Question 1

A cap and trade program is efficient because the cap protects the environment while:
A) generating substantial revenues for the government.
B) keeping compliance and administration costs relatively low.
C) while requiring the same response by each polluter.
D) none of above

Accepted Answer

A cap and trade program sets a limit (or "cap") on the total amount of emissions that are allowed, and permits (or "trades") can be bought and sold between polluters to meet their individual emission targets. This approach encourages companies to find the most cost-effective ways to reduce their emissions, while allowing flexibility in how they accomplish this goal. This leads to lower compliance and administration costs, as well as incentivizing innovation and further reduction in emissions. While some cap and trade programs may generate revenues, this is not the primary goal or benefit of the system. Similarly, the response required of each polluter may vary based on their individual circumstances and chosen strategies.

Question 2

If pollution is reduced below the socially efficient level:
A) the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
B) the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
C) the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
D) nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement.

Accepted Answer

Social efficiency is achieved when the marginal cost of pollution abatement is equal to the marginal benefit of pollution abatement. If pollution is reduced below the socially efficient level, it means that the cost of reducing further pollution exceeds the benefits of doing so. Therefore, the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.

Question 3

Which of the following is not true with regard to pollution control through transferable pollution rights?
A) It does not require the government to obtain information on the pollution abatement techniques being utilized.
B) It creates an incentive to develop improved pollution abatement technologies.
C) It ultimately requires all firms to reduce pollution in equal amounts.
D) It established private property rights that can be sold.

Accepted Answer

Transferable pollution rights allocate pollution allowances based on historical pollution levels, not on equal amounts. Therefore, some firms may be required to reduce pollution more than others.

Question 4

According to the Coase Theorem,private solutions to externalities can lead to the socially efficient outcome when:
i.transaction costs are negligible
ii.property rights are clearly defined
iii.the number of parties involved is small
A) (i), (ii), and (iii)
B) (i) and (ii) only
C) (iii) only
D) (ii) and (iii) only

Accepted Answer

The Coase Theorem suggests that private bargaining can lead to efficient outcomes when transaction costs are negligible, property rights are clearly defined, and the number of parties involved is small, as these conditions facilitate negotiation and agreement.

Question 5

Private solutions often are not possible due to the costs of negotiating and enforcing these solutions.Such costs are called:
A) transaction costs.
B) external costs.
C) deadweight losses.
D) social costs.

Accepted Answer

The costs of negotiating and enforcing private solutions are called transaction costs, which can make private solutions expensive and unfeasible. The other options (external costs, deadweight losses, and social costs) refer to different concepts and are not directly related to the costs of negotiating and enforcing private solutions.

Question 6

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $700 to Nick,and that Jane bears a cost of $500 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for:
A) There is no private solution that would improve this situation for both parties.
B) Jane to pay Nick $650 to get rid of the dog.
C) Jane to pay Nick $800 to get rid of the dog.
D) Nick to pay Jane $600 for her inconvenience.

Accepted Answer

The answer of Nick owns a dog whose barking annoys...

Question 7

An ideal pollution control policy:
A) would reduce pollution to zero.
B) would reduce pollution to the socially efficient level.
C) discourage firms from wasting time developing abatement technologies.
D) reduce pollution as quickly as possible, regardless of the cost.

Accepted Answer

A pollution control policy that reduces pollution to zero is not practical or feasible. However, reducing pollution to the socially efficient level is a realistic goal that balances the costs and benefits of pollution reduction. Discouraging firms from developing abatement technologies is not a desirable outcome, as it reduces the effectiveness of market-based incentives to reduce pollution. Similarly, reducing pollution as quickly as possible, regardless of the cost, is not desirable as it could impose high costs on the economy and society without any significant benefits in terms of environmental quality. Therefore, B is the best choice.

Question 8

Which of the following statements is correct?
A) The ideal solution to a pollution problem is to reduce pollution until it is technologically impossible to reduce it any further.
B) The ideal and fair solution to a pollution problem is to impose identical compliance standards on all polluting firms.
C) Charging firms for transferable emissions permits is a more efficient way of dealing with pollution than are compliance standards.
D) A per-unit pollution tax is a more efficient way of dealing with pollution than is a system of transferable emissions permits.

Accepted Answer

Charging firms for transferable emissions permits creates a market-based system where firms can purchase permits from one another, incentivizing them to reduce pollution if they can do so at a lower cost than purchasing permits. This creates a more efficient system than imposing identical compliance standards on all polluting firms, which may not take into account differences in the cost of reducing pollution for different firms. A per-unit pollution tax is also a market-based solution, but it can be more difficult to properly set the tax rate and enforce compliance compared to a system of transferable emissions permits. Option A is not necessarily the ideal solution, as it may be economically and technologically feasible to continue reducing pollution beyond a certain point.

Question 9

Pollution abatement is likely to be most costly under:
A) a compliance standard.
B) a per-unit pollution tax system.
C) a system of transferable pollution rights.
D) Costs are the same under all three pollution control policies.

