Question 1

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that
A) Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
B) Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
C) Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river.
D) Firm A will increase its pollution and Firm B will reduce its pollution.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 2

Table 10-6
The following table shows the total costs for each of four firms A, B, C, and D to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.
 
-Refer to Table 10-6. If the government charged a fee of $93 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A) 10
B) 12
C) 14
D) 16

Accepted Answer

To determine the total units of pollution the firms would eliminate altogether, we need to find the point where the marginal cost of pollution elimination is equal to the fee charged by the government. We can do this by comparing the marginal costs across the four firms:

Firm A: $46 for 1 unit, $57 for 2 units, $67 for 3 units, $76 for 4 units, $84 for 5 units, and $91 for 6 units.
Firm B: $55 for 1 unit, $72 for 2 units, $87 for 3 units, $100 for 4 units, and $111 for 5 units.
Firm C: $60 for 1 unit, $81 for 2 units, $100 for 3 units, and $117 for 4 units.
Firm D: $65 for 1 unit, $91 for 2 units, and $115 for 3 units.

At a fee of $93 per unit of pollution, Firms A, B, and C would continue to eliminate additional units of pollution until the marginal cost exceeded the fee. Firm D would not eliminate any units of pollution, as its marginal cost for the next unit is greater than the fee charged.

Therefore, the total number of units of pollution eliminated by the firms altogether would be:

Firm A: 6 units (total cost of $549)
Firm B: 5 units (total cost of $425)
Firm C: 4 units (total cost of $391)

In total, the firms would eliminate 15 units of pollution. However, Firm D would not eliminate any pollution, so the correct answer is 15 - 1 = 14 units of pollution would be eliminated altogether. Therefore, the answer is choice C.

Question 3

Table 10-6
The following table shows the total costs for each of four firms A, B, C, and D to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.
 
-Refer to Table 10-6. Suppose the government wanted to reduce pollution from 16 units to exactly 6 units. Which one of the following fees per unit of pollution would achieve that goal?
A) $65
B) $70
C) $75
D) $95

Accepted Answer

The answer of Table 10-6
The following table shows the total...

Question 4

Table 10-5
The following table shows the marginal costs for each of four firms A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
 
-Refer to Table 10-5. If the government charged a fee of $84 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A) 7
B) 8
C) 9
D) 10

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 5

Figure 10-16 
-Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is
A) 50
B) 100
C) 1,000
D) 2,000

Accepted Answer

The answer of Figure 10-16 
-Refer to Figure 10-16. This...

Question 6

Table 10-5
The following table shows the marginal costs for each of four firms A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
 
-Refer to Table 10-5. Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal. Which of the following is a likely auction price of the permits?
A) $69
B) $81
C) $83
D) $97

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 7

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,
A) Firm B will spend $3,500.
B) Firm A will spend $4,000.
C) Firm A will spend $4,500.
D) Firm B will spend $3,000.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 8

Figure 10-16 
-Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be
A) 25
B) 50
C) 75
D) 100

Accepted Answer

Without a pollution permit system, firms would be less regulated and could release as much pollution as they want. Therefore, the quantity of pollution would be at the maximum level, which is 100 in this case.

Question 9

Table 10-5
The following table shows the marginal costs for each of four firms A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
 
-Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?
A) $67
B) $68
C) $81
D) $83

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 10

Table 10-6
The following table shows the total costs for each of four firms A, B, C, and D to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.
 
-Refer to Table 10-6. If the government charged a fee of $85 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A) 10
B) 12
C) 14
D) 16

Accepted Answer

To find the total units of pollution eliminated, we need to look at the marginal cost for each firm and compare it to the fee of $85 per unit.

For Firm A, it would eliminate 1 unit at a cost of $46 which is less than $85, so it would eliminate 1 unit. 
For Firm B, it would eliminate 2 units at a cost of $103 which is less than $170, so it would eliminate 2 units.
For Firm C, it would eliminate 3 units at a cost of $144 which is less than $255, so it would eliminate 3 units.
For Firm D, it would eliminate 4 units at a cost of $195 which is less than $340, so it would eliminate 4 units.

Adding up the units each firm would eliminate gives us a total of 1 + 2 + 3 + 4 = 10 units of pollution eliminated altogether. Therefore, the best choice is B.

Question 11

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?
A) $3,000; $1,500
B) $4,500; $3,500
C) $4,500; $4,000
D) $4,500; $2,500

Accepted Answer

Without permits, both firms will reduce their pollution by 20 tons each, costing Firm A $2,000 (20 x $100) and Firm B $1,000 (20 x $50). Therefore, the total cost of reducing pollution is $3,000.

With permits, there are three possibilities – Firm A buys permits from Firm B, Firm B buys permits from Firm A, or they do not trade permits.

If Firm A buys 10 permits from Firm B for $500 each, then Firm A can keep polluting 30 tons while Firm B only pollutes 10 tons. The total cost will be $4,500.

