Question 1

To maximize welfare in a competitive market that has a negative externality in production, government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.

Accepted Answer

The tax should equal the marginal harm of the pollution at the socially optimal quantity of the good.

Question 2

Production of a good produces pollution that is very damaging with each additional unit. A monopoly facing a very elastic demand curve will most likely produce
A)less than the social optimum of the good.
B)more than the social optimum of the good.
C)the social optimum of the good.
D)no externality.

Accepted Answer

The answer of Production of a good produces pollution that...

Question 3

If both a monopoly and a competitive market with the same marginal cost would produce a quantity that is greater than the social optimum in a market because of externalities, then
A)welfare is greater under monopoly.
B)welfare is greater under competition.
C)welfare is the same for both market structures.
D)the social optimum must be zero.

Accepted Answer

In the presence of externalities that lead to production quantities greater than the social optimum, a monopoly, by producing less than a competitive market due to its profit-maximizing behavior (higher prices and lower quantities), inadvertently moves closer to the social optimum. This results in a potentially higher welfare under monopoly conditions compared to a competitive market, where the quantity produced would be higher and further from the social optimum.

Question 4

In the presence of a negative externality in production, a monopoly will produce
A)more than the social optimum.
B)less than the social optimum.
C)the social optimum.
D)All of the above are possible.

Accepted Answer

The answer of In the presence of a negative externality...

Question 5

-The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can
A)outlaw the production of steel.
B)institute a specific tax of $25.
C)institute a specific tax of $50.
D)institute a specific tax equal to area b.

Accepted Answer

The answer of 
-The above figure shows the market for...

Question 6

Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MC^p = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MC^e = Q. Is social welfare greater under monopoly or under competition?

Accepted Answer

The answer of Suppose that in the market for paper,...

Question 7

In terms of cost-benefit analysis, explain why a competitive market with an externality produces too much pollution.

Accepted Answer

The answer of In terms of cost-benefit analysis, explain why...

Question 8

-The above figure shows the market for steel ingots. If the market is competitive, and the government institutes a $100 specific tax on steel, then
A)less than the socially optimal quantity of steel is produced.
B)the socially optimal quantity of steel of 50 units is produced.
C)the socially optimal quantity of steel of 100 units is produced.
D)more than the socially optimal quantity of steel is produced.

Accepted Answer

When a $100 specific tax is imposed on steel in a competitive market, the cost of production increases. This leads to a decrease in supply, as producers are less willing or able to supply the same quantity at previous prices. Consequently, the quantity of steel produced and sold in the market decreases, leading to less than the socially optimal quantity of steel being produced. This is because the tax creates a wedge between the price buyers pay and the price sellers receive, distorting the market equilibrium and leading to a decrease in economic efficiency.

Question 9

Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MC^p = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MC^e = Q. What specific tax would result in a competitive market producing the socially optimal quantity of paper?

Accepted Answer

The answer of Suppose that in the market for paper,...

Question 10

Because a monopoly ignores external costs, it is possible that it will
A)produce the socially optimal quantity of a good.
B)produce more than the socially optimal quantity of a good.
C)produce less than the socially optimal quantity of a good.
D)All of the above.

Accepted Answer

The answer of Because a monopoly ignores external costs, it...

Question 11

-Suppose that the market for steel is shown in the above figure. What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Accepted Answer

The answer of 
-Suppose that the market for steel is...

Question 12

If the social marginal cost of a good is very high relative to the private marginal cost, then a monopoly will most likely
A)produce more than the social optimum.
B)produce less than the social optimum.
C)produce the social optimum.
D)produce zero pollution.

Accepted Answer

The answer of If the social marginal cost of a...

Question 13

Which of the following policies addresses the problem posed by positive externalities?
A)a subsidy to the agent that generates the positive externality
B)a tax on the agent that generates the positive externality
C)limit the activity that generates the positive externality
D)a subsidy to the agents that benefit from the positive externality

Accepted Answer

A subsidy to the agent that generates the positive externality would encourage them to increase their activity, leading to more positive externalities being generated. This helps to address the underproduction of the good or service that generates the positive externality by providing an incentive for the producer to produce more.

