Deck 5: Externalities, environmental Policy, and Public Goods

Question 1

A positive externality results when

A)economists are sure that a good or service provides benefits to consumers.
B)someone pays for a good or service even though she is not directly affected by the production or consumption of it.
C)when people who live in one country benefit from the production of a good or service that occurs in another country.
D)people who are not directly involved in producing or paying for a good or service benefit from it.

Answer 1

people who are not directly involved in producing or paying for a good or service benefit from it.

Question 2

Which of the following could be evidence of a market failure?

A)Resources in an economy are not fully utilized.
B)The market price of a product is above the average cost of production.
C)There are only a handful of firms competing against each other in an industry.
D)Market prices do not reflect true production costs.

Answer 2

Market prices do not reflect true production costs.

Question 3

Which of the following describes how a negative externality affects a competitive market?

A)The externality causes a difference between the private cost of production and the social cost.
B)The externality causes a difference between the private cost of production and the private benefit from consumption.
C)The externality causes consumer surplus to exceed producer surplus.
D)The externality causes a difference between the private cost of production and the equilibrium price.

Answer 3

The externality causes a difference between the private cost of production and the social cost.

Question 4

The cost borne by a producer in the production of a good or service is called

A)private cost.
B)public cost.
C)social cost.
D)internal cost.

Question 5

An external cost is created when you

A)graduate from college.
B)buy flowers for your mother on Mother's Day.
C)litter on the side of the road.
D)buy a sandwich for lunch.

Question 6

Pollution is an example of a

A)public good.
B)positive externality.
C)private cost.
D)negative externality

Question 7

When there is a positive externality

A)the private benefit received by consumers is greater than the external benefit.
B)the social benefit received by consumers is greater than the private benefit.
C)the private benefit received by consumers is greater than the private cost.
D)the private benefit received by consumers is greater than the social benefit.

Question 8

An externality

A)is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
B)enhances market efficiency.
C)is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
D)refers to production or consumption that occurs outdoors.

Question 9

Alternative approaches for reducing carbon dioxide emissions are

A)carbon taxes and carbon scrubbing.
B)carbon trading and carbon subsidies.
C)carbon taxes and carbon trading.
D)burning low carbon coal and deforestation.

Question 10

When there is a negative externality,the private cost of production ________ the social cost of production.

A)is greater than
B)is equal to
C)eliminates
D)is less than

Question 11

If the social benefit of consuming a good or a service exceeds the private benefit

A)a negative externality exists.
B)the market achieves economic efficiency.
C)a positive externality exists.
D)the sum of consumer surplus and producer surplus is maximized.

Question 12

In the past the federal government often employed what is called a "command and control" approach to the reduction of pollution emissions.Many economists are critical of this approach because

A)it does not lead to significant reductions in pollution.
B)they believe a market-based approach will reduce emissions more efficiently.
C)the "command and control" approach is designed to help firms at the expense of consumers.
D)the "command and control" approach leads to negative externalities.

Question 13

A free market fails when

A)there is government intervention.
B)there is an external effect in either production,consumption,or both.
C)firms that produce goods which create positive externalities go bankrupt.
D)firms that produce goods which create negative externalities earn high profits.

Question 14

When there is an externality in a market

A)the externality will move the market to an economically efficient equilibrium.
B)the externality will cause the market price to be less than or greater than the equilibrium price.
C)the government should use price controls to enable the market to reach equilibrium.
D)government intervention may increase economic efficiency.

Question 15

If there are no externalities a competitive market achieves economic efficiency.If there is a negative externality,economic efficiency will not be achieved because

A)too little of the good will be produced.
B)too much of the good will be produced.
C)a deadweight loss will occur that is equal to the area under the demand curve for the good.
D)economic surplus is maximized.

Question 16

If the social cost of producing a good or service exceeds the private cost,

A)a positive externality exists.
B)the sum of consumer surplus and producer surplus is maximized.
C)the market achieves economic efficiency.
D)a negative externality exists.

Question 17

Which of the following describes how a positive externality affects a competitive market?

A)The externality causes a difference between the private benefit from consumption and the social benefit.
B)The externality causes a difference between the private benefit from production and the social cost of production.
C)The externality causes quantity demanded to exceed quantity supplied.
D)The externality causes a difference between the social cost of production and the social cost of consumption.

Question 18

Which of the following would result in a positive externality?

A)A local government establishes a price ceiling on rental apartments.
B)An electric utility burns coal that causes acid rain.
C)Medical research results in a cure for malaria.
D)McDonald's adds new fat-free items to its menu.

