Question 1

Which of the following statements are TRUE? I. Market prices do not correctly signal the true costs and benefits to society when external costs are present. II. Market prices do not correctly signal the true costs and benefits to society when external benefits are present. III. Taxes and subsidies can adjust prices so that they do send the correct signals.
A) I and III only
B) II and III only
C) I only
D) I, II, and III

Accepted Answer

The answer of Which of the following statements are TRUE?...

Question 2

An external cost is built into the market price of a good and thus paid by the consumers.

Accepted Answer

External costs are those incurred by parties not involved in the production or consumption of a good, such as environmental pollution or traffic congestion. These costs are not reflected in the market price of the good, and consumers do not directly pay for them. Therefore, the statement is false.

Question 3

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

Accepted Answer

The social cost of pollution goes beyond just the costs incurred by private producers and includes the broader costs to society, including the negative impacts on human health, the environment, and the economy. These costs are often borne by bystanders who are adversely affected by the pollution, such as nearby residents or businesses.

Question 4

The Clean Air Act of 1990:
A) established a tradeable allowances program for sulfur dioxide.
B) is an application of the Coase theorem.
C) allows firms to profit by selling their unused pollution allowances.
D) All of the answers are correct.

Accepted Answer

The Clean Air Act of 1990 established a tradeable allowances program for sulfur dioxide, which is an application of the Coase theorem. This program allows firms to profit by selling their unused pollution allowances. Therefore, all of the answers are correct.

Question 5

In a market with external costs, suppose the efficient level of output is 1,000 units. Which of the following statements is TRUE?
A) To achieve the efficient level of output, the government should set a subsidy equal to the external cost.
B) To achieve the efficient level of output the government could set a tax equal to the external cost or issue enough tradeable allowances to restrict the output to the efficient level.
C) With external costs, the government can use only taxes to achieve the efficient level of output.
D) With external costs, the government can use only tradeable allowances to achieve the efficient level of output.

Accepted Answer

To achieve the efficient level of output in a market with external costs, the government could either set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level. This is because both methods create a cost for producers that takes into account the external costs imposed on society. By setting the tax or issuing tradable allowances, the government internalizes the external costs, leading to the efficient level of output being produced. Option A is incorrect, as a subsidy would encourage the production of more goods and result in an overproduction of the good, leading to an inefficient outcome. Option C is incorrect, as the government has both a tax and trading policy available to achieve the efficient level of output. Similarly, option D is incorrect, since only allowing tradeable allowances would limit the government's ability to achieve the efficient output level.

Question 6

When the number of tradeable allowances is set equal to the efficient market quantity:
A) it is equivalent to a tax set equal to the level of the external cost.
B) the outcome will be more efficient than a tax on pollution.
C) it is equivalent to a government regulation set equal to the efficient market quantity.
D) the price of the allowances will equal the social cost of pollution.

Accepted Answer

When the number of tradeable allowances is set equal to the efficient market quantity, it is equivalent to a tax set equal to the level of the external cost because both approaches internalize the externality and lead to the efficient market outcome.

Question 7

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Accepted Answer

The answer of External costs lead markets to produce a...

Question 8

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Accepted Answer

This statement is true. When a transaction between a buyer and seller has an effect on a third party not directly involved in the transaction, it is called an externality.

Question 9

In an efficient market, the supply curve will decrease by the amount of the external cost.

Accepted Answer

In an efficient market, the price of a good will reflect the true cost (including external costs) and the supply curve will shift leftward to account for the negative externality, effectively decreasing the quantity supplied at each price level.

Question 10

What is the importance of the Clean Air Act of 1990?
A) Under this act, the EPA distributes pollution allowances to electricity producers.
B) Under this act, the EPA sets the maximum amount of pollution that each firm may emit.
C) The act lists the pollutants that are deemed harmful to the environment.
D) The act delineates which firms are allowed to emit more than 1 ton of sulfur dioxide.

Accepted Answer

The answer of What is the importance of the Clean...

Question 11

Which of the following statements is TRUE? I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances. III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
A) I only
B) II and III only
C) I, II, and III
D) III only

Accepted Answer

Statement I is true because the EPA's tradeable allowances program for sulfur dioxide is designed to establish property rights to pollute and reduce transaction costs. The program distributes allowances, maintains databases, and monitors emissions to achieve this. Statement II is not true because non-businesses and environmental groups can participate in the purchase of tradeable allowances. Statement III is not true because the tradeable allowances for sulfur dioxide have been successful in reducing emissions since their implementation in the 1990s.

