Question 1

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 2

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 create a market incentive for firms to reduce pollution. This leads to a reduction in the quantity of pollution emitted, moving the market toward the socially optimal outcome. However, while corrective taxes set the price of pollution, pollution permits set the quantity of pollution. Both methods can be effective, but they differ in how they achieve the socially optimal outcome.

Question 3

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 creates an economic incentive for firms to reduce pollution by developing cleaner technologies.

Question 4

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...

Question 5

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 that would be set by the government in order to reduce the quantity of pollution to the socially optimal level. This is known as a corrective tax or a Pigouvian tax. Therefore, option C, "Price of pollution," is the best choice for the relabeled line.

Question 6

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 by making firms accountable for their pollution output. Both policies also require firms to pay for their pollution, either through purchasing permits or paying a tax. Additionally, both policies lead to the establishment of an equilibrium price of pollution in the market. Therefore, all of the statements are correct.

Question 7

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

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

Question 8

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 not by society as a whole. Congestion, pollution, and accidents, on the other hand, are negative externalities because they impose costs on others who are not driving the cars.

Question 9

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

Pigovian taxes are taxes that are designed to reduce the negative externalities caused by certain economic activities, such as pollution or overuse of natural resources. They are named after economist Arthur Pigou who first proposed the concept. These taxes are intended to encourage individuals and businesses to take actions that reduce the harmful effects of their activities on others, while also raising revenue for the government. Choice A, control taxes, and choice B, command levies, are not commonly used terms for this type of tax. Choice D, Marshallian taxes, refers to a different concept related to the taxation of consumer goods.

Question 10

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

This graph shows a positive externality, as the marginal social benefit (MSB) is higher than the marginal private benefit (MPB). Each additional unit produced brings a benefit to society that is not reflected in the cost to the producer. The difference between MSB and MPB is $36, so the answer is B. The best choice is to produce at the point where MSB intersects with the supply curve (where MPB equals marginal social cost), which is at a quantity of 6.

Question 11

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 per unit of the good that is produced is given by the difference between the social benefit and the private benefit. At an output of 5 units of the good, the social benefit is $60 and the private benefit is $24, so the external benefit is $36 (i.e. $60 - $24). Since each additional unit of the good that is produced yields an external benefit of $36, the best choice would be to increase output until the social cost equals the social benefit, which occurs at an output of 8 units. Therefore, the best choice would be to produce 8 units of the good.

Question 12

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

A tax on gasoline would act as a corrective device in a market with negative externalities, such as the negative impact of gasoline consumption on the environment and public health. By increasing the cost of gasoline, consumers would have an incentive to reduce their consumption, resulting in lower levels of pollution and other negative externalities. However, as with any tax, there would be some efficiency loss due to reduced consumer and producer surplus.

Question 13

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 14

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 15

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

By merging, the two firms would no longer be separate entities with positive externalities to each other. Instead, they would be able to coordinate their activities and fully internalize their externalities to each other. This would result in their respective markets moving closer to the social optimum, as the positive externalities would be fully accounted for in their decision-making processes.

Question 16

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 2007 Journal of Economic Literature article calculated the optimal corrective tax on gasoline in the United States at $2.70 per gallon in 2012 dollars.

Question 17

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 and social value are both $0. The private cost is $82.60 and the social cost is $54.00. The difference between the social value and the social cost is $33.60, which represents the increase in social well-being at this level of production and consumption. Therefore, the answer is C, $33.60.

Question 18

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 19

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 maximum level of pollution that factories may emit is an example of a command-and-control policy because it sets a specific regulation that factories must comply with, rather than providing incentives or market-based mechanisms. Subsidies and tradable pollution permits are examples of market-based mechanisms.

Question 20

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.

Quiz 10: Externalities

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

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

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 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

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

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 is not a negative externality associated with driving cars?

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

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. Each additional unit of the good that is produced yields an external benefit of

The tax on gasoline

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

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

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

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

Which of the following policies is 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. What is the appropriate label for the downward-sloping line on the graph?

Quiz 10: Externalities

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

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

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 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

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

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 is not a negative externality associated with driving cars?

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

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. Each additional unit of the good that is produced yields an external benefit of

The tax on gasoline

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

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

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

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

Which of the following policies is 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. 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 line labeled "Corrective tax" could accurately be relabeled as