Question 1

Command and control policies are best suited for:
A) reducing electricity consumption.
B) addressing the problem of acid rain.
C) the suppression of deadly infectious diseases.
D) All of the answers are correct.

Accepted Answer

Command and control policies are most effective in situations where quick and decisive action is necessary to address a pressing threat to public health and safety, such as in the case of deadly infectious diseases. These policies involve strict regulations and enforcement mechanisms to ensure compliance with specific guidelines, and are less effective in situations where more nuanced approaches are required, such as in reducing electricity consumption or addressing the complex problem of acid rain.

Question 2

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct?
A) The EPA should limit both firms' pollution to the same level.
B) The EPA should limit High's pollution level to a lower level than Low's in an attempt to entice High to find more efficient ways to lower its costs.
C) The EPA should allow Low to increase its pollution level and trade with High who would cut its pollution to lower than the required level.
D) The EPA should allow High to increase its pollution level and trade with Low who would cut its pollution to lower than the required level.

Accepted Answer

The EPA should allow High to increase its pollution level and trade with Low, who can reduce pollution at a lower cost. This is an example of a cap-and-trade system, which is economically efficient as it minimizes the total cost of pollution reduction by allowing firms with lower abatement costs to sell permits to firms with higher abatement costs.

Question 3

The command-and-control method to solving an external cost problem usually involves:
A) the imposition of taxes on the consumption of the item that is causing the external cost.
B) the institution of a subsidy on the consumption of the item that is causing the external cost.
C) the issuance of a regulation on the production, operation, or use of the item that is causing an external cost.
D) a price ceiling on the item that is causing an external cost.

Accepted Answer

The command-and-control method involves the government issuing regulations or laws to control the behavior of polluters, such as setting emission standards or enforcing clean-up requirements. Taxes and subsidies are market-based mechanisms, not command-and-control methods. Price ceilings are not typically used to address externalities.

Question 4

Which of the following answers best explains how the market for tradeable allowances in pollution works?
A) Firms are given a particular dollar subsidy value to clean up pollution, and they can trade these subsidies between themselves if they fall below or surpass the limits.
B) Firms are taxed a particular percentage rate according to how much they pollute, and they can trade the pollutants to reduce the effective tax rates they pay.
C) Firms are required to stick to particular production levels, and if they go beyond these production levels, they are charged a percentage of their profits.
D) Firms are given a particular allowance amount of pollutants and if they fall below or surpass these targets they can trade their available allowances with other firms.

Accepted Answer

In a market for tradeable allowances in pollution, firms are given a particular allowance amount of pollutants and can trade these allowances with other firms if they fall below or surpass their targets. This system creates an incentive for firms to reduce emissions as they can sell unused allowances to other firms that need them.

Question 5

Tradeable allowances:
A) are typically hard to pass through the Environmental Protection Agency (EPA) since they allow firms to legally pollute.
B) are an efficient way to reduce pollution at lower costs.
C) decrease the profitability of firms since now they have to pay for the rights to pollute.
D) are equal to the social surplus in the market.

Accepted Answer

Tradeable allowances allow firms to buy or sell permits to emit a certain amount of pollution, creating a market for pollution. This can lead to an efficient allocation of pollution reduction efforts, as firms that can reduce pollution at a lower cost can sell their allowances to firms that would have to pay more to reduce pollution. This leads to a reduction in overall pollution at a lower cost than traditional command and control regulations.

Question 6

Which of the following explains the difference between command and control policies and tradeable allowances?
A) Command-and-control policies are a government solution to externalities, whereas tradeable allowances are a type of private market solution.
B) Tradeable allowances allow for less flexibility than command and control policies.
C) Command-and-control policies require all firms to reduce pollutants by a specific quantity, whereas tradeable allowances allow some firms to pollute more than others by trading for pollution rights.
D) Tradeable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control.

Accepted Answer

Command-and-control policies mandate specific limits or technologies for pollution reduction, while tradeable allowances let firms buy and sell rights to pollute, allowing flexibility in how pollution reduction is achieved.

