Question 1

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

Accepted Answer

Firms maximize profit by taking into account the marginal cost of production.As long as the marginal cost represents the true opportunity cost of the resources used in production,the outcome is efficient.However,if a firm is dumping its waste into a river,and is not taking the cost of this resource into account,it will produce too much of the good.

Question 2

Water pollution is not an example of an external cost.

Accepted Answer

Water pollution is a classic example of an external cost as it is a cost imposed on society as a whole, rather than on individual polluters or users of resources. The pollution caused by industrial and agricultural activities imposes costs on human health, ecosystems, and water quality, which are not accounted for in the market prices of goods and services. This creates a market failure where firms and individuals do not face the full costs of their actions, leading to inefficient resource allocation and negative externalities.

Question 3

Once a firm is forced to consider an external cost,the price of its product will ________ and output will ________.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase

Accepted Answer

When a firm is forced to consider an external cost, it essentially has to internalize a cost that was previously not accounted for in its pricing or production decisions. This leads to an increase in the cost of production, which typically results in the firm raising the price of its product to maintain profitability. As the price increases, the quantity demanded is likely to decrease, leading to a reduction in output.

Question 4

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.

Accepted Answer

Abatement refers to the reduction or elimination of pollution from a specific starting level of existing pollution. It is often achieved through technological improvements or changes in behavior. The other options listed are not specific to the concept of reducing pollution levels.

Question 5

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 stomach ache.
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.

Accepted Answer

External costs, also known as negative externalities, occur when the production or consumption of a good or service imposes costs on third parties not involved in the transaction. Choice C represents an external cost because the noise from the dorm room affects someone who is not part of the activity causing the noise, thereby reducing their ability to study.

Question 6

Jason and Lauren live in the countryside 30 minutes from a large 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 house were zoned for an industrial property.A paper mill was built in the area and now emits strong gases that can be smelled from miles away.The paper mill's emission of gases is an example of a(n)
A) public good.
B) good that imposes an external cost.
C) good that provides an external benefit.
D) efficient good.

Accepted Answer

The paper mill's emission of strong gases that impact the surrounding area and people like Jason and Lauren is an example of a good that imposes an external cost. The cost of the pollution is not internalized by the paper mill and is instead shifted to the surrounding community.

Question 7

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

Accepted Answer

The answer of Give an example of an external cost...

Question 8

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

Accepted Answer

The answer of Comment on the following statement: "The socially...

Question 9

Consumers,not producers,gain from pollution abatement.

Accepted Answer

Both consumers and producers can gain from pollution abatement. Consumers benefit from a cleaner environment and improved health, while producers can benefit from increased efficiency, compliance with regulations, and potentially accessing new markets for green products.

Question 10

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

Accepted Answer

The answer of Pollution abatement results in benefits that exceed...

Question 11

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.

Accepted Answer

Economically speaking, it would be socially optimal to choose the level of pollution where the marginal abatement cost equals the marginal benefit, not when one is considerably less than the other. This balance ensures that the cost of reducing pollution further would exceed the benefits gained from such reduction.

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

Accepted Answer

All the options listed are examples of external costs because they impose a negative effect on third parties who are not directly involved in the activity that generates these costs.

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

Accepted Answer

This is a classic example of market failure where the cost of pollution is not included in the price of goods and services. Therefore, the market fails to account for the negative externalities associated with production, and as a result, pollution is produced beyond the socially optimal level. The market outcome is not efficient, and government intervention may be necessary to correct this market failure through regulations, taxes, or permits.

Question 14

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

Accepted Answer

The optimum level of pollution abatement is where the marginal benefit equals the marginal cost, not where one is greater than the other.

Question 15

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.

Accepted Answer

An external cost of production is a cost that is borne by someone other than the producer. It is also known as a negative externality, and it occurs when the production or consumption of a good or service imposes costs on third parties who are not involved in the transaction. Examples of external costs include pollution, traffic congestion, and noise pollution. Because these costs are not reflected in the market price of the good or service, they can lead to an inefficient allocation of resources and a suboptimal level of production.

Question 16

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.

Accepted Answer

The best response would be to internalize the externality, which means making the producer pay for the cost they are imposing on society. This can be achieved by implementing policies such as taxes or regulations that require the producer to reduce the external cost. Lowering the producer's taxes or subsidizing them would not address the external cost, and increasing production could potentially exacerbate the problem.

Question 17

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.

Accepted Answer

The government imposes taxes on firms which generate external costs in an effort to force decision makers to consider the full costs of their actions. By imposing taxes, decision makers are incentivized to internalize the external costs which were previously ignored, resulting in more efficient resource allocation.

Question 18

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

Accepted Answer

Markets with external costs (negative externalities, such as pollution) tend to overproduce compared to the socially efficient level because not all costs are borne by the producer. Conversely, markets with external benefits (positive externalities, like education) tend to underproduce since not all benefits are captured by the producer, leading to less production than is socially optimal.

Question 19

Recall the Application about determining the optimal level of methane abatement to answer the following question(s).
-Recall the Application.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.

Accepted Answer

The optimal level of methane abatement depends on the marginal benefit of abatement. This means that we need to find the point where the additional benefit from abatement equals the additional cost of abatement. Therefore, the optimal level of abatement is where the marginal cost of abatement equals the marginal benefit of abatement.

Question 20

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

Accepted Answer

Pollution abatement leads to better health by reducing harmful pollutants in the air and water, and can increase enjoyment of the natural environment by preventing damage from pollution. Additionally, although it may involve some initial costs, pollution abatement measures can ultimately lead to lower production costs by reducing the need for expensive remediation efforts and avoiding regulatory fines. Therefore, all of the above options are benefits of pollution abatement from society's perspective.

Quiz 16: External Costs and Environmental Policy

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

Water pollution is not an example of an external cost.

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

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

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

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

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

Consumers,not producers,gain from pollution abatement.

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

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.

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

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

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

An external cost of production is

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

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

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.

Recall the Application about determining the optimal level of methane abatement to answer the following question(s) . -Recall the Application.What does the optimal level of methane abatement depend on?

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