Question 1

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

Accepted Answer

The EPA's tradable allowances program has resulted in an improved air quality. This is because the program creates a market incentive for companies to reduce their emissions or purchase allowances from those who have reduced their emissions. As a result, overall emissions are reduced, leading to improved air quality.

Question 2

Tradable allowances for pollution:

Accepted Answer

Tradable allowances for pollution allow firms to reduce pollution levels at lower costs by incentivizing them to adopt cleaner technologies and reducing the overall costs of pollution control compared to traditional command and control regulations.

Question 3

Use the following to answer questions:
Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
-(Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants released into the environment after the two firms have traded allowances?

Accepted Answer

The total amount of pollutants remains the same at 20 units (10 from Company A and 10 from Company B) after trading allowances.

Question 4

In a market with external costs, suppose the efficient level of output is 1,000 units. Which statement is TRUE?

Accepted Answer

When there are external costs, the market equilibrium output will be greater than the efficient level of output. Therefore, to achieve the efficient level of output, the government could set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level. A subsidy equal to the external cost would encourage more production and increase the externality. Thus, option A is incorrect. Option C and D are incorrect because taxes and tradable allowances can be used interchangeably to achieve the efficient level of output in this scenario.

Question 5

Under the EPA's tradable allowances program, clean energy is ______ and dirty energy is ______.

Accepted Answer

Under the EPA's tradable allowances program, clean energy is subsidized while dirty energy is taxed. This program encourages companies to reduce their emissions and invest in cleaner energy sources by providing financial incentives for doing so. Companies that exceed their allowed emissions can purchase allowances from those who emit fewer pollutants, creating a market for clean air. This approach has been successful in reducing emissions and promoting the transition to clean energy.

Question 6

The Clean Air Act:

Accepted Answer

The Clean Air Act established a cap-and-trade system for sulfur dioxide emissions, creating a market for trading emission allowances.

Question 7

Which of the following statements is TRUE?
I. The EPA's tradable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradable allowances is that they prohibit nonbusinesses and environmental groups from purchasing the allowances.
III. The tradable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

Accepted Answer

Statement I is true as the EPA's tradable allowances program does establish property rights to pollute and helps reduce transaction costs. Statement II is false as nonbusinesses and environmental groups can purchase the allowances, and Statement III is false as sulfur dioxide emissions have significantly decreased since the implementation of the trading program.

Question 8

Use the following to answer questions:
Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
-(Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading allowances?

Accepted Answer

Company A can reduce pollution at a lower cost than Company B, so it is more profitable for them to sell the allowance to Company B for $650 rather than investing $400 to reduce their own pollution. Company B, on the other hand, saves $350 by purchasing the allowance instead of spending $1,000 to reduce their pollution. Therefore, both firms benefit from trading allowances: A gains $250 and B saves $350.

Question 9

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?

Accepted Answer

This would be an efficient trade because Tyler values emitting one pound of carbon dioxide less than Alex's willingness to pay for emitting one pound of carbon dioxide. By allowing them to trade, the total cost of pollution abatement would decrease since Alex can emit more carbon dioxide at a lower cost, and Tyler would also make a profit.

Question 10

Which of answer best explains how the market for tradable allowances in pollution works?

Accepted Answer

Tradable allowances work by setting a limit on the amount of pollutants firms can produce, by giving them a specific allowance amount. Firms that produce less pollution can sell their unused allowances to firms that produce more pollution, allowing the latter to continue operating while reducing overall pollution levels.

Question 11

Tradable allowances:

Accepted Answer

Tradable allowances create a market for pollution permits, allowing firms to trade their emission rights with one another. This system incentivizes companies to reduce emissions, rewards those who do so successfully, and lowers the overall cost of pollution reduction for society as a whole.

Question 12

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?

Accepted Answer

The EPA should allow High to increase its pollution level and trade with Low, who can reduce pollution at a lower cost, achieving overall cost efficiency in pollution reduction.

Question 13

Which statement explains the difference between command and control policies and tradable allowances?

Accepted Answer

Command and control policies mandate specific limits or technologies for pollution reduction, while tradable allowances create a market for pollution rights, allowing firms to trade and potentially pollute more if they purchase additional allowances.

Question 14

If a market for tradable allowances exists, a company that has used up its own allowances can:

Accepted Answer

In a market for tradable allowances, companies that have used up their allowances can buy additional allowances from other firms that have not reached their pollution limits.

Question 15

The system of tradable allowances for carbon dioxide proposed by President Obama:
I. would be easy to implement today if not for the political in-fighting in Congress.
II. would create incentives for firms to move toward the use of fuels that contribute less to global warming (such as nuclear, solar, and so forth).
III. would create large revenues for the government, but do little to increase economic efficiency.

Accepted Answer

The system of tradable allowances for carbon dioxide is designed to create incentives for firms to reduce emissions by using cleaner energy sources, aligning with statement II. Statement I is incorrect because implementation challenges are not solely due to political in-fighting; there are also logistical and economic considerations. Statement III is incorrect because such a system aims to increase economic efficiency by internalizing the cost of carbon emissions.

Question 16

President Barack Obama proposed using a system of:

Accepted Answer

Obama proposed using a system of tradable allowances to reduce carbon dioxide emissions. This system is a type of cap-and-trade program, in which a cap is set on the total amount of emissions allowed, and companies are given allowances that they can trade with other companies to meet their emission targets. This provides companies with an incentive to reduce their emissions, as they can profit from selling unused allowances, and it allows for flexible and efficient ways to achieve emission reductions. Pigouvian taxes would be another approach to addressing carbon emissions, but Obama did not propose this specific approach. Depreciation permits and fines/levies are not common approaches to reducing carbon emissions.

Question 17

The Clean Air Act of 1990:

Accepted Answer

All of the options are correct. The Clean Air Act of 1990 created a tradable allowances program for sulfur dioxide, which allowed firms to profit by selling unused pollution allowances. It is an application of the Coase theorem, which states that private bargaining can lead to efficient outcomes in the presence of externalities.

Question 18

Why are taxes on pollutants and tradable allowances considered to have similar effects in solving externality problems?

Accepted Answer

Both taxes on pollutants and tradable allowances aim to internalize the external cost of pollution by imposing a cost on firms that produce pollution. This cost incentivizes firms to reduce their pollution output and brings the market closer to the efficient level of pollution. Tradable allowances allow firms to trade their permits, creating a market for pollution. Similarly, a tax on pollutants creates a market for pollution abatement where firms can reduce their tax liability by reducing their pollution output or purchasing allowances from other firms. Therefore, both policies can achieve similar outcomes in terms of reducing pollution and bringing the market closer to the efficient quantity.

Question 19

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

Accepted Answer

The Clean Air Act of 1990 introduced a cap-and-trade system where the EPA distributes pollution allowances, particularly for sulfur dioxide, to electricity producers, allowing them to trade these allowances.

Question 20

The EPA's system of tradable allowances:

Accepted Answer

The answer of The EPA's system of tradable allowances:
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Quiz 10: Externalities- When the Price Is Not Right