Question 1

The economically efficient level of an externality is zero.

Accepted Answer

The economically efficient level of an externality is not necessarily zero, but rather at a level where the marginal social cost of the externality equals the marginal social benefit. This recognizes that completely eliminating an externality may be more costly than the benefits gained from reducing it to zero, and some level of externality may be acceptable or unavoidable for certain economic activities.

Question 2

According to the Coase theorem,only when transaction costs are extremely high can two parties internalize a negative externality.

Accepted Answer

The Coase theorem states that if transaction costs are low and property rights are well-defined, then two parties can negotiate and internalize an externality without government intervention. If transaction costs are high, however, it may not be possible for parties to negotiate and internalize the externality, and government intervention may be necessary. Therefore, the statement is false as it has the condition for internalizing the externality reversed.

Question 3

Externalities exist when individuals impose costs or confer benefits on others but don't have an incentive to take those costs or benefits into account.

Accepted Answer

Externalities occur when an individual's actions have an impact on others without any compensation or payment for that impact. This can result in costs or benefits being imposed on others without any incentive for the individual to consider them.

Question 4

Markets for the right to pollute are:
A)established by individual firms when they reduce emissions.
B)established by government when it issues tradable pollution permits.
C)likely to result in fewer incentives to develop and implement technology that reduces pollution.
D)a means by which more pollution is encouraged.

Accepted Answer

Markets for the right to pollute are established by government when it issues tradable pollution permits. These permits allow firms to pollute up to a certain level and can be bought and sold. This system creates a market where the cost of reducing pollution is balanced with the cost of buying pollution permits. This incentivizes companies to reduce their emissions to save money on buying permits, and it creates a revenue stream for those who are successful in reducing their pollution levels. However, it is important to note that this system may not provide enough incentive to develop and implement technology that reduces pollution beyond the level required by the permit system.

Question 5

Pigouvian taxes:
A)tax the profits of polluting firms.
B)are designed to reduce external costs.
C)are essentially the same as emissions standards.
D)are tradable emissions permits.

Accepted Answer

Pigouvian taxes are designed to reduce external costs, which are costs that are imposed on society as a whole due to a firm's actions, such as pollution. This type of tax is intended to make the polluting firm internalize the cost they are imposing on society and change their behavior accordingly. Pigouvian taxes are different from emissions standards and tradable emissions permits, as they directly target the negative externality of pollution and do not rely on regulating the quantity of emissions.

Question 6

If at the current amount of pollution its marginal social benefit is greater than its marginal social cost,then there is too little pollution.

Accepted Answer

If the marginal social benefit of pollution exceeds its marginal social cost, it indicates that the additional benefits gained from pollution (such as economic activity) outweigh the additional costs (such as health or environmental damage), suggesting that a higher level of pollution could be socially optimal, or in other words, there is currently too little pollution from a cost-benefit perspective.

Question 7

The total external cost of air pollution in Tennessee affects the final price of goods in Tennessee,assuming that the government does not intervene in the marketplace.

Accepted Answer

The answer of The total external cost of air pollution...

Question 8

Taxes on sulfur dioxide emissions,excise taxes on gas,and sales taxes are all examples of Pigouvian taxes.

Accepted Answer

Pigouvian taxes are designed to correct for negative externalities, such as pollution, by taxing the activity that causes the harm. Taxes on sulfur dioxide emissions are an example of Pigouvian taxes because they aim to reduce air pollution. However, excise taxes on gas and sales taxes are generally aimed at raising revenue rather than correcting for a specific negative externality, so they are not considered Pigouvian taxes.

Question 9

The marginal social benefit of pollution is always zero.

Accepted Answer

The marginal social benefit of pollution is not always zero as there may be some industries or activities that require some level of pollution to function. However, in general, the marginal social cost of pollution, in terms of negative impacts on health and the environment, outweighs any potential benefits, leading to an overall negative impact on society.

Question 10

Economists and environmentalists agree that pollution is undesirable and that government policy should aim to achieve a zero-pollution society.

Accepted Answer

While economists and environmentalists agree that pollution is undesirable, achieving a zero-pollution society is often considered impractical or economically unfeasible. Instead, they focus on reducing pollution to acceptable levels or finding a balance between economic growth and environmental protection.

Question 11

Environmental standards ensure that the marginal benefit of pollution is equal for all sources of pollution.