Question 19

"A competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus." This statement

A)is true only if there are positive externalities in production in the market.
B)is true only if there are no negative externalities in the market.
C)is true only if there are no positive or negative externalities in the market.
D)is true in theory,but economic efficiency cannot be achieved in a real market.

Question 20

When production generates a negative externality,the true cost of production is the

A)private cost of production.
B)public cost of production.
C)social cost of production.
D)average cost of production.

Question 21

Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s).
Refer to Figure 5-1.What does S₁ represent?

A)the market supply curve that reflects social cost
B)the market supply curve that reflects only external cost
C)the market supply curve that reflects only private benefit
D)the market supply curve that reflects private cost

Question 22

Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s).
Refer to Figure 5-1.What does S₂ represent?

A)the market supply curve that reflects social cost
B)the market supply curve that reflect private cost
C)the market supply curve that reflects external cost
D)the market supply curve that reflects social benefit

Question 23

Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s).
Refer to Figure 5-1.Why is there a deadweight loss?

A)because the marginal social cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
B)because the marginal private cost of producing each additional unit in excess of Q₂ exceeds the marginal benefit
C)because the marginal social benefit of producing each additional unit in excess of Q₂ exceeds the private cost
D)because the marginal private benefit of producing each additional unit in excess of Q₂ exceeds the social cost

Question 24

Medical research that ends in a cure for a serious disease produces positive externalities.What is the impact of this positive externality on economic efficiency?

A)At equilibrium,less than the economically efficient quantity of medical research is produced.
B)A deadweight loss occurs because at equilibrium the marginal social cost of medical research is greater than the marginal social benefit.
C)At equilibrium,more than the economically efficient quantity of medical research is produced.
D)A deadweight loss occurs because at equilibrium the marginal social cost equals the marginal social benefit.

Question 25

When products that create positive externalities are produced,at the market equilibrium output,the social benefit generated by consuming the product exceeds the private benefit.

Question 26

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.What does D₂ represent?

A)the social welfare curve
B)the demand curve reflecting social benefit
C)the demand curve reflecting private benefit
D)the positive externalities curve

Question 27

Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s).
Refer to Figure 5-1.What is the economically efficient output level?

A)Q₁
B)Q₂ minus Q₁
C)Q₂
D)Q₁ plus Q₂

Question 28

The social cost of cutting trees for firewood in a government forest is

A)the increased likelihood of flooding as more trees are cut.
B)the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees.
C)opportunity cost to the individual of cutting the wood.
D)the marginal costs of cutting the last tree.

Question 29

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.What does D₁ represent?

A)the demand curve reflecting social benefit
B)the positive externalities curve
C)the demand curve reflecting private benefit
D)the social welfare curve

Question 30

Figure 5-2 Figure 5-2 shows a market with an externality.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂.
Refer to Figure 5-2.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does D₂ represent?

A)the demand curve reflecting external benefits
B)the demand curve reflecting social benefits
C)the demand curve reflecting private benefits
D)the demand curve reflecting the sum of social and external benefits

Question 31

Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s).
Refer to Figure 5-1.What is the deadweight loss from producing at the market equilibrium?

A)area C
B)area E
C)area D
D)area F

Question 32

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.Why is there a deadweight loss?

A)because the marginal private benefit for each additional unit between Q₁ and Q₂ exceeds the marginal cost
B)because the marginal private cost for each additional unit between Q₁ and Q₂ exceeds the marginal private benefit
C)because the marginal social cost for each additional unit between Q₁ and Q₂ exceeds the marginal social benefit
D)because the marginal social benefit for each additional unit between Q₁ and Q₂ exceeds the marginal cost

Question 33

The social cost of a good or service is the cost borne by the producer.

Question 34

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.What is the deadweight loss resulting from producing at the market equilibrium?

A)B + C
B)E + C
C)F
D)C

Question 35

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.What is the market equilibrium output level?

A)Q₁
B)Q₂
C)Q₁ + Q₂
D)Q₂ - Q₁

Question 36

An externality is an example of a market failure.

Question 37

Figure 5-2 Figure 5-2 shows a market with an externality.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂.
Refer to Figure 5-2.If,because of an externality,the economically efficient output is Q₂ and not the current equilibrium output of Q₁,what does D₁ represent?

