Question 1

Consider a competitive market with a MPB = 22 - q and a MPC = 10 +q.There is a negative production externality of e = q, where q is the level of output in the market, the government can achieve the efficient level of output by:

A)Implementing a per-unit tax of $4 on suppliers.
B)Implementing a per-unit tax of $6 on suppliers.
C)Implementing a per-unit tax of $8 on suppliers.
D)Implementing a per-unit tax of $10 on suppliers.
E)None of the above.

Accepted Answer

The efficient level of output is where MPB = MSC. With the externality, MSC = MPC + e = 10 + q + q = 10 + 2q. Setting MPB = MSC, we get 22 - q = 10 + 2q, which implies q = 4. To achieve this efficient level of output, the government can implement a per-unit tax of $4 on suppliers, which will shift the MPC up by $4 and make it equal to the MPB at q = 4.

Question 2

Consider a competitive market with a MPB = 22 - q and a MPC = 10 +q.There is a negative production externality of e = q, where q is the level of output in the market, the government can achieve the efficient level of output by:

A)Implementing a per-unit tax of $4 on suppliers.
B)Implementing a per-unit tax of $6 on suppliers.
C)Implementing a per-unit tax of $8 on suppliers.
D)Implementing a per-unit tax of $10 on suppliers.
E)None of the above.

Accepted Answer

The efficient level of output is where the marginal social benefit (MSB) equals the marginal social cost (MSC). Here, MSB = MPB = 22 - q and MSC = MPC + e = 10 + q + q = 10 + 2q. Setting MSB = MSC gives 22 - q = 10 + 2q, solving this gives q = 4.

Question 3

The government issues tradable permits to tackle with the issue of sulphur dioxide emissions.Which statement is true?&#10;A)The initial allocation does not affect the final allocation and use of the permits.&#10;B)The initial distribution of permits impacts on their final use because it changes the relative opportunity cost of selling and buying permits for firms depending on their initial allocation.&#10;C)Firms that were not allocated any permits initially never end up using any permits.&#10;D)The firms allocated more permits in the initial allocation process typically use more permits than other firms.&#10;E)None of the above statements are true.

Accepted Answer

The initial allocation does not affect the final allocation and use of the permits.

Question 4

A negative production externality results in:&#10;A)A DWL in the market equilibrium because there is too much output relative to the efficient level of production.&#10;B)A DWL in the market equilibrium because output is too low in the market equilibrium relative to the socially efficient level of output.&#10;C)No DWL loss in the market equilibrium as all costs and benefits are captured in the actions of market participants.&#10;D)All of the above.&#10;E)None of the above.

Accepted Answer

A negative production externality, such as pollution from a factory, means that not all costs of production are borne by the producer. This leads to overproduction relative to the socially efficient level, as the market price does not reflect the true cost to society, resulting in a deadweight loss (DWL).

Question 5

Consider a competitive market in which the MPB = 180 - 2q and the MSC = q.In this market, however, there is a positive consumption externality of $60 per unit consumed.What is the DWL that results in the market equilibrium?

A)$200
B)$600
C)$400
D)$500
E)$0

Accepted Answer

To find the efficient level of output in the presence of a positive consumption externality, we adjust the Marginal Private Benefit (MPB) to include the externality, creating a Marginal Social Benefit (MSB) equation. The MSB is calculated by adding the externality to the MPB: MSB = MPB + Externality = 180 - 2q + 60. Simplifying, we get MSB = 240 - 2q. To find the efficient output, set MSB equal to MSC and solve for q: 240 - 2q = q. Adding 2q to both sides gives 240 = 3q, and dividing both sides by 3 gives q = 80.

Question 6

Consider a competitive market in which the MPB = 180 - 2q and the MSC = q.In this market, however, there is a positive consumption externality of $60 per unit consumed.What is the DWL that results in the market equilibrium?

A)$200
B)$600
C)$400
D)$500
E)$0

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Accepted Answer

The efficient outcome is where the MSC = MSB. The MSB is equal to the MPB + the externality, which is 180 - 2q + 60 = 240 - 2q. Setting this equal to the MSC, we get 240 - 2q = q, which solves for q = 80. To achieve this efficient outcome, the government can either provide a consumption subsidy of $60 per unit to consumers (option B) or subsidize producers by $60 per unit (option C). Both of these interventions will shift the supply curve to the right, leading to an increase in quantity supplied and a decrease in price until the efficient outcome is reached.

Question 7

A positive consumption externality results in:&#10;A)A market equilibrium quantity traded being more than the surplus-maximizing quantity, and consumers paying too high a price.&#10;B)A market equilibrium quantity traded being more than the surplus-maximizing quantity, and consumers paying too little for the product.&#10;C)The market output being below the surplus-maximizing level, and the market equilibrium price paid by consumers being too high.&#10;D)All of the above.&#10;E)None of the above.

Accepted Answer

A positive consumption externality means that the social benefits of consumption exceed the private benefits, leading to a situation where the market output is less than the socially optimal level. This results in a higher equilibrium price than what would be ideal for maximizing total surplus.

Question 8

The Coase theorem states that:&#10;A)The initial allocation of property rights affects the final outcome achieved in the market.&#10;B)Bargaining is difficult, given the high transaction costs typically involved.&#10;C)Provided property rights have been assigned and transactions costs are low, the efficient outcome will be achieved regardless as to the initial allocation of property rights.&#10;D)The initial allocation of property rights has no impact on the final outcome in market equilibrium, which is typically inefficient and results in a DWL.&#10;E)None of the above.

Accepted Answer

The Coase theorem posits that if property rights are clearly defined and transaction costs are minimal, parties will negotiate to correct any inefficiencies caused by externalities, leading to an efficient outcome regardless of the initial allocation of property rights.

Question 9

Consider a competitive market in which the MPB = 180 - 2q and the MSC = q.In this market, however, there is a positive consumption externality of $60 per unit consumed.What is the DWL that results in the market equilibrium?

A)$200
B)$600
C)$400
D)$500
E)$0

Accepted Answer

The answer of Consider a competitive market in which the...

Question 10

Consider a competitive market with a MPB = 22 - q and a MPC = 10 +q.There is a negative production externality of e = q, where q is the level of output in the market, the government can achieve the efficient level of output by:

A)Implementing a per-unit tax of $4 on suppliers.
B)Implementing a per-unit tax of $6 on suppliers.
C)Implementing a per-unit tax of $8 on suppliers.
D)Implementing a per-unit tax of $10 on suppliers.
E)None of the above.

Accepted Answer

The answer of Consider a competitive market with a MPB...

Deck 16: Externalities