Accepted Answer

Environmental standards set limits on the amount of pollution that a source is allowed to emit, but do not necessarily ensure that the marginal benefit of pollution is equal for all sources. The goal of environmental standards is to reduce overall pollution levels and protect human health and the environment.

Question 12

An emissions tax will:
A)ensure that the marginal benefit of pollution is equal for all sources of pollution.
B)set standards to which all producers must adhere,regardless of their production costs.
C)cause all polluters to reduce emissions by the same amount.
D)increase pollution,but not in the most efficient cost-saving way.

Accepted Answer

An emissions tax will ensure that the marginal benefit of pollution is equal for all sources of pollution. This means that all polluters will be forced to consider the cost of their pollution rather than just focusing on production costs. This will encourage polluters to find more efficient and less polluting ways of producing goods and services.

Question 13

The most economically efficient way to reduce pollution is to impose strict environmental standards on all polluters.

Accepted Answer

Imposing strict environmental standards on all polluters may not be the most economically efficient way to reduce pollution because it does not consider the varying costs of pollution abatement across different sources. Market-based approaches like taxes on pollution or tradable pollution permits can achieve the same environmental goals at a lower overall cost by allowing reductions to occur where they are cheapest.

Question 14

If externalities are fully internalized,an outcome is efficient,even without government intervention.

Accepted Answer

When externalities are fully internalized, the cost of the externality is borne by the parties involved in the market transaction. This means that the market outcome will already be efficient as the parties will be taking into account all the costs and benefits of the transaction. Therefore, government intervention may not be necessary.

Question 15

According to the Coase theorem,the inefficiencies caused by externalities can be removed by the private sector if individuals enter into appropriately structured deals,provided that the transaction costs of such deals are sufficiently low.

Accepted Answer

The Coase theorem states that the private sector can internalize externalities and eliminate inefficiencies through private bargaining, as long as transaction costs are sufficiently low. Therefore, option A is true.

Question 16

The optimal Pigouvian tax is equal to the marginal social cost of pollution at the socially optimal quantity of pollution (assuming there are no private costs from pollution to the polluter).

Accepted Answer

This statement accurately describes the definition of the optimal Pigouvian tax. The purpose of the tax is to internalize the external cost of pollution and align private incentives with social outcomes, leading to an optimal level of pollution that takes into account both the benefits and costs of pollution. The tax is set equal to the marginal social cost of pollution at the socially optimal quantity of pollution, ensuring that the polluter pays for the damage they cause and that resources are allocated efficiently.

Question 17

Firm A and firm B both produce a good whose manufacture causes pollution,but the firms differ in their marginal benefit from pollution.In this case,an emissions standard would:
A)reduce pollution in the most effective manner.
B)lead to an unequal reduction in pollution for both firms.
C)not be efficient since it does not take into account differences in marginal benefits from polluting.
D)be preferred to an emissions tax since it takes into account differences in marginal benefits.

Accepted Answer

An emissions standard does not account for the differences in marginal benefits from pollution between firms, leading to inefficiencies.

Question 18

(Table: The Marginal Social Benefit of Computer Chips)Use Table: The Marginal Social Benefit of Computer Chips.The production of computer chips generates an external benefit in the form of a technology spillover.If the marginal social benefit is indicated by MSB,the optimal Pigouvian subsidy is equal to $10.

Accepted Answer

The question states that the optimal Pigouvian subsidy is equal to $10, meaning that the government should provide a subsidy in order to incentivize the production of computer chips that accounts for the positive externality of technology spillovers. This is consistent with the marginal social benefit being greater than the marginal private benefit, as shown in the table.

Question 19

Emissions taxes and tradable emissions permits both ensure that any given reduction in total pollution is achieved at the lowest possible cost.This is not the case for environmental standards since they fail to ensure that those who can reduce pollution most cheaply are in fact the ones to do so.

Accepted Answer

Emissions taxes and tradable emissions permits create a market-based approach to reducing pollution, where the most cost-effective solutions are incentivized. Environmental standards, on the other hand, rely on a command and control approach, which may not result in the most efficient use of resources.

Question 20

Since texting while driving generates a negative externality,banning texting while driving would necessarily be economically efficient.

Accepted Answer

While banning texting while driving addresses the negative externality by potentially reducing accidents, it does not automatically ensure economic efficiency. Economic efficiency involves considering all costs and benefits, including enforcement costs and the impact on individual freedom and convenience.

Quiz 16: Externalities