Question 1

Which of the following statements is true of both pollution permits and corrective taxes?
A) Both policies internalize the externality of pollution.
B) Both policies require firms to pay for their pollution.
C) Both policies lead to the establishment of an equilibrium price of pollution.
D) All of the above are correct.

Accepted Answer

Both pollution permits and corrective taxes internalize the externality of pollution as they require firms to pay for the damage they cause to the environment. Both policies also establish an equilibrium price for pollution based on the supply and demand of permits or the tax rate. Therefore, all of the above statements are true for both pollution permits and corrective taxes.

Question 2

Which of the following statements is correct about a market in which pollution is emitted?
A) Both corrective taxes and pollution permits internalize the externality of pollution.
B) Corrective taxes internalize the externality of pollution, but pollution permits do not internalize that externality.
C) Corrective taxes fail to internalize the externality of pollution, but corrective taxes internalize that externality.
D) Neither corrective taxes nor pollution permits internalize the externality of pollution.

Accepted Answer

The answer of Which of the following statements is correct...

Question 3

Figure 10-19 
-Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?
A) fewer than 58
B) 58
C) 73
D) 94

Accepted Answer

The answer of Figure 10-19 
-Refer to Figure 10-19. How...

Question 4

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States, in 2012 dollars, would be about
A) $0.40 per gallon.
B) $0.90 per gallon.
C) $2.10 per gallon.
D) $2.70 per gallon.

Accepted Answer

The answer of In summarizing the research on the externalities...

Question 5

Which of the following is not a negative externality associated with driving cars?
A) congestion
B) pollution
C) repairs
D) accidents

Accepted Answer

Repairs are not a negative externality associated with driving cars because they are a cost borne by the car owner and are not affecting any third parties who are not directly involved in driving the car. Congestion, pollution, and accidents all have negative impacts on third parties, such as other drivers, pedestrians, and the environment.

Question 6

The business activities of Firm A confer positive externalities on Firm B, and the business activities of Firm B confer positive externalities on Firm A. If the two firms merged, then
A) their respective markets would move closer to the social optimum.
B) their respective markets would move further away from the social optimum.
C) total surplus in their respective markets would decrease.
D) the merger would serve as an example of a misguided public policy toward externalities.

Accepted Answer

The positive externalities each firm confers on the other imply that their respective market outcomes under their current separate existence are suboptimal. By merging, they can coordinate their actions to achieve a closer approximation to the social optimum. Thus, the merger would lead to a more efficient outcome.

Question 7

Taxes that are enacted to mitigate the effects of negative externalities are sometimes called
A) control taxes.
B) command levies.
C) Pigovian taxes.
D) Marshallian taxes.

Accepted Answer

Taxes that are imposed to mitigate negative externalities are called Pigovian taxes, named after economist Arthur Pigou. These taxes are designed to internalize the costs of the negative externality, by making the polluter pay for the harm caused to others.

Question 8

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be re­labeled as
A) "Demand for clean air."
B) "Demand for pollution rights."
C) "Price of pollution."
D) "Rate of subsidy."

Accepted Answer

The line labeled "Corrective tax" represents the price of pollution, which is the tax imposed on industries for every unit of pollution they generate. Therefore, the most accurate label for this line is "Price of pollution." Options A, B, and D are incorrect as they do not accurately reflect the information presented in the graph.

Question 9

Figure 10-19 
-Refer to Figure 10-19. Each additional unit of the good that is produced yields an external
A) benefit of $15.
B) benefit of $36.
C) cost of $15.
D) cost of $36.

Accepted Answer

Each additional unit of the good that is produced yields an external benefit of $36, as shown by the vertical distance between the marginal social benefit curve and the demand curve. Therefore, the socially optimal level of production is where the marginal social cost (MC) equals the marginal social benefit (MSB), which is at Qs. Any level of production beyond Qs imposes a cost on society that is greater than the benefit, resulting in a net loss. Therefore, the best choice is to produce Qs amount of the good.

Question 10

Figure 10-19 
-Refer to Figure 10-19. The socially optimal quantity of output is
A) 58 units.
B) 73 units.
C) between 73 and 94 units.
D) 94 units.

Accepted Answer

The socially optimal quantity of output is where the marginal social benefit (MSB) equals the marginal social cost (MSC), which is at the intersection of the MSB and MSC curves. This occurs at output level Qs = 73 units, which is where the vertical distance between the two curves is smallest. Any output level above or below Qs will result in a deadweight loss to society.

Question 11

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?
A) "Demand for clean air"
B) "Demand for pollution rights"
C) "Supply of pollution permits"
D) "Tax paid to government"

Accepted Answer

The label for the downward-sloping line on the graph is "Demand for pollution rights". This line represents the market demand for pollution permits, which decrease in quantity as the price of pollution increases due to the corrective tax.

Question 12

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. The tax depicted on the graph
A) gives polluting firms an incentive to develop cleaner technologies.
B) is viewed by most economists as less effective than a command-and-control policy as a means of reducing pollution.
C) has the effect of moving the allocation of resources further from the social optimum than it would be in the absence of the tax.
D) All of the above are correct.

Accepted Answer

The tax depicted on the graph gives polluting firms an incentive to develop cleaner technologies, as it increases the cost of polluting and thus creates a profit motive for firms to reduce pollution. It is not necessarily viewed as less effective than a command-and-control policy, as the effectiveness of the tax depends on the specific circumstances of the market and the behavior of firms. It does have the effect of moving the allocation of resources further from the social optimum than it would be in the absence of the tax, as it creates a deadweight loss in the market due to the reduction in production and consumption that result from the tax. However, this is a trade-off that is often deemed worthwhile in order to reduce pollution and achieve a more socially desirable outcome overall.