Question 14

A specific tax in a monopoly market equal to the marginal harm of pollution
A)will increase welfare.
B)will decrease welfare.
C)will leave welfare unchanged.
D)All of the above are possible.

Accepted Answer

The answer of A specific tax in a monopoly market...

Question 15

-Suppose that the market for steel is shown in the above figure. What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Accepted Answer

The answer of 
-Suppose that the market for steel is...

Question 16

Explain why the optimal amount of pollution is often not zero.

Accepted Answer

The answer of Explain why the optimal amount of pollution...

Question 17

In the presence of a negative externality, a specific tax can achieve the social optimum because
A)output is reduced to zero as a result.
B)it internalizes the external cost.
C)it directly charges the producer for polluting.
D)the price of the good rises by the full amount of the tax.

Accepted Answer

A specific tax internalizes the external cost by charging the producer for the negative externality, which gives them an incentive to reduce their level of pollution to the optimal level that achieves the social optimum. This results in a reduction of the negative externality while still allowing for some level of production and consumption of the good.

Question 18

Which of the following is an example of internalizing an externality?
A)a paper mill that spends money removing the pollution it generated
B)a neighbor leaving lots of trash in his front yard
C)a student receives $15 for each bright question asked during lecture
D)Both A and C.

Accepted Answer

Internalizing an externality means that the cost or benefit of a market activity is borne by the individual or firm engaging in the activity, rather than being passed on to a third party who is not involved in the market transaction. Choice A describes a paper mill that spends money to remove pollution, which is an example of internalizing the cost of pollution. Choice C describes a student who is rewarded for asking good questions, which is an example of internalizing the benefit of learning. Therefore, D is the best choice because it includes both examples of internalizing externalities. Choice B is not an example of internalizing an externality; it describes a situation where a neighbor is creating a negative externality (visual pollution) that is not being internalized by the neighbor.

Question 19

-The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can
A)institute a standard and allow firm to produce at most 50 ingots per period.
B)institute a standard and allow firm to produce at most 25 ingots per period.
C)institute a standard and allow firm to produce at most 100 ingots per period.
D)institute a standard and allow firm to produce at most 10 ingots per period.

Accepted Answer

The answer of 
-The above figure shows the market for...

Question 20

A monopoly might produce less than the socially optimal amount of pollution because
A)it likes to be a good citizen.
B)it sets price above marginal cost.
C)it earns economic profit.
D)it internalizes the external costs.

Accepted Answer

A monopoly sets price above marginal cost, which means they are not producing at the socially optimal level. When it comes to pollution, the socially optimal level would involve reducing pollution to the point where marginal benefits equal marginal costs. However, a monopoly may not have an incentive to reduce pollution to this socially optimal level because it could result in increased costs and decreased profits. Therefore, they may not produce the socially optimal level of pollution.

Quiz 18: Externalities, Open-Access, and Public Goods

To maximize welfare in a competitive market that has a negative externality in production, government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.

Production of a good produces pollution that is very damaging with each additional unit. A monopoly facing a very elastic demand curve will most likely produce

If both a monopoly and a competitive market with the same marginal cost would produce a quantity that is greater than the social optimum in a market because of externalities, then

In the presence of a negative externality in production, a monopoly will produce

-The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can

Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q. Is social welfare greater under monopoly or under competition?

In terms of cost-benefit analysis, explain why a competitive market with an externality produces too much pollution.

-The above figure shows the market for steel ingots. If the market is competitive, and the government institutes a $100 specific tax on steel, then

Because a monopoly ignores external costs, it is possible that it will

-Suppose that the market for steel is shown in the above figure. What specific tax would result in a competitive market producing the socially optimal quantity of steel?

If the social marginal cost of a good is very high relative to the private marginal cost, then a monopoly will most likely

Which of the following policies addresses the problem posed by positive externalities?

A specific tax in a monopoly market equal to the marginal harm of pollution

-Suppose that the market for steel is shown in the above figure. What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Explain why the optimal amount of pollution is often not zero.

In the presence of a negative externality, a specific tax can achieve the social optimum because

Which of the following is an example of internalizing an externality?

-The above figure shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can

A monopoly might produce less than the socially optimal amount of pollution because

Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MC^p = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MC^e = Q. Is social welfare greater under monopoly or under competition?