A)the demand curve reflecting external benefits
B)the demand curve reflecting social benefits
C)the demand curve reflecting private benefits
D)the demand curve reflecting the sum of private and social benefits

Question 38

Figure 5-2 Figure 5-2 shows a market with an externality.The current market equilibrium output of Q₁ is not the economically efficient output.The economically efficient output is Q₂.
Refer to Figure 5-2.Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality.The economically efficient output is Q₂.In that case,diagram shows

A)the effect of a subsidy granted to producers of a good.
B)the effect of an excess demand in a market.
C)the effect of a positive externality in the consumption of a good.
D)the effect of a negative externality in the consumption of a good.

Question 39

Assume that emissions from electric utilities contribute to pollution in the form of acid rain.Which of the following describes how this affects the market for electricity?

A)The equilibrium in the market is not efficient; the marginal benefit from electricity is greater than the marginal social cost.
B)A deadweight loss occurs; at equilibrium the additional social cost of production is greater than the additional benefit to consumers.
C)The equilibrium in the market is not efficient; because of the cost of the acid rain,economic efficiency would be greater if more electricity were produced.
D)The equilibrium in the market is not efficient; consumer surplus is equal to producer surplus.

Question 40

Figure 5-3 Figure 5-3 shows the market for measles vaccinations,a product whose use generates positive externalities.
Refer to Figure 5-3.What is the economically efficient output level?

A)Q₁
B)Q₁ + Q₂
C)Q₂ - Q₁
D)Q₂

Question 41

According to Steven Cheung: "Pollination contracts usually include stipulations regarding the number and strength of ...[bee] colonies,the rental fee per hive,the time of delivery...the protection of bees from pesticides,and the strategic placing of hives." Cheung cites this as evidence that

A)the high costs of writing and enforcing complicated written agreements between owners of beehives and apple orchards prevents economic efficiency from being achieved in these markets.
B)government intervention is not always necessary to bring about an economically efficient number of apple trees and beehives.
C)government regulation of contracts between owners of beehives and apple orchards is necessary to bring about an economically efficient number of apple trees and beehives.
D)the beekeeping and apple growing businesses have become more complicated and costly over time due to the legal costs involved.

Question 42

Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter.If the victims of the pollution could not legally enforce the right of their property not to be damaged,the amount of pollution reduction

A)would be significantly less than if the owners of the smelter were legally liable for damages.
B)would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost.
C)would be the same as if it would be if the owners of the smelter were legally liable.
D)would be too small; the government would have to intervene to bring about an efficient outcome.

Question 43

When negative externalities exist,the competitive market supply curve does not include all of the costs borne by members of society.

Question 44

Compare two situations.(A)A firm is not legally responsible for damages that result from air pollution caused by its production of steel.(B)A firm is legally responsible for damages that result from its production of steel.Ronald Coase argued that

A)bargaining between the firm and the victims of the air pollution caused by the firm will result in little reduction of pollution in either situation (A)or (B)because the firm has greater economic and political power than the victims.
B)bargaining between the firm and the victims of the air pollution caused by the firm would lead to a greater reduction in pollution in situation (A)than situation (B).
C)bargaining between the firm and the victims of the air pollution caused by the firm would lead to a smaller reduction in pollution in situation (A)than situation (B).
D)bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation (A)and situation (B).

Question 45

A negative externality is an example of market failure.The root of the problem lies in the definition and enforcement of property rights.Explain.

Question 46

If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost,

A)further reductions will make society better off.
B)the marginal benefit will rise and the marginal cost will fall as further reductions are made.
C)economic efficiency will be achieved when emissions are reduced to zero.
D)private businesses,rather the consumers,should be made to pay for the cost of further reductions.

Question 47

Private solutions to the problem of externalities are most likely when

A)government actively encourages these solutions.
B)transaction costs are low and the number of bargaining parties is small.
C)transaction costs are low and the number of bargaining parties is large.
D)transaction costs are low and the monetary damages to third parties is high.

Question 48

Congress passed the Clean Air Act in 1970.Since this act was passed,emissions of the six main air pollutants

A)have fallen by more than one-half.
B)have increased significantly due to the growth of the U.S.economy.
C)cannot be measured since Congress failed to appropriate money to monitor the level of emissions.
D)have remained essentially constant,even though significant economic growth has occurred in the United States since 1970.

Question 49

What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?

Question 50

Steven Cheung examined the relationship between beekeepers and apple growers.Cheung noted that: "Pollination contracts usually include stipulations regarding the number and strength of ...[bee] colonies,the rental fee per hive,the time of delivery...the protection of bees from pesticides,and the strategic placing of hives." Cheung's suggests that the relationship between beekeepers and apple growers is an example of

A)the Coase Theorem.
B)how excessive legal costs can prevent economic efficiency from being achieved.
C)negative externalities.
D)government intervention improving economic efficiency.

