Question 1

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

Accepted Answer

Positive externalities in production or consumption lead to the social value of a product being higher than the private value. This typically results in a higher quantity being efficiently produced or consumed than would be the case without the externality. Among the given options, D) 1,700 units at $56.00 per unit price indicates an increase in quantity, consistent with the presence of a positive externality, suggesting that the social optimum is to produce more of the good.

Question 2

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

Accepted Answer

A negative externality means that the production or consumption of a good or service imposes costs on third parties who are not involved in the transaction. In the case of gasoline, a negative externality could be air pollution, which can cause health problems for people who live near roads or highways. The marginal social cost of gasoline is the cost to society of producing and consuming one more gallon of gasoline, including the cost of the negative externality. The marginal private cost of gasoline is the cost to the individual consumer of buying one more gallon of gasoline. If a negative externality is associated with the sale of gasoline, then the marginal social cost of gasoline will exceed its marginal private cost.

Question 3

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

Accepted Answer

Negative externalities cause the social cost of production to be higher than the private cost. Therefore, to account for the negative externality, the efficient quantity should decrease (to reduce the negative impact) and the price should increase (to cover the higher social cost). Option B reflects this adjustment.

Question 4

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:

Accepted Answer

If the marginal external cost of emissions varies among regions, then one region might impose higher costs than another for the same output of pollutants. In some regions, the cost of reducing emissions to the 1,000 tons level will be less than the cost of reducing pollution farther below the 1,000 tons limit, and in other regions, the cost of further reductions in pollution will be less than the cost of abating pollution to the 1,000 tons limit. Thus, the regulations are likely to achieve more than the efficient amount of abatement in some regions but less than the efficient amount in others.

Question 5

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.

Accepted Answer

A corrective tax of $150 per ton of steel (5 pounds x $30) can be imposed to internalize the external cost of sulfur dioxide emissions. This tax will increase the price of steel to $650 per ton, reducing the equilibrium quantity produced. Steel companies will reduce production to avoid the tax burden. The tax revenue collected will be $1,500,000 (10,000 tons x $150).

Question 6

The effect of a negative externality is similar to:

Accepted Answer

A negative externality increases the marginal social cost, causing the supply curve to shift to the left, reflecting higher costs to society.

Question 7

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

Accepted Answer

The Coase theorem suggests that when transaction costs are zero, assigning property rights to resource use and allowing free exchange of assigned property rights will lead to internalization of externalities. This means that individuals will bargain amongst themselves to reach an optimal outcome and the market will work efficiently without the need for any government intervention or corrective taxes/subsidies. Effluent fees may also be used to internalize externalities, but they do not necessarily require zero transaction costs, whereas option D does. Option C, where property rights are assigned but outlawed from exchange, does not allow for the efficient use of resources as it blocks potential gains from trade.

Question 8

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 statements is true

Accepted Answer

Efficiency in this context means that the marginal external cost of pollution is internalized by the polluters. By imposing a $50 per ton annual effluent charge, the firms in the chemical industry are made to bear the external cost of their pollution, thereby aligning private costs with social costs. This encourages firms to reduce pollution to the level where the marginal cost of pollution abatement equals the marginal external cost, achieving an efficient outcome.

Question 9

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

Accepted Answer

The answer of Assuming a product can be manufactured competitively...

Question 10

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:

Accepted Answer

The answer of The marginal external cost associated with paper...

Question 11

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:

Accepted Answer

Uniform regulations that require all regions to reduce emissions by the same amount do not account for the varying marginal costs of reducing emissions across regions. This means that in some regions, it will be more costly to meet the reduction targets (leading to more than the efficient amount of abatement), while in others, it will be less costly (leading to less than the efficient amount of abatement).

Question 12

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

Accepted Answer

The answer of The marginal external cost associated with air...

Question 13

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

Accepted Answer

A positive externality means that there is a benefit to society beyond the private benefit received by the individual consumer. In a competitive market, the price will reflect the private cost of production, but not the social benefit. Therefore, the marginal social benefit will exceed the marginal private benefit, and the market will underproduce smoke detectors.

Question 14

Electric power is produced by an unregulated monopoly in a certain region. The monopolistic electric 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,

Accepted Answer

The answer of Electric power is produced by an unregulated...

Question 15

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,

Accepted Answer

The answer of The competitive market equilibrium price of sanitation...

Question 16

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

Accepted Answer

A negative externality leads to overconsumption, so more than the efficient amount is consumed (A). Additionally, the marginal social cost exceeds the marginal social benefit (C).

Question 17

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

Accepted Answer

Command-and-control regulations that have a limit on emissions allow firms to emit up to a certain amount without any charge. Once the limit is reached, emissions are banned. This is different from emissions charges, which make firms pay for every unit of emissions. Command-and-control regulations are also unlikely to minimize the cost of achieving a reduction in emissions because they do not provide any incentives for firms to reduce their emissions beyond the limit set by the regulation.

Question 18

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

Accepted Answer

If a positive externality prevails, then the social benefit of the good is greater than the private benefit. In other words, the marginal social benefit of smoke detectors (which includes the private benefit as well as the positive externality) exceeds the marginal private benefit. In equilibrium, the market only takes into account the marginal private benefit and marginal private cost, so the market equilibrium will occur where marginal private benefit equals marginal private cost. However, since the marginal social benefit is greater than the marginal private benefit, the efficient quantity is greater than the market equilibrium quantity. Therefore, choice A is correct.

Question 19

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,

Accepted Answer

The fishing firm is willing to pay up to $60 per ton of chemicals per year to induce the chemical firm to reduce chemical output because each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm, which translates to a loss of $60 (20 pounds x $3 per pound). Therefore, if the chemical firm reduces chemical output by one ton, it would save the fishing firm from losing $60. The chemical firm can potentially negotiate for a higher price because they have the legal right to dump effluent into the lake.

Quiz 3: Externalities and Government Policy