii.increases the price of the product produced by the firms. iii.decreases the quantity of the good produced.

When using pollution charges to improve efficiency in a market with an external cost,regulators attempt to set the pollution charge equal to the

Suppose a firm pollutes a river when it produces a product.To achieve the efficient amount of output,a government could impose a that equals the of the pollution.

When government levies pollution taxes on sellers to eliminate the inefficiency from the cost of pollution,the result is

If transactions costs are low,then assigning property rights in a market with external costs i.increases the deadweight loss. ii.means private transactions are efficient. iii.means that only consumers must pay the external costs.

If a pollution tax in a market with an external cost changes the market so that it produces the efficient level of output,which of the following occurs? i.the supply curve shifts leftward ii.the price increases iii.the quantity produced decreases

Three methods the government can use to cope with the external cost from pollution are

-Producing leather creates external costs in the form of water pollution.The figure above illustrates the market for leather.If the government sets a pollution limit that achieves efficiency,how many tons of leather are produced?

Which of the following is true regarding pollution charges? i.They force a polluter to pay a price for its pollution. ii.They are based on the marginal external cost of pollution. iii.The fee that produces the efficient amount of pollution is easily determined.

Which of the following is the best example of a transactions cost?