Question 51

Kenneth Chay and Michael Greenstone examined the impact of reductions in air pollution since the passage of the Clean Air Act of 1970.Which of the following statements summarizes their findings?

A)The marginal benefit of reductions in air pollution was less than the marginal cost.
B)The marginal cost of reducing emissions of sulfur dioxide has increased over time as the marginal benefit of the reductions has increased.
C)The benefits of reducing the six main air pollutants in the two years following the Act greatly exceeded the costs.
D)In the two years following passage of the Act,fewer infants died than would have died if the Act had not been passed.

Question 52

Figure 5-4 Consider a chemical plant that discharges toxic fumes over a nearby community.To reduce the emissions of toxic fumes the firm can install pollution abatement devices.Figure 5-4 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.
Refer to Figure 5-4.What is the economically efficient level of pollution reduction?

A)12.5 million tons
B)9 million tons
C)8 million tons
D)0 tons

Question 53

How does a positive externality in consumption reduce economic efficiency?

Question 54

Which of the following statements about the economically efficient level of air pollution is correct?

A)The economically efficient level of pollution is zero.
B)The economically efficient level of pollution occurs where all social costs equal all social benefits.
C)The economically efficient level of pollution occurs where the marginal cost of pollution reduction equals the marginal social benefit of reduction.
D)The economically efficient level of pollution occurs where total benefits of pollution reduction are maximized.

Question 55

If electric utilities continually reduce their emissions of sulfur dioxide,

A)the utilities will eventually be forced to go out of business.
B)the marginal benefit of additional emissions will rise.
C)the marginal cost of further emissions will rise.
D)the total benefit of sulfur dioxide emissions will fall.

Question 56

An external benefit is created when you pursue a college education.

Question 57

Ronald Coase was awarded the 1991 Nobel Prize in Economics primarily for addressing problems related to externalities.Which of the following describes Coase's work?

A)Coase argued that government intervention is necessary to achieve economic efficiency in markets that are affected by externalities.
B)Coase proved that economic efficiency cannot be achieved in a market that is affected by positive or negative externalities.
C)Coase argued that under some circumstances private solutions to the problems of externalities will occur.
D)Coase proved that a competitive market achieved a greater degree of economic efficiency than a non-competitive market when externalities occur.

Question 58

Which of the following statements describes the Coase Theorem?

A)It is not possible to completely eliminate an externality.
B)Under some circumstances private solutions to the problems that result from externalities can be found.
C)Completely eliminating an externality is not economically efficient.
D)A negative externality occurs when the marginal social cost of production exceeds the social benefit.

Question 59

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

A)enforcement costs.
B)implicit costs.
C)explicit costs.
D)transaction costs.

Question 60

If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost,

A)further reductions will make society better off.
B)further reduction will make society worse off.
C)pollution taxes should be imposed on producers to pay for further reductions.
D)economic efficiency will be increased if further reductions are made.

Question 61

What are transactions costs? Why do transactions costs create difficulties in finding a private solution to the problem of pollution?

Question 62

State and local governments subsidize college students with grants and low-interest loans.The loans and subsidies are examples of

A)positive externalities.
B)Coase subsidies.
C)Pigovian subsidies.
D)emission allowances.

Question 63

Figure 5-4 Consider a chemical plant that discharges toxic fumes over a nearby community.To reduce the emissions of toxic fumes the firm can install pollution abatement devices.Figure 5-4 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.
Refer to Figure 5-4.Suppose the emissions reduction target is currently established at 8 million tons.What is the area that represents the cost of eliminating an additional 1 million tons?

A)A
B)B + C
C)A + B
D)A + B + C

Question 64

The first economist to systematically analyze market failure was

A)Adam Smith.
B)Ronald Coase.
C)A.C.Pigou.
D)J.E.Meade.

Question 65

Congressman Murphy made the following proposal: "We should establish policies that completely eliminate air pollution.This is the only way to ensure that none of our citizens suffers the negative effects of air pollution." If Congressman Murphy's proposal was adopted and all forms of air pollution were eliminated,which of the following would be true?

A)The total cost of pollution reductions would equal the total benefit to society.
B)Economic efficiency would be maximized
C)The total benefit to society from reductions in air pollution would be maximized.
D)The marginal cost from pollution reductions would exceed the marginal benefit.