Question 7

The paper industry and brewery industry each emit 60 tons of particulates into the air. It costs the paper industry $1,000 to remove 1 ton of particulates and it costs the brewery industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate pollution, the government gives each industry tradeable allowances worth 50 tons of particulates. We would expect that:
A) the paper industry will buy tradeable allowances from the brewery industry at a cost between $1,000 and $1,400 per allowance.
B) the paper industry will buy tradeable allowances from the brewery industry at a cost greater than $1,400 per allowance.
C) the brewery industry will buy tradeable allowances from the paper industry at a cost between $1,000 and $1,400 per allowance.
D) the brewery industry will buy tradeable allowances from the paper industry at a cost greater than $1,400 per allowance.

Accepted Answer

The brewery industry has a higher cost of removing particulates ($1,400) compared to the paper industry ($1,000). Therefore, it is more cost-effective for the brewery industry to buy allowances from the paper industry, and the price will be between $1,000 and $1,400.

Question 8

The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:
A) consumers may be reluctant to follow.
B) the situation may be difficult for the government to control.
C) the goal itself may not necessarily be the socially optimal outcome.
D) the government may not have enough information to choose the least costly methods.

Accepted Answer

The answer of The problem with using command-and-control policies to...

Question 9

Which method achieves the lowest per-gallon cost of reducing water consumption?
A) low-flow toilets as mandated by the government
B) lawn watering restrictions for odd or even days only
C) shower heads with restricted water flow
D) a tax on water consumption

Accepted Answer

The answer of Which method achieves the lowest per-gallon cost...

Question 10

If you are a government official, under which of the following situations would you opt for a command-and-control solution to an externality problem? I. Lack of running water in part of the country is exacerbating the spread of cholera in the population. II. Foreign ships are dumping toxic wastes in the waters off your country's shores. III. A large number of banks fail due to excessive risk taking.
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Accepted Answer

The answer of If you are a government official, under...

Question 11

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:
A) corrective tax.
B) subsidy.
C) regulation.
D) market-based policy.

Accepted Answer

A regulation is a direct government policy that limits or mandates certain actions or behaviors from industries or individuals. In this case, the government is setting a specific limit on the amount of air pollution that the steel mill is allowed to release. This is different from a corrective tax or market-based policy, which incentivizes industries to reduce pollution by imposing fees or credits based on their emissions. A subsidy, on the other hand, would involve the government providing financial support to the steel mill for reducing its pollution, rather than setting a limit on how much it can emit.

Question 12

Command and control may be the best approach to handling externalities if:
A) flexibility is desired.
B) the marginal social cost of the externality is greater than the social benefit.
C) taxes and/or subsidies fail to reach the efficient outcome.
D) success requires strong compliance.

Accepted Answer

Command and control may be the best approach to handling externalities when success requires strong compliance. This is because this approach involves enforcing specific regulations, such as laws or standards, to reduce the negative externality. This may be necessary when other approaches, such as taxes or subsidies, fail to reach the efficient outcome. However, command and control can be inflexible and may not provide opportunities for innovation or creativity.

Question 13

Which of the following statements is TRUE?
A) Mandating that every firm emit no more than X amount of pollutants is the most efficient method of reducing pollution.
B) A system of tradeable allowances increases pollution because firms can pay for the right to pollute.
C) To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry.
D) If the EPA cares about the sum of consumer and producer surplus, they should ignore the impact of pollution reduction on the profitability of firms.

Accepted Answer

To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry because some industries have higher costs of reducing pollution than others. Mandating every firm to emit no more than a certain amount of pollutants is not necessarily the most efficient method because firms may have different costs of reducing pollution. A system of tradeable allowances does not necessarily increase pollution because it provides incentives for firms to reduce pollution and rewards those who do. Ignoring the impact of pollution reduction on the profitability of firms is not advisable because it can have unintended consequences on the economy.

Question 14

If a market for tradeable allowances exists, a company that has used up its own allowances can:
A) buy allowances from another firm that has surpassed its limit of pollution.
B) purchase additional allowances from the EPA on a temporary basis.
C) pay a fine to the EPA and purchase additional allowances from other firms.
D) buy allowances from another firm that will not reach its limit of pollution.

Accepted Answer

In a market for tradeable allowances, companies that have used up their allowances can buy additional allowances from other firms that have not reached their pollution limits.