Accepted Answer

A compliance standard requires firms to meet a specific level of pollution reduction without any flexibility in how they achieve it. This can result in higher costs as firms may have to invest in specific technologies or processes that are more expensive than other options. In contrast, a per-unit pollution tax system and a system of transferable pollution rights provide incentives for firms to reduce pollution in the most cost-effective way, which can potentially lead to lower costs.

Question 10

Assume your roommate is very untidy.According to campus policy,you have a right to live in an uncluttered apartment.Suppose she/he gets a $200 benefit from being untidy but imposes a $100 cost on you.The Coase Theorem would suggest an efficient solution can be reached where:
A) you continue to live with your messy roommate until you are able to make other living arrangements elsewhere.
B) your roommate stops her/his messy habits or you force her/him to move out.
C) you pay your roommate at least $100 but no more than $200 to clean up after (her)himself.
D) your roommate pays you at least $100 but no more than $200 for the right to be untidy (or to have you clean up after her/him).

Accepted Answer

The Coase Theorem suggests that if property rights are clearly defined, a mutually beneficial solution can be reached through bargaining, regardless of the initial allocation of those property rights. In this case, you have the right to live in an uncluttered apartment, but your roommate's untidiness imposes a cost on you. Your roommate also benefits from being untidy. Therefore, a solution can be found where your roommate compensates you for the cost imposed on you, in exchange for being allowed to continue their untidy habits. Option D is the best choice, as your roommate pays you for the right to be untidy, but the payment is limited to the cost imposed on you.

Question 11

Thousands of Japanese fishermen have used gill nets to catch tuna with great efficiency.Many environmentalists have objected to this practice since many other marine animals (such as dolphins and sharks)are killed by the nets and discarded by the fishermen.Which of the following statements is most accurate?
A) A private solution can be reached through negotiation between the fishermen and the environmentalists.
B) A private solution is not practical due to the large number of individuals affected.
C) The market price of tuna is higher than the socially optimum price of tuna.
D) A private solution to this problem would not affect the price of tuna.

Accepted Answer

A private solution is not practical due to the large number of individuals affected, including various marine species and numerous fishermen, making negotiation and agreement difficult.

Question 12

If pollution levels exceed the socially efficient level:
A) the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
B) the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
C) the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
D) nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement.

Accepted Answer

When pollution levels exceed the socially efficient level, it means that the cost to society of the pollution (in terms of health effects, environmental degradation, etc.) is greater than the cost of reducing (abating) that pollution. Therefore, the marginal benefit of reducing pollution (such as improved health, cleaner environment) is greater than the marginal cost of taking actions to reduce the pollution.

Question 13

The presence of a negative externality is likely to give rise to significant market failures when:
A) property rights are not well-defined.
B) property rights are well-defined.
C) there are few victims of pollution and few polluters.
D) transaction costs are relatively low.

Accepted Answer

When property rights are not well-defined, it is difficult to assign responsibility for the negative externality and to enforce a solution. This can lead to market failures such as overproduction of the good causing the externality.

Question 14

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:
A) the fallacy of composition.
B) a pollution tax.
C) a private solution to a negative externality problem.
D) how lazy Tom is.

Accepted Answer

Nancy is taking action to address the negative externality of Tom neglecting his yard, which is potentially lowering property values or impacting the aesthetic appeal of the neighborhood. By mowing his lawn, Nancy is providing a private solution to this problem without involving any government intervention or regulation.

Question 15

The theory that private negotiations have the potential to make some people better off without making anyone worse off when negative externalities are present is known as:
A) the Negative Externality Theorem.
B) the Sexton Theorem.
C) the Coase Theorem.
D) the Abatement Theorem.

Accepted Answer

This theorem is commonly associated with Ronald Coase, who argued that under certain conditions, private parties could negotiate and find a mutually beneficial solution to the problem of negative externalities without any intervention from the government. The Coase Theorem argues that the allocation of property rights can lead to efficient outcomes, regardless of who initially holds those rights, as long as transaction costs are low and people can bargain freely.

Question 16

Suppose that your roommate is very untidy.Suppose she/he gets a $100 benefit from being messy but imposes a $200 cost on you.(Assume that there are no regulations against untidiness in your living quarters.)The Coase Theorem would suggest that an efficient solution can be reached where:
A) you pay your roommate at least $100 but no more than $200 to clean up after her/himself.
B) you pay your roommate at least $201 to clean up after her/himself.
C) you continue to live with your untidy roommate until you are able to make other living arrangements elsewhere.
D) your roommate pays you at least $100 to have you clean up after her/him.

Accepted Answer

According to the Coase Theorem, as long as property rights are well-defined and there are zero transaction costs, a mutually beneficial agreement can be reached between the two parties. In this case, the property right of the living space and cleanliness can be assigned to either party or split between them. Assuming the property right is assigned to you, you can negotiate with your roommate to clean up after herself/himself by paying her at least $100 but no more than $200 (the cost imposed on you). This will incentivize your roommate to clean up, as she will receive a benefit from doing so (the payment from you), and you will benefit from living in a cleaner environment. Option B is not optimal, as it is more than the cost imposed on you and will result in an inefficient outcome. Option C may not be feasible or desirable, and option D does not provide the right incentives to your roommate to change her behavior.