Question 66

Figure 5-5 Coal burning utilities release sulfur dioxide and nitric acid which react with water to produce acid rain.Acid rain damages trees and crops and kills fish.Because the utilities do not bear the cost of the acid rain they overproduce the quantity of electricity.This is illustrated in Figure 5-5.
Refer to Figure 5-5.S₁ represents the supply curve that reflects the private cost of production and S₂ represents the supply curve that reflects the social cost of production.One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity.What is the size of the Pigovian tax that will internalize the cost of the externality?

A)P₀
B)P₂-P₀
C)P₁-P₀
D)P₂-P₁

Question 67

The efficient level of paper production will occur where the

A)marginal private benefit from consuming paper is equal to the marginal social cost of production.
B)marginal social benefit from consuming paper is equal to the marginal social cost of production.
C)the economically efficient level of the output of paper is equal to the economically efficient level of inputs.
D)production of paper no longer produces negative externalities.

Question 68

The Coase Theorem asserts that government intervention is a prerequisite for addressing externality problems.

Question 69

If transactions costs are low,private bargaining will always result in an efficient solution to the problem of externalities.

Question 70

Figure 5-4 Consider a chemical plant that discharges toxic fumes over a nearby community.To reduce the emissions of toxic fumes the firm can install pollution abatement devices.Figure 5-4 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.
Refer to Figure 5-4.Suppose the emissions reduction target is currently established at 8 million tons.Should society undertake to reduce an additional 1 million tons so that the total reduction is 9 million tons?

A)No,because there is a net cost represented by the area B + C.
B)Yes,because the marginal benefit exceeds the marginal costs.
C)Yes,because toxic fumes are dangerous and must be eliminated at any cost.
D)No,because the firms will pass the additional cost on to consumers.

Question 71

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

A)externalize the externality.
B)result in a marginal social benefit greater than the marginal cost of the electricity.
C)be an example of supply side economic policy.
D)internalize the externality.

Question 72

Policies that mandate the installation of specific pollution control devices are called

A)command and control policies.
B)benefit policies.
C)welfare policies.
D)incentive policies.

Question 73

Ronald Coase is famous for the Coase Theorem,which is based on the premise that there is an economically efficient level of pollution reduction.Many economists believe that the tradable emissions allowance program that has been used to deal with the problem of acid rain has been successful in reducing emissions of sulfur dioxide in an economically efficient manner.Why isn't this program an example of the Coase Theorem?

Question 74

Economic incentives are designed to make individual self-interest coincide with social interest.According to economists,which of the following methods of pollution control best uses economic incentives to reduce pollution?

A)Rewarding environmental groups for monitoring the activities of private firms that produce products which generate pollution.
B)Imposing quantitative limits on the amount of pollution and imposing a penalty for non-compliance with these limits.
C)Requiring the installation of specific pollution control devices.
D)Instituting a system of tradable emissions allowances.

Question 75

Which of the following describes a positive externality?

A)John Henry paints the outside of his house in order to increase its market value just before he puts the house up for sale.
B)People who do not attend college still benefit from others who receive a college education.
C)The government imposes a tax on cigarettes in order to discourage smoking among teenagers.
D)Mary volunteers to drive her neighbor's children to soccer practice.

Question 76

State the Coase theorem.What are some of the limitations of the Coase theorem in practice?

Question 77

Suppose a negative externality exists in a market.If transactions costs are low and parties are willing to bargain then,according to the Coase theorem,

A)an efficient solution can be reached only if property rights are assigned to the victims of the pollution.
B)an efficient solution can be reached only if property rights are assigned to the polluters.
C)an efficient solution can be reached regardless of the initial assignment of property rights.
D)government intervention is critical to reach an efficient solution.

Question 78

Which of the following is an example of a Pigovian tax?

A)payments by utilities to obtain tradable emissions allowances
B)a payroll tax
C)payments for licenses to pollute
D)a tax imposed on a utility that internalizes the cost of externalities caused by the utility

Question 79

Figure 5-6 College education benefits society by producing a more employable workforce,reducing crime and creating a better informed citizenry.Thus,the social benefits of college education exceed the private benefits for any level of college education.This is illustrated in Figure 5-6.
Refer to Figure 5-6.One way to obtain the economically efficient amount of college education is for governments to subsidize college education.What is the size of the per-student Pigovian subsidy that the government must provide to internalize the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example,through low-interest student loans.)

A)P₂-P₀
B)P₂-P₁
C)P₀-P₁
D)P₁

Question 80

Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain.This is an example of

A)a transaction cost.
B)a Pigovian tax.
C)a Pigovian subsidy.
D)the Coase Theorem.