Externalities 2623
40.
Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further
suppose that the
local government offers a $7 per-shrub subsidy to planters. The number of shrubs
that are planted is then
a.
less than the socially optimal quantity.
b.
greater than the socially optimal quantity.
c.
equal to the socially optimal quantity.
d.
There is not enough information to answer the question.
41.
Suppose that candy producers create a positive externality equal to $1 per pound of candy.
Further suppose that the
government offers a $1-per-pound subsidy to the producers. What is the
relationship between the equilibrium
quantity and the socially optimal quantity of candy?
a.
The equilibrium quantity is greater than the socially optimal quantity.
b.
The equilibrium quantity is less than the socially optimal quantity.
c.
They are equal.
d.
There is not enough information to answer the question.
42.
Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the
government offers
a $9-per-shot subsidy to producers. What is the relationship between the
equilibrium quantity and the socially
optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
43.
Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the
government offers
a $6-per-shot subsidy to producers. What is the relationship between the
equilibrium quantity and the socially
optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
44.
Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the
government offers
a $11-per-shot subsidy to producers. What is the relationship between the
equilibrium quantity and the socially
optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
45.
Which of the following statements is not correct?
a.
Tradable pollution permits have an advantage over corrective taxes if the government is
uncertain as to the
optimal size of the tax necessary to reduce pollution to a specific level.
b.
Both corrective taxes and tradable pollution permits provide market-based incentives for firms
to reduce
pollution.
c.
Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix
the price of
pollution.
d.
Both corrective taxes and tradable pollution permits reduce the cost of environmental protection
and thus
should increase the public’s demand for a clean environment.
2626 Externalities
Figure 10–15
46.
Refer to Figure 10–15. Which graph illustrates a pollution permit program?
a.
the left graph
b.
the right graph
c.
both graphs
d.
neither graph
47.
Refer to Figure 10–15. Which graph illustrates a corrective tax?
a.
the left graph
b.
the right graph
c.
both graphs
d.
neither graph
48.
Refer to Figure 10–15. Which of the following is not necessary in order for the corrective tax
and pollution
permit to have equivalent effects?
a.
PB must be equivalent to the corrective tax.
b.
QA must be equivalent to the amount of pollution allowed to the pollution permit holders.
c.
The equilibrium price and quantity of pollution must be the same in both graphs.
d.
The amount of pollution emitted by each firm must be the same.
49.
Refer to Figure 10–15. The supply of pollution permits is
a.
elastic and represented by line A.
b.
inelastic and represented by line A.
c.
elastic and represented by line F
d.
inelastic and represented by line F.
50.
Which of the following statements is correct?
a.
Corrective taxes are often preferred over direct regulation because they typically reduce
externalities at a
lower cost.
b.
Corrective taxes distort economic incentives.
c.
Corrective taxes are often preferred over direct regulation because they typically reduce
externalities at a
faster rate.
d.
Both a and b are correct.
51.
Regulations to reduce pollution
a.
cause pollution levels to drop below the regulated amount.
b.
are a more costly solution to society than a corrective tax.
c.
allow firms with the lowest cost to reduce pollution by more than those with highest costs.
d.
are a better solution for the environment than a corrective tax.
52.
A corrective tax
a.
causes each factory to reduce pollution by the same amount.
b.
assigns a legal pollution limit for firms.
c.
places a price on the right to pollute.
d.
costs society more than pollution regulations.
53.
A corrective tax
a.
can be used to internalize a negative externality.
b.
imposed on sellers shifts the supply curve to the left.
c.
imposed on buyers shifts the demand curve to the left.
d.
All of the above are correct.
54.
Most economists prefer corrective taxes to regulation as a way to correct the problem of
pollution because
a.
the market-based solution is less costly to society.
b.
the market-based solution can result in a greater reduction in pollution.
c.
the market-based solution raises revenue for the government.
d.
All of the above are correct.
55.
In recent years, the Canadian province of British Columbia has increased its carbon tax. Which
of the following
statements is correct?
a.
Despite the increase in the carbon tax, emissions of greenhouse gases in British Columbia have
continued to
increase at a rapid rate.
b.
Along with the increase in the carbon tax, British Columbia has decreased income–tax rates on
individuals
and corporations.
c.
Few, if any, economists favor carbon taxes such as the one that British Columbia has imposed.
d.
All of the above are correct.
56.
Which of the following statements is correct?
a.