Question 17

The Coase Theorem suggests that the efficient solution to an externality problem:
A) depends on who owns property rights to the resources.
B) is enhanced by government involvement in the negotiations.
C) can be enhanced through the use of taxes.
D) does not depend on the distribution of property rights.

Accepted Answer

The Coase Theorem posits that if property rights are well-defined and transaction costs are negligible, parties can negotiate to reach an efficient outcome regardless of the initial distribution of property rights.

Question 18

If transaction costs of negotiating are ____,the ____ suggests that the private market ____ allocate resources.
A) low; Sexton Theorem; will not efficiently
B) high; Externality Theorem; will efficiently
C) high; Coase Theorem; will not efficiently
D) low; Coase Theorem; will efficiently
E) both c. and d.

Accepted Answer

The answer of If transaction costs of negotiating are ____,the...

Question 19

The noise from the low altitude combat training the Air Force conducts over the Yippy I-O Ranch causes the ranch's cattle to lose weight.Which of the following actions is not consistent with recognition that the Yippy I-O has a property right to its skies?
A) The Air Force equips its planes with mufflers.
B) The Air Force compensates the Yippy I-O for the value of the lost weight.
C) The ranch compensates the Air Force for the cost of moving the exercises to another location.
D) The Air Force pays for cow earplugs for the ranch herd.

Accepted Answer

Compensating the Air Force for the cost of moving the exercises to another location is not consistent with recognition that the Yippy I-O has a property right to its skies. This action puts the burden of the Air Force's activities on the ranch, which is not fair and does not acknowledge the ranch's property rights. The other choices show attempts to mitigate the negative effects on the ranch without infringing on its property rights.

Question 20

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Nick,and that Jane bears a cost of $700 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for:
A) Jane to pay Nick $450 to get rid of the dog.
B) Nick to pay Jane $650 for her inconvenience.
C) Jane to pay Nick $650 to get rid of the dog.
D) There is no private solution that would improve this situation for both parties.

Accepted Answer

In this situation, a possible private solution is for Jane to pay Nick to get rid of the dog. The question states that the benefit of owning the dog is worth $500 to Nick, whereas Jane bears a cost of $700 from the barking. Therefore, if Jane pays Nick $650, Nick would be better off by $150 and Jane would be better off by $50 ($700-$650). This is the best solution for both parties as it leads to a Pareto improvement, where both parties are better off without making anyone worse off. Option A is not feasible as Nick values his dog at $500 and would not give it up for a lower price. Option B is also not feasible as Jane bears the cost of the barking and therefore, it does not make sense for her to pay Nick for her inconvenience. Option D is not correct as we have found a private solution that improves the situation for both parties.

Quiz 8: Market Failure

A cap and trade program is efficient because the cap protects the environment while:

If pollution is reduced below the socially efficient level:

Which of the following is not true with regard to pollution control through transferable pollution rights?

According to the Coase Theorem,private solutions to externalities can lead to the socially efficient outcome when: i.transaction costs are negligible ii.property rights are clearly defined iii.the number of parties involved is small

Private solutions often are not possible due to the costs of negotiating and enforcing these solutions.Such costs are called:

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $700 to Nick,and that Jane bears a cost of $500 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for:

An ideal pollution control policy:

Which of the following statements is correct?

Pollution abatement is likely to be most costly under:

Assume your roommate is very untidy.According to campus policy,you have a right to live in an uncluttered apartment.Suppose she/he gets a $200 benefit from being untidy but imposes a $100 cost on you.The Coase Theorem would suggest an efficient solution can be reached where:

If pollution levels exceed the socially efficient level:

The presence of a negative externality is likely to give rise to significant market failures when:

Nancy loves to landscape her yard,but her neighbor Tom places a low value on his landscaping.When Tom's grass is neglected and gets long,Nancy will mow for Tom.This is an example of:

The theory that private negotiations have the potential to make some people better off without making anyone worse off when negative externalities are present is known as:

Suppose that your roommate is very untidy.Suppose she/he gets a $100 benefit from being messy but imposes a $200 cost on you.(Assume that there are no regulations against untidiness in your living quarters.) The Coase Theorem would suggest that an efficient solution can be reached where:

The Coase Theorem suggests that the efficient solution to an externality problem:

If transaction costs of negotiating are ,the suggests that the private market allocate resources.

The noise from the low altitude combat training the Air Force conducts over the Yippy I-O Ranch causes the ranch's cattle to lose weight.Which of the following actions is not consistent with recognition that the Yippy I-O has a property right to its skies?

Nick owns a dog whose barking annoys his neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Nick,and that Jane bears a cost of $700 from the barking.Assume that the city has no ordinance against barking dogs.A possible private solution that would benefit both parties is for: