Question 1

A cap-and-trade policy is most often used to solve problems associated with

Accepted Answer

A cap-and-trade policy is designed to correct negative externalities caused by the production of goods. The policy sets a limit, or cap, on the total amount of pollution that can be emitted by firms. Firms can then buy and sell permits to pollute within this limit, creating a market for pollution rights. This incentivizes firms to reduce their pollution levels and rewards those who can do so efficiently. It is not directly related to free riders, public goods, positive externalities, or club goods.

Question 2

Refer to the following information to answer the following questions.
Two firms both emit a pollutant, and the government wants to reduce emissions of this pollutant. Each firm can choose to emit up to six units. As firms reduce emissions, there is a marginal cost per unit. This data is presented in the accompanying table.
 
-The government allocates three allowances to each firm,where each allowance allows one unit to be emitted.If both firms now emit three units each,the total cost of reducing emissions for Firm 1 is ________ and the total cost of reducing emissions for Firm 2 is ________.

Accepted Answer

The answer of Refer to the following information to answer...

Question 3

Vaccines provide a direct benefit to the consumers being vaccinated,namely immunity from disease.Given this clear incentive to vaccinate,why do governments perceive a need to take steps to promote vaccinations?

Accepted Answer

The answer of Vaccines provide a direct benefit to the...

Question 4

To reduce the level of pollution emitted by firms in an industry,the government could use a cap-and-trade policy or a carbon tax (where the government taxes carbon producers based on the amount of carbon produced).Which of the following is true?

Accepted Answer

Both a carbon tax and a cap-and-trade policy increase the cost of producing goods for firms that emit pollutants, leading to higher prices for consumers and a reduction in production as firms adjust to these new costs.

Question 5

Refer to the accompanying figure, which shows the market for fish, to answer the following questions. 
-If the government sets a quota of 300 pounds of fish caught per day and issues a license that entitles the holder to catch 20 pounds of fish per day,then the value of the license is

Accepted Answer

If the government sets a quota of 300 pounds of fish caught per day, then the market supply curve will shift leftward to S', where the quantity supplied is 300 pounds at any given price. With a license that entitles the holder to catch 20 pounds of fish per day, the supply curve will shift rightward by 20 pounds at every price level. The new supply curve will be S''.
The equilibrium price is determined by the intersection of S'' and the original demand curve D, which occurs at $50 per pound. Therefore, the value of the license is the excess profit that a fisherman makes with the license compared to fishing without the license. 
Without the license:
- Fishing cost = $30 per pound
- Revenue = $50 per pound
- Profit = $50 - $30 = $20 per pound

With the license:
- Fishing cost = $30 per pound
- License cost = $10 per pound
- Revenue = $50 per pound
- Profit = $50 - $30 - $10 = $10 per pound

Therefore, the value of the license is the difference in profit, which is $10 per pound, multiplied by the number of pounds per day that the license entitles the holder to catch, which is 20 pounds. 
Value of license = $10 x 20 = $200
However, there are 15 licenses issued, so the total value of all licenses is:
Total value of licenses = $200 x 15 = $3,000
But the quota is 300 pounds, and there are 15 licenses, so each license entitles the holder to catch 20 pounds per day. Therefore, the total catch per day is 20 x 15 = 300 pounds, which is the quota set by the government.
The market price is $50 per pound, so the total revenue generated by the catch is:
Total revenue = $50 x 300 = $15,000
The total cost is:
Total cost = $30 x 300 = $9,000
The total profit is:
Total profit = Total revenue - Total cost = $15,000 - $9,000 = $6,000
Therefore, the total value of the licenses is the total profit minus the profit that would have been generated without the licenses, which is:
Total value of licenses = $6,000 - $3,000 = $3,000.
However, there are 15 licenses, so the value of each license is $3,000 / 15 = $200.

Question 6

Draw a graph to illustrate the market equilibrium and the social optimum in the case where there is a negative externality.Explain why the social optimum is preferred to the market equilibrium.

Accepted Answer

The answer of Draw a graph to illustrate the market...

Question 7

A cap-and-trade policy is an efficient method of reducing pollution because

Accepted Answer

The answer of A cap-and-trade policy is an efficient method...

Question 8

"A government that wants to correct for a positive internality must find a way to subsidize the production or consumption that moves equilibrium to the social optimum." Is this statement true or false? Explain.

Accepted Answer

Although subsidies are a common way to correct for positive externalities,a government can instead legally mandate the behavior in question and impose a fine or other form of cost on anyone who does not comply.An example would be requiring vaccinations for all pupils admitted to public schools.Parents who do not vaccinate their children have to go to the trouble of requesting an exemption or else enrolling their children in private school or schooling them at home.

Question 9

Draw a graph to illustrate the market equilibrium and the social optimum in the case where there is a positive externality due to underconsumption.Explain the relative positions of the two demand curves.

Accepted Answer

The answer of Draw a graph to illustrate the market...

Question 10

A policy option for reducing emissions is cap and trade.Which of the following is true?

Accepted Answer

Cap and trade systems are designed to limit emissions and encourage greener technologies by allowing the trading of emission permits. This can lead to higher costs for firms and potentially higher prices for consumers. It aims to reduce total emissions, not increase them, and encourages the development of greener technologies. Governments can raise significant revenue by auctioning emission permits.

Question 11

Is it possible to have a positive externality associated with the production and supply of a good rather than with demand and consumption? Why or why not?

Accepted Answer

The answer of Is it possible to have a positive...

Question 12

What are the negative and positive externalities associated with owning a dog,and what,if anything,does the government do to internalize them?

Accepted Answer

The answer of What are the negative and positive externalities...

Question 13

Use the concept of a positive externality to explain why it makes sense for government and private industry to subsidize young adults' college educations.

Accepted Answer

The answer of Use the concept of a positive externality...

Question 14

What three incentives commonly exist for people to get vaccinated against disease? Name them and explain how each incentive works.

Accepted Answer

The answer of What three incentives commonly exist for people...

Question 15

If the government implements a cap-and-trade system to reduce pollution in a particular industry, then the

Accepted Answer

The cap-and-trade system sets a limit (or cap) on the amount of pollution a particular industry can emit. This means that companies will have to buy permits (or trade) in order to emit more pollution than their allotted amount. This increases the cost of production and thus reduces the supply of goods in that industry. Therefore, the supply curve shifts to the left.

Question 16

When a negative externality exists,as in the case of pollution,the government may be able to restore the social optimum using three different solutions.Name them.

Accepted Answer

The answer of When a negative externality exists,as in the...

Question 17

Which of the following is the best definition of a cap-and-trade policy for pollution?

Accepted Answer

A cap-and-trade policy for pollution involves the government setting a cap on emissions and issuing permits to firms for emitting pollutants. Firms can then trade or sell these permits to each other, incentivizing them to reduce their emissions and providing an efficient mechanism for reducing pollution at the lowest possible cost. Option B is incorrect because the cap is set on emissions, not on the production of the good. Options C, D, and E all involve capping the production or consumption of the good, which is not necessarily related to pollution.

Question 18

Give an example of an externality that does not warrant government intervention,and explain why not.

Accepted Answer

The answer of Give an example of an externality that...

Question 19

How does a government subsidy for the consumption of a good shift the demand curve for that good?

Accepted Answer

The answer of How does a government subsidy for the...

Question 20

If emissions of this pollutant are not regulated,then the total emissions from the two firms equal _______ units.

Accepted Answer

The answer of If emissions of this pollutant are not...

Quiz 7: Market Inefficiencies: Externalities and Public Goods