Deck 3: Externalities and Government Policy 

Question 1

Emissions standards allow businesses to emit waste at zero cost until the limits set by the standards are reached.

Answer 1

True

Question 2

According to the Coase theorem, corrective taxes are necessary to internalize negative externalities when the transactions costs of exchanging property rights to use resources are zero.

Answer 2

False

Question 3

Pollution rights can be used to price the right to emit pollutants and to provide incentives to reduce emissions by profit-maximizing firms.

Answer 3

True

Question 4

The efficient amount of pollution abatement is likely to be 100 percent.

Question 5

When a positive externality exists, benefits to third parties other than the buyers and sellers of a good will result from market exchange of the good.

Question 6

If a positive externality is associated with college enrollment, then when college instruction is provided in a competitive market, the marginal social benefit of enrollment will exceed its marginal social cost in equilibrium.

Question 7

Command-and-control regulation to reduce emissions is likely to be a less costly way of reducing a given amount of emissions than tradeable emissions permits.

Question 8

At the current level of annual supply of inoculations against polio, the marginal external benefit of an inoculation is zero.To achieve efficiency, a corrective subsidy must be provided to those being inoculated.

Question 9

Assuming a negative externality, the price of a good will be lower than if the price was set in a competitive environment without an externality.

Question 10

When a negative externality exists, the marginal social cost of annual output sold in a competitive market will exceed the marginal social benefit of that output in equilibrium.

Question 11

The market for sulfur dioxide allowance trading has lowered the cost of achieving a given reduction in sulfur dioxide emissions by electric power-generating plants.

Question 12

Assuming no externalities and a competitive environment, the marginal private cost is equal to the marginal social cost.

Question 13

When negative externalities exist, perfectly competitive markets produce less than the efficient output.

Question 14

To internalize an externality, a corrective tax must be set equal to the marginal external cost.

Question 15

If the marginal external cost of pollution increases with the annual output of polluting goods, then the total external cost will increase at a constant rate with annual output.

Question 16

If a negative externality exists for sales of gasoline in a competitive market, more than the efficient amount of gasoline will be sold per year.

Question 17

The marginal external benefit of the sale of smoke detectors in a city declines with annual output.The total external benefit of smoke detectors will therefore eventually become zero.

Question 18

If a negative externality is associated with the sale of wood stoves, then the marginal private cost of those stoves is less than their marginal social cost.

Question 19

A toll road used to subsidize public transportation in an effort to reduce pollution is an example of a corrective tax.

Question 20

A negative externality results from the sale of firewood in competitive markets.It then follows that the marginal private:

A)cost of firewood is less than its marginal social cost.
B)cost of firewood exceeds its marginal social cost.
C)benefit of firewood is less than its marginal social benefit.
D)benefit of firewood exceeds its marginal social benefit.

Question 21

The competitive market equilibrium price of sanitation services in a small town with no government-supplied sanitation services is $2 per trash pickup.There is a $1 marginal external benefit associated with each trash pickup.The elasticity of supply of trash pickups is infinite in the long run, implying a horizontal supply curve.To achieve the efficient output of sanitation services, a corrective

A)subsidy must increase the price received by suppliers to $3 per pickup.
B)subsidy must decrease the price paid by consumers of sanitation services to $1 per pickup.
C)tax of $1 per pickup is required.
D)subsidy must increase the price paid by buyers to $3 per pickup.

Question 22

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,500 units and an efficient price of $50.00 per unit, what efficient quantity-price combination would be consistent with a positive externality?

A)1,500 units, $60.00 per unit price.
B)1,300 units, $45.00 per unit price.
C)1,600 units, $40.00 per unit price.
D)1,700 units, $56.00 per unit price.

Question 23

Regulations require that emissions of carbon monoxide be limited to 1,000 tons per 100 square miles for all regions of the nation.If the marginal external cost of the emissions varies among regions in the nation, then the regulations will:

A)achieve the efficient amount of pollution abatement.
B)achieve more than the efficient amount of pollution abatement.
C)achieve less than the efficient amount of pollution abatement.
D)be likely to achieve more than the efficient amount of abatement in some regions but less than the efficient amount in others.

Question 24

If the marginal costs of reducing emissions varies among regions, then regulations requiring all regions in a nation to reduce emissions by the same amount will achieve:

A)the efficient amount of pollution abatement.
B)more than the efficient amount of pollution abatement.
C)less than the efficient amount of pollution abatement.
D)more than the efficient amount of pollution abatement in some regions but less than the efficient amount in other regions.

Question 25

According to the Coase theorem, externalities can be internalized when transactions costs are zero through:

A)corrective taxes and subsidies.
B)effluent fees.
C)assigning property rights to resource use but outlawing their exchange.
D)assignment of property rights to use resources and allowing free exchange of assigned property rights.

Question 26

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 500 units and an efficient price of $150.00 per unit, what efficient quantity-price net subsidy combination would be consistent with a corrective subsidy for a positive externality?

A)500 units, $150.00 per unit price net subsidy.
B)300 units, $120.00 per unit price net subsidy.
C)600 units, $160.00 per unit price net subsidy.
D)700 units, $100.00 per unit price net subsidy.

Question 27

The effect of a negative externality is similar to a:

A)supply curve (marginal social cost) shifting to the left.
B)supply curve (marginal social benefit) shifting to the right.
C)demand curve (marginal social cost) shifting to the left.
D)demand curve (marginal social benefit) shifting to the right.