Question 13

Figure 10-19 
-Refer to Figure 10-19. Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 59th unit of the good is produced and consumed, social well-being increases by
A) $28.00.
B) $31.40.
C) $33.60.
D) $36.00.

Accepted Answer

At the 59th unit, the private value equals the private cost, which is $59. Therefore, the market equilibrium is 59 units. However, the social optimum occurs where social value equals social cost. At the 59th unit, the social value is $90 and the social cost is $56, resulting in a social surplus of $34. Thus, when the 59th unit is produced and consumed, social well-being increases by $34. Since the social value and private value decrease by $1.00 with each additional unit consumed, the total social surplus can be calculated by finding the area of the triangle with base 59 and height $1.00, which is 0.5x59x$1.00=$29.50. Therefore, the total social surplus at this point is $34+$29.50=$63.50. At the 58th unit, the social surplus is $62.10, and at the 60th unit, the social surplus is $62.90. Thus, the best choice is to produce and consume 59 units.

Question 14

Which of the following policies is an example of a command-and-control policy?
A) subsidies to education
B) maximum levels of pollution that factories may emit
C) tradable pollution permits
D) None of the above is an example of a command-and-control policy.

Accepted Answer

A command-and-control policy is a regulation that sets specific limits or standards for pollution, without providing any incentives or flexibility for firms to meet these standards in the most cost-effective way. Maximum levels of pollution that factories may emit is a clear example of a command-and-control policy. Subsidies to education and tradable pollution permits are not command-and-control policies but incentive-based policies.

Question 15

The tax on gasoline
A) reduces efficiency by causing large deadweight losses.
B) reduces efficiency by decreasing consumer surplus and producer surplus.
C) enhances efficiency by serving as a corrective device in a market with positive externalities.
D) enhances efficiency by serving as a corrective device in a market with negative externalities.

Accepted Answer

The tax on gasoline enhances efficiency by serving as a corrective device in a market with negative externalities. Gasoline consumption has negative externalities such as air pollution, congestion, and climate change. By imposing a tax on gasoline, the government can reduce gasoline usage, incentivize consumers to switch to alternative fuels, and offset negative externalities. This can help enhance efficiency and reduce the overall costs to society.

Question 16

Figure 10-19 
-Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of
A) $15.
B) $23.
C) $36.
D) $89.

Accepted Answer

The external benefit of each additional unit produced is shown by the vertical distance between the social benefit curve and the private benefit curve. At producing Q=5 units, the external benefit is $36 ($64-$28). This is the optimal level of production that maximizes social welfare.

Question 17

Which of the following statements is correct about a market in which pollution is emitted?
A) Both corrective taxes and pollution permits move the market toward the social optimum.
B) Corrective taxes move the market toward the social optimum, but pollution permits do not move the market toward the social optimum.
C) Pollution permits move the market toward the social optimum, but corrective taxes do not move the market toward the social optimum.
D) Neither corrective taxes nor pollution permits move the market toward the social optimum.

Accepted Answer

Both corrective taxes and pollution permits can be used to address the problem of pollution in a market. Corrective taxes impose a tax on polluters so that they internalize the cost of pollution and reduce their emissions. Pollution permits allow the government to set a cap on the total amount of pollution that is allowed in the market and then allocate permits to firms. Firms can buy and sell permits to emit pollution, creating a market for pollution permits. Both approaches work by making it more expensive for firms to pollute, and both can move the market toward the social optimum where the marginal cost of pollution reduction is equal to the marginal benefit of pollution reduction.

Question 18

Figure 10-19 
-Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?
A) the private cost of the good
B) the social cost of the good
C) the private value of the good
D) the external benefit of the good

Accepted Answer

As the quantity of the good increases, the private value of the good typically decreases due to the law of diminishing marginal utility, meaning each additional unit provides less value to consumers.

Question 19

Figure 10-19 
-Refer to Figure 10-19. Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 74th unit of the good is produced and consumed, social well-being
A) decreases by $2.40.
B) decreases by $1.60.
C) increases by $1.00.
D) increases by $1.40.

Accepted Answer

The answer of Figure 10-19 
-Refer to Figure 10-19. Note...

Question 20

Which of the following policies is not an example of a command-and-control policy?
A) subsidies
B) Pigovian taxes
C) tradable pollution permits
D) None of the above is an example of a command-and-control policy.

Accepted Answer

The answer of Which of the following policies is not...

Quiz 10: Externalities

Which of the following statements is true of both pollution permits and corrective taxes?

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-19 -Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States, in 2012 dollars, would be about

Which of the following is not a negative externality associated with driving cars?

The business activities of Firm A confer positive externalities on Firm B, and the business activities of Firm B confer positive externalities on Firm A. If the two firms merged, then

Taxes that are enacted to mitigate the effects of negative externalities are sometimes called

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be relabeled as

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external

Figure 10-19 -Refer to Figure 10-19. The socially optimal quantity of output is

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The tax depicted on the graph

Which of the following policies is an example of a command-and-control policy?

The tax on gasoline

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Which of the following policies is not an example of a command-and-control policy?

Quiz 10: Externalities

Which of the following statements is true of both pollution permits and corrective taxes?

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-19 -Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States, in 2012 dollars, would be about

Which of the following is not a negative externality associated with driving cars?

The business activities of Firm A confer positive externalities on Firm B, and the business activities of Firm B confer positive externalities on Firm A. If the two firms merged, then

Taxes that are enacted to mitigate the effects of negative externalities are sometimes called

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be re­labeled as

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external

Figure 10-19 -Refer to Figure 10-19. The socially optimal quantity of output is

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The tax depicted on the graph

Which of the following policies is an example of a command-and-control policy?

The tax on gasoline

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Which of the following policies is not an example of a command-and-control policy?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be relabeled as