Taxes are more difficult to administer than regulations.
b.
Taxes provide incentives for firms to adopt new methods to reduce negative externalities.
c.
Command-and-control policies provide incentives for private decisionmakers to solve their
problems on their
own.
d.
Corrective taxes distort incentives.
57.
Which of the following is not an effective method of reducing negative externalities?
a.
relying on voluntary compliance
b.
taxing the output of industries that pollute
c.
creating legal environmental standards
d.
increasing public spending on cleanup and reduction of pollution
58.
What is the difference between command-and-control policies and market-based policies toward
externalities?
a.
Command-and-control policies provide incentives for private decision makers to solve the
problems on their
own, whereas market-based policies regulate behavior directly.
b.
Command-and-control policies rely on taxes, whereas market-based policies rely on quotas.
c.
Command-and-control policies regulate behavior directly, whereas market-based policies
provide incentives
for private decision makers to change their behavior.
d.
Command-and-control policies are efficient, whereas market-based policies are inefficient.
59.
In many cases selling pollution permits is a better method for reducing pollution than imposing a
corrective tax
because
a.
it is hard to estimate the market demand curve and thus charge the “right” corrective tax.
b.
selling pollution permits create a net increase in pollution.
c.
Corrective taxes distort incentives.
d.
Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.
60.
The difference between a corrective tax and a tradable pollution permit is that
a.
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
b.
a corrective tax creates a more efficient outcome than a permit.
c.
a corrective tax sets the quantity of pollution and a permit sets the price of pollution.
d.
a permit creates a more efficient outcome than a corrective tax.
61.
In some cases, tradable pollution permits may be better than a corrective tax because
a.
pollution permits allow for a market solution while a corrective tax does not.
b.
pollution permits generate more revenue for the government than a corrective tax.
c.
pollution permits are never preferred over a corrective tax.
d.
the government can set a maximum level of pollution using permits.
62.
Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain?
(i)
corrective taxes
(ii)
tradable pollution permits
(iii)
amendments to the Clean Air Act
a.
(i) only
b.
both (i) and (ii)
c.
(iii) only
d.
both (ii) and (iii)
63.
With pollution permits, the supply curve for pollution rights is
a.
perfectly elastic.
b.
perfectly inelastic.
c.
upward sloping.
d.
downward sloping.
64.
Tradable pollution permits
a.
are widely viewed as a cost-effective way to reduce pollution.
b.
have helped reduce carbon emissions.
c.
have helped reduce sulfur dioxide emissions.
d.
All of the above are correct.
65.
Tradable pollution permits
a.
have prices that are set by the government.
b.
will be more valuable to firms that can reduce pollution only at high costs.
c.
are likely to create a higher level of total pollution.
d.
are less desirable than corrective taxes in reducing pollution.
66.
Which of the following is not a characteristic of pollution permits?
a.
Prices are set by supply and demand.
b.
Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial
allocation.
c.
Real-world markets for pollution permits include sulfur dioxide and carbon.
d.
Firms for whom pollution reduction is very expensive are willing to pay more for permits than
firms for
whom pollution reduction is less expensive.
67.
When one firm sells its pollution permit to another firm,
a.
both firms benefit.
b.
the total amount of pollution remains the same.
c.
the total amount of pollution decreases.
d.
Both a and b are correct.
68.
Which of the following is an advantage of tradable pollution permits?
a.
Each firm is allowed to pollute exactly the same amount.
b.
Revenue from the sale of permits is greater than revenue from a corrective tax.
c.
The initial allocation of permits to firms does not affect the efficiency of the market.
d.
Firms will engage in joint research efforts to reduce pollution.
69.
Which of the following is a way to address an externality problem?
a.
command and control solution
b.
corrective tax
c.
corrective subsidy
d.
all of the above.
70.
Which of the following is a difference between corrective taxes and tradable pollution permits?
a.
Corrective taxes are a market-based solution while tradable pollution permits are a command-
and-control
policy.
b.
With a corrective tax the government sets the price of pollution; with tradable pollution permits,
demand and
supply set the price of pollution.
c.
With corrective taxes firms pay for pollution; with tradable pollution permits firms do not.
d.
Corrective taxes internalize the pollution externality while tradable pollution permits do not.
Figure 10–16
71.
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 price of pollution is
a.
$50
b.
$500
c. $1,000
d. $2,000
72.
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
73.
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
74.
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.
75.
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.
76.
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
77.
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.
78.
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.