Question 1

Figure 5-10
  
Chicken pox vaccinations for toddlers benefit society by protecting young children and by preventing an epidemic of the disease. Thus, the marginal social benefits of chicken pox vaccinations exceed the marginal private benefit for any quantity of vaccinations as illustrated in Figure 5-10.
-Refer to Figure 5-10.One way to obtain the economically efficient amount of chicken pox vaccinations is for governments to subsidize these vaccinations.What is the size of the per-vaccination Pigovian subsidy that the government must provide to internalize the external benefits?

Accepted Answer

The Pigovian subsidy is equal to the difference between the marginal external benefit and the marginal external cost. In this case, the marginal external benefit is PE and the marginal external cost is PG. Therefore, the Pigovian subsidy is (PE - PG).

Question 2

Assume that production from an electric utility caused acid rain.If the government imposed a tax on the utility equal to the marginal external cost of the acid rain, the government's action would

Accepted Answer

Imposing a tax equal to the marginal external cost would force the electric utility to bear the cost of the pollution it is producing, making it internalize the externality. This would incentivize the utility to reduce its pollution and promote a more economically efficient outcome.

Question 3

Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption.All else equal, if the government decided to impose a tax on soda, the equilibrium quantity of soda would ________ and the equilibrium price of soda would ________.

Accepted Answer

A tax on soda would increase the cost of production for soda manufacturers, leading to a decrease in the equilibrium quantity of soda. The decrease in supply would also lead to an increase in the equilibrium price of soda.

Question 4

Figure 5-9
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.The market equilibrium output level is

Accepted Answer

The answer of Figure 5-9
  
Companies producing toilet paper...

Question 5

Worldwide annual carbon dioxide emissions increased from about 198 million metric tons in 1850 to ________ million metric tons in 2015.

Accepted Answer

In 2015, global carbon dioxide emissions were approximately 35,700 million metric tons, reflecting significant industrial growth and fossil fuel consumption since 1850.

Question 6

Anyone can purchase sulfur dioxide emission allowances on the Chicago Mercantile Exchange.Several environmental groups have raised money to buy allowances (which they subsequently destroy).As part of their fund-raising, these groups have urged contributors to buy the allowances as gifts.As one newspaper story put it, "For the environmentalist in your life, here's a gift that is sold by the ton, fits in an envelope and will last forever."
Source for quote: Randall Edwards, "Dear Santa: Please Bring Me Sulfur Dioxide for Christmas," Columbus Dispatch, December 19, 1999.
What would be the impact on the price of the emission allowances in the market if more people buy sulfur emission allowances and destroy them?

Accepted Answer

When more people buy and destroy sulfur dioxide emission allowances, the supply of available allowances decreases, leading to an increase in their price due to reduced availability.

Question 7

A major problem with using a tradable emission allowances system to control pollution is

Accepted Answer

The answer of A major problem with using a tradable...

Question 8

Consider the following methods of pollution reduction:
A.the government sets a target for maximum emissions
B.the government mandates the installation of specific pollution abatement equipment
C.the government imposes a per unit tax on the good that creates pollution
D.the government gives firms a tax rebate for every unit of pollution abated
Which of the above is an example of a command-and-control approach to reducing pollution?

Accepted Answer

A command-and-control approach involves the government setting explicit regulations and standards for polluting firms to follow. Options A and B both involve the implementation of such standards, while options C and D utilize market-based incentives to encourage pollution reduction. Therefore, only options A and B are examples of command-and-control, and the best choice is C as it includes both.

Question 9

Figure 5-9
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.Suppose the government wants to use a Pigovian tax to bring about the efficient level of production.What should the value of the tax be?

Accepted Answer

To bring about the efficient level of production, the government should impose a tax equal to the external cost of producing toilet paper. In this case, the external cost is the environmental damage caused by the discharge of bleach into rivers and lakes. The efficient level of production occurs at Q₀, where the marginal social cost (MSC) equals the marginal social benefit (MSB). The Pigovian tax should be equal to the vertical distance between the MSC curve and the supply curve at Q₀, which is equal to (P₂-P₀) per unit of output. Therefore, choice B is the correct answer.

Question 10

Figure 5-9
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.Let's suppose the government imposes a tax of $50 per unit of toilet paper to bring about the efficient level of production.What happens to the market price of toilet paper?

Accepted Answer

The tax increases the marginal cost of producing toilet paper by $50 per unit, which shifts the supply curve upward. As a result, the market price of toilet paper increases, but by less than $50 per unit due to the elasticity of demand. This leads to a reduction in quantity demanded and an increase in quantity supplied, moving the market closer to the efficient level of output.