Question 12

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Accepted Answer

The answer of Antibiotics tend to be overused, as the...

Question 13

Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)? I. levy taxes on the coal factory's production of pollutants II. levy taxes on the consumers' consumption of fish III. create a market for tradeable allowances IV. subsidize firms that produce clean fish
A) I and III only
B) II and IV only
C) III and IV only
D) I, III, and IV only

Accepted Answer

Both levying taxes on the coal factory's production of pollutants and creating a market for tradable allowances would incentivize the factory to reduce their pollution output. Levying taxes on consumers' consumption of fish and subsidizing clean fish production would not directly address the source of the pollution and may not be effective in mitigating the negative externality in the short run.

Question 14

In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output.

Accepted Answer

When there is an external cost, the price does not reflect the full cost of production and consumption, leading to an overproduction of the good. Therefore, the market equilibrium output exceeds the efficient level of output.

Question 15

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?
A) The companies who are taxed are also simultaneously subject to the allowances of pollutants.
B) They both reduce pollution of exactly the same types of pollutants.
C) They both bring markets closer to the efficient quantity.
D) Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts.

Accepted Answer

Both taxes on pollutants and tradeable allowances aim to internalize the externality by putting a price on pollution, which brings the market closer to the socially efficient quantity. Taxes and allowances provide incentives for firms to reduce pollution, and they both generate revenues for the government. However, they differ in implementation and outcomes, as taxes do not guarantee a certain level of pollution reduction, while tradeable allowances allow for flexibility in the allocation of pollution reduction efforts among firms.

Question 16

The main difference between tradable allowances and taxes is:
A) only large firms may trade pollution allowances.
B) tradeable allowances result in a more efficient outcome.
C) taxes decrease firms' profits.
D) purely political.

Accepted Answer

The answer of The main difference between tradable allowances and...

Question 17

The social cost of antibiotic consumption equals the private cost of producing antibiotics plus the cost of increased bacterial resistance to antibiotics.

Accepted Answer

The social cost of antibiotic consumption includes not only the private cost of producing antibiotics but also the cost of increased bacterial resistance to antibiotics. This cost is borne by society as a whole, not just by the individual consuming antibiotics, and can lead to longer hospital stays, more expensive treatments, and even deaths from drug-resistant infections. Therefore, it is important to consider both the private and social costs of antibiotic use when making decisions about their use.

Question 18

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradeable allowances program has resulted in:
A) air quality that is neither improved nor worsened.
B) an improved air quality.
C) a worsening in air quality.
D) a less efficient market outcome.

Accepted Answer

The EPA's tradeable allowances program has incentivized firms to reduce their emissions and invest in cleaner technologies in order to trade or sell their excess allowances, leading to an overall improvement in air quality.

Question 19

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
A) too low; too high
B) equal to the efficient price; too low
C) too high; too low
D) equal to the efficient price; too high

Accepted Answer

When external benefits are present, the market price is too low because the price only takes into account the private benefits of the consumer and not the additional benefits that are being provided to others (i.e. third parties). This leads to an underproduction of the good. On the other hand, when external costs are present, the market price is too high because the price only takes into account the private costs of the producer and not the additional costs that are being imposed on others (i.e. third parties). This leads to an overproduction of the good. Therefore, the market outcome is inefficient in both cases.

Question 20

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Accepted Answer

Barking dogs can be considered as an externality because they are a cost that is incurred by individuals who are not part of the market exchange of the dog ownership. This cost can include disturbance and decreased quality of life for neighboring households.

Quiz 10: Externalities: When the Price Is Not Right

An external cost is built into the market price of a good and thus paid by the consumers.

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

The Clean Air Act of 1990:

In a market with external costs, suppose the efficient level of output is 1,000 units. Which of the following statements is TRUE?

When the number of tradeable allowances is set equal to the efficient market quantity:

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

In an efficient market, the supply curve will decrease by the amount of the external cost.

What is the importance of the Clean Air Act of 1990?

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output.

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?

The main difference between tradable allowances and taxes is:

The social cost of antibiotic consumption equals the private cost of producing antibiotics plus the cost of increased bacterial resistance to antibiotics.

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradeable allowances program has resulted in:

When external benefits are present, the market price is , however when external costs are present, the market price is .

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.