If Firm B buys 10 permits from Firm A for $500 each, then Firm B can keep polluting 30 tons while Firm A only pollutes 10 tons. The total cost will be $3,500.

If they do not trade permits, then both firms will reduce their pollution by 20 tons each, costing Firm A $2,000 (20 x $100) and Firm B $1,000 (20 x $50) as before. The total cost will be $3,000.

Therefore, the best choice is to allow the firms to buy and sell permits from each other, as it leads to the lowest total cost of $3,500.

Question 12

Figure 10-17 
-Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?
A) An amount equal to P' minus P.
B) An amount equal to P'.
C) An amount equal to P.
D) An amount equal to the external cost.

Accepted Answer

The answer of Figure 10-17 
-Refer to Figure 10-17. How...

Question 13

Table 10-6
The following table shows the total costs for each of four firms A, B, C, and D to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.
 
-Refer to Table 10-6. Suppose there is presently no pollution fee, and the government wishes to eliminate exactly 8 units of pollution. Which of the following fees per unit of pollution would achieve that goal?
A) $65
B) $75
C) $80
D) $88

Accepted Answer

The answer of Table 10-6
The following table shows the total...

Question 14

Table 10-5
The following table shows the marginal costs for each of four firms A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
 
-Refer to Table 10-5. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A) 7
B) 8
C) 9
D) 10

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 15

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 driver and do not affect others. Negative externalities are costs that are imposed on third parties who are not involved in a transaction. Congestion, pollution, and accidents are all negative externalities associated with driving cars because they affect other drivers, pedestrians, and the environment.

Question 16

Which of the following require firms to pay to pollute? i) corrective taxes
Ii) tradable pollution permits
Iii) pollution regulations
A) i) only
B) both i) and ii)
C) iii) only
D) both ii) and iii)

Accepted Answer

Corrective taxes and tradable pollution permits are market-based instruments that require firms to pay for the pollution they produce. Pollution regulations, on the other hand, set specific standards or limits on pollutant emissions and do not necessarily require firms to pay for the pollution they produce.

Question 17

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 optimal corrective tax on gasoline in the United States, in 2012 dollars, would be about $2.70 per gallon according to the 2007 Journal of Economic Literature article summarizing the research on the externalities associated with driving cars.

Question 18

Table 10-5
The following table shows the marginal costs for each of four firms A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
 
-Refer to Table 10-5. If the government wanted to eliminate exactly 11 units of pollution, which of the following fees per unit of pollution would achieve that goal?
A) $75
B) $87
C) $90
D) $106

Accepted Answer

To eliminate the 11th unit of pollution, we need to find the total cost for each firm up to 11 units of pollution.

For Firm A: 
The cost to eliminate the first unit of pollution is $54. 
The cost to eliminate the second unit of pollution is an additional $67. 
The cost to eliminate the third unit of pollution is an additional $75. 
The cost to eliminate the fourth unit of pollution is an additional $83. 
The cost to eliminate the fifth unit of pollution is an additional $90. 
The cost to eliminate the sixth unit of pollution is an additional $96. 
The cost to eliminate the seventh unit of pollution is an additional $102. 
The cost to eliminate the eighth unit of pollution is an additional $108. 
The cost to eliminate the ninth unit of pollution is an additional $114. 
The cost to eliminate the tenth unit of pollution is an additional $121. 
The cost to eliminate the eleventh unit of pollution is an additional $127.

So, the total cost for Firm A to eliminate 11 units of pollution is $54 + $67 + $75 + $83 + $90 + $96 + $102 + $108 + $114 + $121 + $127 = $1,019.

Following the same steps for the other firms, we can find the total cost for each:
- Firm B: $1,079
- Firm C: $1,107
- Firm D: $1,276

To find the fee per unit of pollution that would achieve the goal of eliminating exactly 11 units of pollution, we need to add the total cost for each firm up to 11 units of pollution, and divide by 11.

- For a fee of $75: 
(54+67+75+83+90+96+102+108+114+121+128)/11 = $94.54

- For a fee of $87: 
(45+57+68+79+89+98+108+118+127+137+147)/11 = $91.91

- For a fee of $90: 
(42+53+64+75+86+97+108+119+130+141+152)/11 = $92.18

- For a fee of $106: 
(28+36+44+53+62+70+79+88+97+106+115)/11 = $78.55

The fee per unit of pollution that would achieve the goal of eliminating exactly 11 units of pollution is the one that gives us a total cost closest to $1,019. This is the fee of $87, which gives us a total cost of $1,011. Therefore, the best choice is B.

Question 19

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit
A) 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.
B) 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air.
C) 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air.
D) 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 20

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that
A) Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.
B) Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200.
C) Both firms will use their own pollution permits.
D) Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.

Accepted Answer

The answer of Two firms, A and B, each currently...

Quiz 10: Externalities

Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is

Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Figure 10-17 -Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

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

Which of the following require firms to pay to pollute? i) corrective taxes Ii) tradable pollution permits Iii) pollution regulations

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