Question 28

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 1,000 units and an efficient price of $100.00 per unit, what efficient quantity-price combination would be consistent with a negative externality?

A)1,000 units, $95.00 per unit price.
B)950 units, $102.00 per unit price.
C)900 units, $90.00 per unit price.
D)1,100 units, $105 per unit price.

Question 29

Which of the following is true if a negative externality is associated with the sale of gasoline?

A)Third parties other than the buyers and sellers of gasoline receive benefits.
B)Third parties other than the buyers and sellers of gasoline bear costs.
C)The marginal social cost of gasoline exceeds its marginal private cost.
D)Both (b) and (c) are correct.

Question 30

The marginal external cost associated with air pollution increases with the annual output of a pollut?ing industry.At the current competitive equilibrium level of output per year, the marginal external cost is $10 per unit of output.To achieve efficiency, a corrective

A)tax of $10 per unit of output is required.
B)tax of more than $10 per unit of output is required.
C)tax of less than $10 per unit of output is required.
D)subsidy of $10 per unit of output is required.

Question 31

Electric power is produced by an unregulated monopoly in a certain region.The monopolistic elec?tric power company's production of electricity results in $10 per kilowatt hour of pollution damage to parties other than the buyers of electricity in the region.To achieve efficiency,

A)a $10 per kilowatt hour corrective tax is required.
B)more than $10 per kilowatt hour corrective tax is required.
C)a $10 corrective subsidy is required.
D)less than $10 per kilowatt hour corrective tax is required.

Question 32

If a negative externality prevails in a competitive market for air travel, then:

A)more than the efficient amount of annual air travel will be consumed in equilibrium.
B)less than the efficient amount of annual air travel will be consumed in equilibrium.
C)the marginal social cost of air travel will exceed its marginal social benefit in equilibrium.
D)both (a) and (c) are correct

Question 33

If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,

A)the marginal social benefit of smoke detectors exceeds the marginal social cost.
B)the marginal social cost of smoke detectors exceeds the marginal social benefit.
C)the marginal social cost of smoke detectors is equal to the marginal social benefit.
D)more than the efficient amount of smoke detectors is sold.

Question 34

The marginal external cost associated with the emissions of sulfur dioxide is estimated to be $30 per pound of this chemical per year.Assume that each ton of steel produced per year results in 5 pounds of sulfur dioxide emissions.Suppose that the supply of steel is infinitely elastic at a price of $500 per ton.The current equilibrium output of steel produced by a competitive industry is 10,000 tons.
a.Show how a corrective tax can be used to achieve efficiency.Predict the impact of the tax on the equilibrium price and quantity of steel.Explain how steel companies will react to the tax.Indicate the amount of tax revenue that will be collected.
b.Discuss the political support for the tax.In your discussion, show the net gain in well-being possible from the tax and indicate which groups will gain and which groups will lose as a result of its imposition.

Question 35

The marginal external cost associated with paper production is constant at $10 per ton per year.The competitive market equilibrium for paper production is currently 10 million tons per year.A corrective tax on paper production will:

A)collect $100 million annually.
B)collect more than $100 million annually.
C)collect less than $100 million annually.
D)reduce annual damages to those other than buyers and sellers of paper to zero.

Question 36

A positive externality results from the purchase of smoke detectors.If smoke detectors are sold in a competitive market,

A)the marginal social benefit of smoke detectors is less than the marginal private benefit received by any consumer.
B)the marginal social benefit will exceed the marginal private benefit received by any consumer.
C)in equilibrium the marginal social cost of smoke detectors will equal the marginal social benefit.
D)in equilibrium the marginal social benefit of smoke detectors is zero.

Question 37

The effect of a positive externality is similar to a:

A)supply curve (marginal social cost) shifting to the left.
B)supply curve (marginal social benefit) shifting to the right.
C)demand curve (marginal social cost) shifting to the left.
D)demand curve (marginal social benefit) shifting to the right.

Question 38

The marginal external cost per unit of effluent discharged into a river by a perfectly competitive chemical industry is currently estimated to be $50 per ton per year.Which of the following state?ments is true?

A)Efficiency can be achieved with a $50 per ton annual effluent charge.
B)At the competitive equilibrium output, the marginal social benefit of discharging effluent is $50.
C)Efficiency can be achieved by banning discharge of effluent.
D)At the efficient output, the marginal social benefit of discharging effluent will be zero.

Question 39

Which of the following is true about command-and-control regulation that allows businesses to emit pollutants up to a certain point and bans emissions after that limit is reached?

A)They are equivalent to emissions charges.
B)They make firms pay the marginal cost of the damages done by their emissions, no matter what the level.
C)They allow firms to emit some pollutants at zero charge.
D)They are likely to minimize the cost of achieving any given reduction in emissions.

Question 40

The current competitive market price of fish is $3 per pound.A chemical producer emits effluent into a lake used by a commercial fishing firm.Each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm.Assuming that transactions costs are zero and the chemical firm has the legal right to dump effluent into the lake,

A)the fishing firm would be willing to pay up to $60 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
B)the fishing firm would be willing to pay up to $3 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
C)the chemical firm would never consider the damage caused by its effluent.
D)government intervention is required to achieve efficiency.

Question 41

How would you select an appropriate policy to internalize negative externalities associated with pollution? In your answer indicate the information required to internalize a negative externality.How do the transactions costs of exchanging the right to pollute affect the choice of policy? Explain why there would be no negative externalities associated with pollution if the transactions costs of establishing and exchanging the rights to pollute (or to have a pollution-free environment) were zero.