Question 11

What is the rationale behind a tradable emission allowance scheme?

Accepted Answer

The answer of What is the rationale behind a tradable...

Question 12

Figure 5-10
  
Chicken pox vaccinations for toddlers benefit society by protecting young children and by preventing an epidemic of the disease. Thus, the marginal social benefits of chicken pox vaccinations exceed the marginal private benefit for any quantity of vaccinations as illustrated in Figure 5-10.
-Refer to Figure 5-10.What is the value of the net gain to society as a result of subsidizing chicken pox vaccinations?

Accepted Answer

The net gain to society can be calculated by finding the difference between the total social benefits and the total social costs, which is equal to the area of the triangle EFH. This represents the positive externalities (benefits to society beyond the individual receiving the vaccination) generated by the vaccinations. The other options, such as (PE x QE) and (PF x QF), do not accurately represent the net gain to society as they only calculate the benefits to individuals or the costs to society. The area of QFFGQE represents the total social costs.

Question 13

Figure 5-9
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.An efficient way to get the firm to produce the socially optimal output level is

Accepted Answer

Imposing a tax on the toilet paper industry will increase the cost of production, making it more expensive for firms to produce the product. This will lead to a decrease in the quantity of toilet paper produced and an increase in price. As a result, consumers will reduce their consumption and the industry will internalize the environmental costs associated with its production. This will lead to a socially optimal outcome where the marginal social cost equals the marginal social benefit. Therefore, imposing a tax is an effective way to get the firm to produce the socially optimal output level.

Question 14

Government-imposed quantitative limits on the amount of pollution firms are allowed to produce is an example of

Accepted Answer

Government-imposed quantitative limits on the amount of pollution firms are allowed to produce is a command-and-control approach to pollution reduction. This approach involves setting specific regulations or standards that firms must meet in terms of their pollution output.

Question 15

Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption.If the government decided to impose a tax on soda, the government will cause

Accepted Answer

By imposing a tax on soda, the price will increase and consumers will be discouraged from purchasing soda. This will cause consumers to internalize the negative externality of consuming soda, as they will now bear the cost of the tax. This will likely lead to decreased consumption and a reduction in the negative externalities associated with soda consumption. Producers may also be affected if the tax leads to decreased demand for their products, but the primary goal of the tax is to encourage consumers to internalize the externality. Options C and D are not accurate because the cost of the tax is not paid by the government or the producers - it is paid by the consumers who choose to purchase soda.

Question 16

Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution generating good.All of the following will result from the tax except

Accepted Answer

A tax equal to the value of the marginal external cost at the optimal output will increase the cost of production for the pollution-generating good. This will cause a decrease in the equilibrium quantity produced and consumed (B) and a decrease in the market supply of the good (C). Since the cost of production increases, the equilibrium market price will also increase (A). However, there will not be an increase in the demand for the good (D) as the tax will increase the cost for consumers as well, leading to a decrease in demand.

Question 17

Figure 5-9
  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-9 illustrates the situation in the toilet paper market.
-Refer to Figure 5-9.The efficient output is

Accepted Answer

The efficient output is where the marginal social cost (MSC) intersects with the marginal social benefit (MSB), which is at point B. This is the optimal level of production where the benefits to society are maximized while also taking into account the environmental damage caused by bleaching the toilet paper. Therefore, Q₂ is the best choice.

Question 18

Governments can increase the consumption of a product that creates positive externalities by

Accepted Answer

By subsidizing the production of a product with positive externalities, the government can decrease the cost of production for the producers, increasing the supply of the product and lowering the market price. This, in turn, can encourage more consumption of the product, leading to greater social benefits.

Question 19

The first economist to systematically analyze market failure was

Accepted Answer

A.C. Pigou was the first economist to systematically analyze market failure in his book "The Economics of Welfare" published in 1920. He introduced the concept of externalities and proposed government intervention through taxes or subsidies to correct market failures. Adam Smith is considered the father of modern economics but did not formally address market failures. Ronald Coase, J.E. Meade, and other economists contributed to the analysis of market failure, but Pigou was the first to systematically analyze it.

Question 20

In 2017, economists working at the U.S.Department of Treasury's Office of Tax Analysis have estimated that the marginal social cost of carbon dioxide emissions was about

Accepted Answer

According to the U.S. Department of Treasury's Office of Tax Analysis, in 2017, economists estimated that the marginal social cost of carbon dioxide emissions was around $49 per metric ton. This takes into account the costs associated with climate change, such as damage to crops, property, and infrastructure, as well as negative health impacts. This estimate is widely accepted among economists as a reasonable estimate of the social cost of carbon.

Quiz 5: Externalities, Environmental Policy, and Public Goods