Question 1

A local cafe that allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards.This decision provides an example of:

Accepted Answer

The closure of the cafe due to non-compliance with clean air standards represents direct regulation by the local authorities to address the negative externality of second-hand smoke.

Question 2

When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality:

Accepted Answer

When the government chooses an externality policy that aligns private incentives with social efficiency, it provides incentives to private decision makers to induce them to solve the externality problem on their own. This is done through market-based instruments such as taxes, subsidies, and tradable permits, rather than command-and-control techniques. Subsidies are not always the best policy, as it depends on the specific externality being addressed.

Question 3

Which policy would best suit a positive externality?

Accepted Answer

Subsidies work best for positive externalities as they provide a financial incentive for individuals or firms to produce or consume the good/service that creates the positive externality. This helps to increase the production and consumption of the good/service and therefore increases the positive externality.

Question 4

If the government were to limit the release of air pollution produced by a steel mill to 10 000 units, this policy would be considered a:

Accepted Answer

A regulation is a direct government intervention in setting and enforcing standards or rules for the behavior of individuals and firms. In this case, the government is setting a limit on the amount of air pollution that the steel mill is allowed to emit. This is a form of command and control regulation.

Question 5

Pigovian taxes:

Accepted Answer

Pigovian taxes are meant to internalize the external costs of a product or service, such as pollution caused by a factory. By imposing a tax on the factory's pollution, the owner now has an economic incentive to reduce the pollution, either by implementing cleaner technology or producing less. This can help society reach a socially optimal level of pollution. Choices A and B are incorrect as Pigovian taxes are not intended to address these issues. Choice C is partially correct, as direct regulation may be used in conjunction with Pigovian taxes, but Pigovian taxes can often be a preferred alternative to more cumbersome regulation.

Question 6

Graph 10-4 
-Referring to Graph 10-4, which curve best represents a Pigovian tax?

Accepted Answer

A Pigovian tax is a tax imposed on a negative externality, such as pollution. The tax is designed to internalize the cost of the externality, so that the producer takes into account the full social cost of their production. In Graph 10-4, curve A represents a Pigovian tax, as it increases the marginal cost of production by the amount of the tax, which is equal to the marginal external cost.

Question 7

Graph 10-4 
-Refer to Graph 10-4.The equivalence of a Pigovian tax and a pollution permit would require that:

Accepted Answer

In order for a Pigovian tax and a pollution permit to be equivalent, all of the conditions listed in the answer choices must hold. 
A) PB must be equivalent to the Pigovian tax because PB represents the price paid for the pollution permit. 
B) QA must be equivalent to the amount of pollution allowed by the pollution permit holders because QA represents the quantity of pollution that can be emitted with the pollution permit. 
C) The equilibrium price and quantity of pollution must be the same in both panel A and panel B because this represents the efficient outcome where marginal benefit equals marginal cost. Therefore, all of the above conditions must hold for a Pigovian tax and a pollution permit to be equivalent.

Question 8

In order for a Pigovian tax to be efficient, it often requires detailed information about:

Accepted Answer

A Pigovian tax aims to internalize external costs, or the costs of production that are not paid by the producer but instead by society. In order for the tax to be efficient, there must be a clear understanding of both the social and private costs of the good. This information is necessary to determine the appropriate tax rate in order to fully cover the external costs and encourage producers to find more efficient, lower-cost methods of production.

Question 9

Assume that your housemate is very messy.Suppose he gets a $200 benefit from being messy but imposes a $100 cost on you.The Coase theorem would suggest that an efficient solution would be for you to:

Accepted Answer

The answer of Assume that your housemate is very messy.Suppose...

Question 10

Assume that your housemate is very messy.Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you.The Coase theorem would suggest that an efficient solution would be for you to:

Accepted Answer

The answer of Assume that your housemate is very messy.Suppose...

Question 11

Emission controls on automobiles provide an example of a:

Accepted Answer

Emission controls on automobiles are a type of command-and-control policy, where the government sets specific regulations (such as emission standards) that must be met by manufacturers and enforced by regulatory agencies. This type of policy is used to increase social efficiency by reducing negative externalities (in this case, air pollution). Other options (A, C, and D) are not accurate descriptions of emission controls on automobiles.

Question 12

Assume that your housemate is very messy.Suppose he gets a $200 benefit from being messy but imposes a $300 cost on you.The Coase theorem would suggest that an efficient solution would be:

Accepted Answer

The Coase theorem suggests that if transaction costs are low, parties can negotiate a mutually beneficial solution to externalities. In this case, paying the housemate between $200 and $300 to clean up would compensate him for his loss of benefit while costing you less than the $300 cost of his messiness.

Question 13

In Australia, hunting regulations for kangaroos are closely monitored and enforced.This is an example of a policy:

Accepted Answer

Hunting regulations for kangaroos in Australia are enforced through command-and-control techniques such as licensing, bag limits, and restrictions on hunting methods. This approach is necessary to ensure that kangaroo populations are not over-harvested and to protect the species from extinction. Moral codes and social sanctions may also be important in promoting responsible hunting practices, but they are not the primary means of enforcing regulations. Discrimination against native wildlife is not a factor in this policy, as kangaroos are considered native to Australia. Private incentives are not used to reduce the conservation externality in this case, as hunting is generally not a for-profit activity and the goal is to protect the species rather than generate economic benefits.

Question 14

Which of the following statements is most correct?

Accepted Answer

Pigovian taxes provide an economic incentive for people to reduce their negative externalities by making them pay for the cost. In contrast, direct regulation requires monitoring and enforcement, which can be expensive. Therefore, Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.

Question 15

The distribution of rights among parties affected by an externality:

Accepted Answer

According to the Coase Theorem, if property rights are well-defined and transaction costs are low, the allocation of rights determines who bears the cost, but the efficiency of the outcome remains unaffected.

Question 16

In Singapore, property taxes on an automobile can exceed the purchase price of a new automobile.Assuming that the tax is a fixed percentage of market value, which of the following does this tax represent?
(i) a policy in which private incentives are used to reduced the traffic externality on congested roads in Singapore
(ii) the government's direct control over the number of automobiles that are purchased
(iii) a policy in which private incentives are used to reduce automobile pollution

Accepted Answer

The tax represents a policy where private incentives (the high cost of owning a car) are used to reduce traffic congestion (i) and pollution (iii) by discouraging excessive use of automobiles. It does not directly control the number of automobiles purchased, but rather influences it through economic disincentives.

Question 17

Assume that your housemate is very messy.(There is no law against being messy.) Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you.The Coase theorem would suggest that an efficient solution would be for you to:

Accepted Answer

The Coase theorem suggests that if transaction costs are negligible, parties can negotiate to an efficient solution regarding the allocation of resources, regardless of the initial distribution of property rights. In this scenario, paying your housemate at least $100 but no more than $200 to clean up after herself would compensate her for the loss of her benefit from being messy, while also being less than the cost imposed on you, leading to an efficient outcome.

Question 18

If the government were to decide that for the best interests of the country each litre of petrol should cost $2.50 instead of $1.50, it would be making an assumption about:

Accepted Answer

The government's decision to increase the price of petrol from $1.50 to $2.50 is based on the assumption about the social cost of petrol. This implies that the government is considering the external costs (such as pollution and environmental degradation) associated with petrol consumption that are not reflected in its private cost.

Question 19

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

Accepted Answer

Command-and-control policy directly regulates behavior, often through regulations or laws.

Question 20

Pigovian taxes are typically advocated to correct for the effects of:

Accepted Answer

The answer of Pigovian taxes are typically advocated to correct...

Quiz 10: Externalities