Question 1

Government intervention will not be necessary when voluntary contracting internalizes an externality. Which of the following is NOT a necessary condition for this to occur?

Accepted Answer

Large numbers of individuals involved in the transactions can actually make it more difficult for voluntary contracting to internalize an externality, as coordinating and reaching an agreement between a large number of parties can be costly and time-consuming. Therefore, having a smaller number of parties involved can facilitate the process of internalizing an externality. The other options are necessary conditions for voluntary contracting to internalize an externality.

Question 2

Common property ownership most likely leads to

Accepted Answer

Common property ownership often leads to an increase in externalities because individuals do not bear the full cost of their actions, leading to overuse or misuse of resources.

Question 3

When no property rights exist

Accepted Answer

Without property rights, there is no clear ownership of common property and therefore no economic incentive for individuals to care for or maintain it. This can lead to an externality, such as overuse or degradation of the resource, that harms the broader community.

Question 4

One difficulty in using voluntary transactions to internalize externalities is that

Accepted Answer

Transaction costs of coming to an agreement can be very large when numerous people are involved. This can make it difficult to negotiate and complete voluntary transactions that internalize externalities.

Question 5

Common property is

Accepted Answer

Common property refers to a resource that is available to everyone to use as much as they want, for example, air, water, or fish in the sea.

Question 6

All the costs associated with making, reaching, and enforcing agreements are called

Accepted Answer

Transaction costs refer to all the costs incurred in the process of making, reaching, and enforcing agreements. These costs can include legal fees, negotiation costs, communication costs, and other administrative costs. Private costs refer to the costs directly incurred by the individuals or firms involved in an agreement, while social costs refer to the total costs to society as a whole, including externalities. Opportunity costs refer to the benefits foregone by pursuing one choice over another.

Question 7

Explain how a market for pollutant emission allowances can induce firms to reduce the amount of emissions.

Accepted Answer

The answer of Explain how a market for pollutant emission...

Question 8

The costs associated with reaching and enforcing agreements are called

Accepted Answer

Transaction costs refer to the costs that are incurred in the process of negotiating, monitoring, and enforcing agreements. These costs could include legal expenses, negotiation expenses, and monitoring expenses. Private property costs refer to the costs of establishing and enforcing private property rights, while common property costs refer to the costs associated with managing and regulating common-pool resources. Public costs refer to the costs incurred by society as a whole, such as taxes and subsidies. Therefore, the best choice is C) transaction costs.

Question 9

Which of the following would be viewed as a common property problem?

Accepted Answer

The picking of flowers in a public park is an example of a common property problem, where individuals overuse or exhaust a shared resource without considering the negative impact on others. The other options are not related to common property problems as they relate more to individual property rights and security.

Question 10

Transaction costs are

Accepted Answer

Transaction costs refer to the costs associated with making, reaching, and enforcing agreements. These costs include the costs of negotiating a deal, drafting contracts, and monitoring and enforcing compliance with the terms of the agreement. They also include the costs of information search, due diligence, and monitoring the performance of the other party. Despite not involving direct expenditure of money, transaction costs are significant because they represent the real resources expended in order to facilitate and maintain economic activity.

Question 11

The exclusive rights of ownership that allow the use, transfer, and exchange of property are called

Accepted Answer

Private property rights refer to the exclusive rights of ownership that allow the use, transfer, and exchange of property. Common property rights refer to shared ownership or access to property, while transaction costs refer to the costs associated with exchanging property. Social benefits refer to the positive effects that property ownership and use may have on society.

Question 12

Which of the following is TRUE of the cap-and-trade program in the United States?

Accepted Answer

The state of California began a cap-and-trade program in 2013. Option B is incorrect as the United States did not participate in the Kyoto Protocol, which was established in 1997. Option C is incorrect as no state had implemented a cap-and-trade program before the Kyoto Protocol in 2005. Option D is incorrect as several other states besides Texas have not implemented a cap-and-trade program.

Question 13

If pollution is bad, why do we still use pollution-causing resources such as coal and oil to generate electricity?

Accepted Answer

While pollution is certainly a concern, the cost of using alternative, non-polluting resources to generate power is often significantly higher than relying on traditional, pollution-causing sources like coal and oil. Until these alternative resources become more affordable and cost-efficient, many governments and industries will continue to rely on the cheaper, but more polluting options.

Question 14

Buffalo in the United States almost became extinct while cattle have never been close to extinction. The difference is due to

Accepted Answer

The primary reason buffalo almost became extinct while cattle did not is due to the use of private property rights on cattle, which provided incentives for their preservation and sustainable management, whereas buffalo were subject to common property rights, leading to overexploitation and near extinction.

Question 15

With defined property rights, an externality

Accepted Answer

When property rights are well-defined, it may be possible for parties to negotiate and arrive at a mutually beneficial agreement to internalize the externality. This can be done through voluntary contracting, such as bargaining or the creation of Coasean bargaining. Therefore, option C is the correct answer. Options A, B, and D are incorrect because government intervention may not always be necessary, a misallocation of resources can still occur, and externality does not necessarily lead to production inside the production possibilities frontier.

Question 16

Economic theory suggests that if natural resources can be held as private property, then

Accepted Answer

When natural resources are held as private property, the owners have an incentive to manage and conserve them appropriately so that they can continue to reap benefits from them in the long run. This is because the owners have a direct stake in the economic value of the resource and would want to maximize its benefits over time. This aligns with the basic principles of economic theory, which suggest that private ownership leads to better management and conservation of resources. Therefore, option B is the correct answer.

Question 17

When negative externalities exist, a voluntary agreement can be negotiated. Which of the following statements is TRUE?

Accepted Answer

Transactions costs play a key role in determining the feasibility of voluntary agreements. If transactions costs are low relative to the benefits of reaching an agreement, then voluntary agreements are more likely to work. However, if transactions costs are high, then the cost of reaching an agreement may outweigh the benefits, making it less likely that an agreement will be reached. The other statements are false.

Question 18

A farmer notices that a neighboring rancher's cattle are wandering and destroying some of his crops. The farmer decides to offer a payment to the rancher if the rancher will reduce the size of his herd. By doing so, the farmer

Accepted Answer

By offering a payment to reduce the size of the herd, the farmer is indicating to the rancher that there is an opportunity cost to the wandering of the cattle, and thereby internalizing the externality. This can lead to more efficient use of resources and a reduction in harm to the farmer's crops.

Question 19

"Creating a free market for carbon-dioxide emission permits would only encourage firms to pollute more." Do you agree or disagree? Why?

Accepted Answer

The answer of "Creating a free market for carbon-dioxide emission...

Question 20

Private property rights involve

Accepted Answer

Private property rights include exclusive rights to use, transfer, and exchange the property. This means that the owner has complete control and decision-making power over their property, including the ability to sell, lease, or mortgage it. These rights are considered a fundamental aspect of a capitalist economy and are protected by law.

Quiz 31: Environmental Economics