Question 15

A) Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons.
B) Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301.
C) If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100.
D) Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500.

Accepted Answer

This statement suggests that Industry Y is willing to reduce its emissions if compensated, and that Industry X has the potential to pay for these reductions. The other options do not provide evidence of a viable solution to reducing pollution.

Question 16

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.
A) Legislative transaction costs
B) Tradable pollution permits
C) A command-and-control policy
D) A market-based policy

Accepted Answer

A command-and-control policy sets specific regulations and standards for pollution control, including prohibitions on certain activities such as releasing waste into nearby streams. This approach is often used to mandate actions that protect the environment or human health. Legislative transaction costs refer to the expenses incurred in the legislative process, such as drafting bills and lobbying efforts. Tradable pollution permits and market-based policies are approaches that use economic incentives to encourage pollution reduction, but they do not necessarily make it illegal to release waste into nearby streams.

Question 17

When the government uses a command-and-control policy to solve an externality, it:
A) usually involves taxing the consumption of a commodity.
B) relies on the Coase theorem to structure the policy.
C) creates policies that directly regulate behavior.
D) is usually the most effective policy option available.

Accepted Answer

When the government uses a command-and-control policy to solve an externality, it creates policies that directly regulate behavior. This can include setting limits on emissions or mandating certain safety standards, without giving the polluter any flexibility in how they achieve compliance. This approach is often criticized for lacking the flexibility of other policy options and for potentially creating added costs and inefficiencies.

Question 18

Which of the following best creates incentives to reduce the pollution generated by washing machines?
A) regulating the capacity of washing machines
B) requiring appropriate filtering mechanisms on washing machines
C) taxing the pollutants directly caused by washing machines
D) allowing the Coase theorem to effectively reach an efficient market equilibrium.

Accepted Answer

Taxing the pollutants directly caused by washing machines creates an economic incentive for manufacturers and consumers to reduce the amount of pollution generated by washing machines. By increasing the cost of producing and using machines that release pollutants, manufacturers and consumers are encouraged to find ways to reduce the pollution, such as by developing more efficient filtering methods or using alternative, cleaner energy sources for powering washing machines. This approach is also consistent with the polluter pays principle, which places the burden of pollution on those who create it.

Question 19

Tradable pollution permits:
A) have helped reduce sulfur dioxide emissions but not carbon emissions.
B) have helped reduce sulfur dioxide and carbon emissions.
C) have not helped reduce any pollution emissions.
D) are widely viewed as an ineffective way to reduce pollution.

Accepted Answer

Tradable pollution permits have been implemented in various countries to help reduce both sulfur dioxide and carbon emissions. This market-based approach allows companies to buy and sell permits to emit a certain amount of pollution, which creates an incentive for companies to reduce their emissions in order to sell their surplus permits. Studies have shown that this approach has been effective in reducing both sulfur dioxide and carbon emissions in various countries, such as the United States and the European Union.

Question 20

Which of the following statements is TRUE? I. Taxes may reduce consumption by exactly the same amount as government regulations. II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity. III. Command-and-control policies effectively reduce consumption; but may not be the lowest cost method for doing so.
A) I and II only
B) I and III only
C) II only
D) II and III only

Accepted Answer

Statement I is not necessarily true, as the reduction in consumption depends on the specific tax or regulation. Statement II is not true, as government regulations can also raise prices (e.g. through compliance costs). Statement III is true, as command-and-control policies may not be the most cost-effective method for reducing consumption, but they can still be effective.

Quiz 10: Externalities: When the Price Is Not Right

Command and control policies are best suited for:

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct?

The command-and-control method to solving an external cost problem usually involves:

Which of the following answers best explains how the market for tradeable allowances in pollution works?

Tradeable allowances:

Which of the following explains the difference between command and control policies and tradeable allowances?

The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

Which method achieves the lowest per-gallon cost of reducing water consumption?

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

Command and control may be the best approach to handling externalities if:

Which of the following statements is TRUE?

If a market for tradeable allowances exists, a company that has used up its own allowances can:

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

When the government uses a command-and-control policy to solve an externality, it:

Which of the following best creates incentives to reduce the pollution generated by washing machines?

Tradable pollution permits: