Chapter 14—Environmental Economics
MULTIPLE CHOICE
1. Which of the following best describes social benefits?
a.
The external benefits to other members of society, ignoring the private benefits to market
participants.
b.
The sum of external benefits and private benefits.
c.
External benefits minus benefits.
d.
Private benefits minus external benefits.
2. The socially efficient level of output is determined where:
a.
marginal social cost equals marginal social benefit.
b.
marginal private cost equals marginal social benefit.
c.
average social cost equals average social benefit.
d.
average private cost equals average social benefit.
3. If firms pollute when they produce:
a.
marginal social cost equals marginal private cost.
b.
marginal private cost exceeds marginal social cost.
c.
marginal social cost exceeds marginal private cost.
d.
marginal social cost equals marginal external cost.
4. To maximize social welfare in the presence of a negative externality, marginal ____ must equal
marginal ____.
a.
social cost; private cost
c.
social cost; social benefit
b.
private cost; social cost
d.
private cost; social benefit
5. The optimal level of pollution is:
a.
the level at which the marginal social cost of air quality equals the marginal social benefit.
b.
the level at which the average social cost of air quality equals the average social benefit.
c.
the level at which the total social cost of air quality equals the total social benefit.
d.
zero.
6. At the market output and price for a good whose production causes pollution:
a.
pollution is eliminated.
b.
the marginal social cost of production exceeds the marginal social benefit of production
c.
the private cost of production equals the private benefit of production.
d.
the marginal social benefit of production equals the marginal social cost of production.
7. Economists view pollution as an economic problem that arises because:
a.
private enterprise always minimizes the amount of pollution produced.
b.
profitable firms rarely pollute.
c.
as the economy grows, the level of pollution declines.
d.
firms that pollute do not pay the full social cost of producing their output.
8. Firms that emit toxins into the air:
a.
underproduce because the private cost of production exceeds the social cost.
b.
overproduce because the social cost of production exceeds the private cost.
c.
produce the same as nonpolluting firms.
d.
produce at the socially optimal amount.
9. Private costs are:
a.
the full resource costs of an economic activity.
b.
always less than social costs.
c.
the costs of an economic activity borne by the producer.
d.
all of these.
10. A profit-maximizing firm will base its supply decisions on its marginal:
a.
private cost.
c.
external cost.
b.
social cost.
d.
transactions cost.
11. When negative externalities like pollution exist, competition leads to:
a.
a socially efficient outcome.
b.
too few goods being bought and sold.
c.
a market equilibrium price that is too high.
d.
more production than would be efficient.
12. People are unlikely to choose to pay extra for a low-emissions automobile, because they:
a.
do not fully understand the environmental benefits of lower emissions.
b.
are better off “free-riding” on others’ attempts to reduce emissions.
c.
would have to sacrifice fuel efficiency and automotive performance.
d.
cannot afford the extra expense of “green” technology.
13. The costs of an economic activity borne by the producers are:
a.
always less than social costs.
b.
the full resource costs of an economic activity.
c.
private costs.
d.
all of these.
14. Suppose a state discovered chemical compounds in their water. The source of these chemicals is the
waste discharges of industrial plants in another state. This is an example of a(n):
a.
market failure where the market price of the output of these industrial plants does not fully
reflect the social cost of producing these goods.
b.
external cost imposed by the industrial plants of another state.
c.
externality where the marginal social costs of producing these industrial goods differ from
the marginal private costs.
d.
all of these.
15. Negative externalities impose most of their costs:
a.
directly on consumers of polluting processes.
b.
whenever individual health is harmed in the production process.
c.
only in large cities.
d.
on individuals other than consumers of the polluting product.
16. Recently, the State of Tennessee discovered chemical compounds in their drinking water which may
cause cancer. Since Tennessee’s drinking water comes from the Pigeon River in North Carolina, the
source of these chemicals is the waste discharges of industrial paper plants in North Carolina. This is
an example of a(n):
a.
external cost imposed on the citizens of Tennessee by the industrial plants of North
Carolina.
b.
market failure where the market price of the output of these industrial plants does not fully
reflect the social cost of producing these goods.
c.
externality where the marginal social costs of producing these industrial goods differ from
the marginal private costs.
d.
all of these.
17. At the efficient level of pollution, the:
a.
total social costs and total social benefits of reduction are equal.
b.
marginal social costs and marginal social benefits are equal.
c.
marginal private costs and marginal private benefits are equal.
d.
total private costs and total private benefits are equal.
18. Negative externalities:
a.
are found only in large cities.
b.
occur whenever individual health is harmed in the production process.
c.
impose most of their costs directly on consumers of polluting processes.
d.
impose most of their costs on individuals other than consumers of the polluting product.
19. Which of the following best describes social costs?
a.
The external costs borne by other members of society, ignoring the private costs to market
participants.
b.
The sum of external costs and private costs.
c.
External costs minus private costs.
d.
Private costs minus external costs.
20. If some firms internalize their external costs by being a cleaner and more “environmentally friendly”
producers than other firms that do not, then which of the following offers the best and most complete
description of this situation?
a.
The environmentally friendly firm will be operating at a higher marginal and average cost
than those firms that shift some costs to society in the form of external costs.
b.
In a long-run competitive equilibrium in which consumers do not distinguish between
environmentally friendly and standard producers, the environmentally producers will
receive negative economic profits and be forced to change or exit.
c.
Without regulations requiring firms to internalize their external costs, producers can only
afford to be environmentally friendly if consumers reward them with a price premium.
d.
None of the above is correct.
21. When consumption of a good or service produces benefits or costs that are not reflected in the market
price for the good, this is known as a(n):
a.
externality.
c.
nonexcludable resource.
b.
common pool problem.
d.
public good.
22. All of the following are examples of negative externalities except one. Which is the exception?
a.
Water pollution.
c.
Second-hand smoke.
b.
Your roommate going on a diet.
d.
Loud conversation in the workplace.
23. As a general rule, if pollution costs are external, firms will produce:
a.
too little of a polluting good.
b.
too much of a polluting good.
c.
an optimal amount of a polluting good.
d.
cannot be determined without additional information.
24. From society’s point of view, the amount of air and water pollution that currently exists is excessive.
Which of the following statements are explanations of this excessive pollution?
a.
Firms that cause air and water pollution are not paying the full social costs of producing
their output.
b.
Consumers, who purchase goods from firms that pollute, are not paying a price for these
goods which totally reflect the social costs of producing the goods.
c.
Private property rights for clear air and clean water are not currently well defined by the
judicial system; hence private individuals cannot charge polluters for the external costs
these polluters impose on private individuals.
d.
All of these.
25. The environmental approach found in the Clean Air Act of 1990 is:
a.
marketable pollution permits.
c.
command-and-control regulation.
b.
price caps.
d.
a thousand points of light.
26. Which of the following is the environmental approach found in the Clean Air Act of 1990?
a.
Marketable pollution permits.
c.
Command-and-control regulation.
b.
Price caps.
d.
EPA marginal social permits.
27. If government taxes a firm which pollutes this will:
a.
increase the demand for the good produced.
b.
decrease the supply of the good produced.
c.
increase the equilibrium quantity of the good produced in the market.
d.
decrease the equilibrium price of the good produced in the market.
e.
all of these.
28. The pig farm industry is perfectly competitive. Which of the following is true?
a.
Since the industry is perfectly competitive, price and quantity are at the socially efficient
levels.
b.
The competitive price is higher and quantity lower than the socially efficient point.
c.
The competitive price is higher and quantity higher than the socially efficient point.
d.
The competitive price is lower and quantity higher than the socially efficient point.
29. If a good is produced up to the point where marginal social benefit equals marginal social cost, then:
a.
social welfare is maximized.
b.
the good is overproduced and the market is inefficient.
c.
firms are earning zero profits.
d.
all externalities have been eliminated.
30. Consider a competitive industry in which a “green” company uses a cleaner but costlier production
method than is used by other firms. In the long run, the “green” company will:
a.
earn more profit than will the typical firm in the industry.
b.
drive its competitors out of business.
c.
have economic losses and exit the industry.
d.
charge a higher-than-average price for its product.
31. According to most economists, reducing automobile emissions to zero would be:
a.
optimal.
c.
beneficial.
b.
inefficient.
d.
impossible.
32. Which of the following is not an obstacle to achieving environmental efficiency through markets?
a.
Transactions costs.
c.
Free-rider problems.
b.
Income effects.
d.
Private negotiations.
33. In a perfectly competitive industry, which of the following is true?
a.
The competitive price is higher and quantity higher than the socially efficient point.
b.
The competitive price is higher and quantity lower than the socially efficient point.
c.
Since the industry is perfectly competitive, price and quantity are at the socially efficient
levels.
d.
The competitive price is lower and quantity higher than the socially efficient point.
34. The ozone layer:
a.
protects us from ultraviolet rays which can cause cancer and blindness.
b.
has been damaged as a result of the Montreal Protocol.
c.
has been damaged as a result of the ban on CFCs.
d.
is another term for the greenhouse effect.
35. From an economic perspective, the socially best amount of pollution control is that amount in which:
a.
there is zero pollution.
b.
the private plus external marginal costs are equal to the private plus external marginal
benefits.
c.
the private plus external marginal costs are less than the private plus external marginal
benefits.
d.
the private marginal costs are equal to the private marginal benefits.
e.
the external costs equal the external benefits.
36. From an economic viewpoint, the optimal amount of pollution:
a.
is zero since all pollution imposes costs on society.
b.
is that amount which firms create when they maximize economic profits by setting their
marginal private costs equal to market price.
c.
is that amount where the marginal social costs of producing a good precisely equals the
price of the good.
d.
b and c are correct.
37. Command-and-control regulation, as compared to incentive-based regulation, is:
a.
efficient in the short run and in the long run.
b.
efficient in the short run, but not in the long run.
c.
inefficient in the short run, but efficient in the long run.
d.
inefficient in the short run and long run.
38. Command-and-control legislation, as compared to incentive-based regulation:
a.
encourages the use of comparative advantage in the short run, and the development of new
technology in the long run.
b.
encourages the use of comparative advantage in the short run, but discourages the
development of new technology in the long run.
c.
discourages the use of comparative advantage in the short run, but encourages the
development of new technology in the long run.
d.
discourages the use of comparative advantage in the short run, and discourages the
development of new technology in the long run.
39. Solar vehicles that operate on photovoltaic cells:
a.
are economically efficient today as compared to gasoline vehicles.
b.
are not economically efficient because they create greater negative externalities than
gasoline vehicles.
c.
are not economically efficient even though they create fewer negative externalities than
gasoline vehicles.
d.
should be subsidized by government so that they cost less than gasoline automobiles.
40. When using the traditional command-and-control approach to environmental regulation, the
government attempts to:
a.
set a minimum requirement and then allows the firm to determine the most efficient
method for achieving this requirement.
b.
determine the most efficient method for different industries.
c.
make allowances for differences across industries and between firms.
d.
set standards that are applicable to all situations and does not recognize unique
circumstances.
41. An example of the command-and-control approach to environmental policy is:
a.
placing a tax on freon to reduce its use and the corresponding CFC emissions (which
contribute to the ozone hole).
b.
requiring car producers to install new air conditioners that do not use freon.
c.
allowing coal producers to buy and sell permits to allow CFC emissions.
d.
allowing individuals to sue freon producers if CFC emissions exceed a government-set
standard.
42. Government regulations that set an environmental goal and dictate how the goal will be achieved are
called:
a.
effluent-offset regulations.
c.
Coasian regulations.
b.
incentive-based regulations.
d.
command-and-control-regulations.
43. Which of the following is the best example of a command-and-control regulation?
a.
Effluent taxes on pollutants.
b.
Emissions trading.
c.
Requiring automobiles to have catalytic converters.
d.
Offset programs.
44. An example of the command-and-control approach to environmental policy is:
a.
allowing individuals to sue freon producers if CFC emissions exceed a government-set
standard.
b.
allowing coal producers to buy and sell permits to allow CFC emissions.
c.
placing a tax on freon to reduce its use and the corresponding CFC emissions (which
contribute to the ozone hole).
d.
none of these.
45. Which of the following statements is true?
a.
Competitive markets result in the socially efficient price and quantity when externalities
exist.
b.
Command-and-control regulations set an environmental goal and dictate how the goal will
be achieved.
c.
Economists prefer command-and-control regulations to incentive-based pollution
programs.
d.
An effluent tax is a tax imposed on rich people.
Exhibit 14-1 Private and social cost
46. The perfectly competitive profit-maximizing firm in Exhibit 14-1 creates water and air pollution as a
consequence of producing its output of pigs. If pollution costs are borne by third parties, the firm will
maximize economic profit by choosing to:
a.
voluntarily incur costs to reduce its pollution.
b.
produce at output rate Q3.
c.
produce at output rate Q2.
d.
produce at output rate Q4.
47. Use Exhibit 14-1 to answer the following question. To maximize social welfare, the firm should
produce at the output rate:
a.
zero.
c.
Q3.
b.
Q2.
d.
Q4.
48. A government passes a new law allowing only 1,000 tons of pollution per day to be generated and
simultaneously sells 1,000 transferable rights to emit one ton each of pollution per day. Which of the
following is true?
a.
The pollution will be created by those least willing and able to pay the damages.
b.
The pollution will be created by those most willing and able to pay for the right to pollute.
c.
The funds collected by the government will be enough to compensate any individuals
harmed by the pollution.
d.
Pollution will increase from zero to 1,000 units per day.
49. Markets for pollution rights:
a.
have never been tried in the United States.
b.
assign property rights to those who value them least.
c.
allow the government to assign property rights.
d.
enable those who value them most to pollute.
50. Incentive-based regulatory approaches:
a.
are viewed favorably by most economists as a way to control pollution.
b.
provide less flexibility than the command-and-control approach.
c.
tend to hurt wealthier people more than poor people.
d.
require that the government specify certain types of pollution control technology that firms
must adopt.
51. A pollution tax is:
a.
a positive externality used to offset a negative one
b.
a price per unit of discharge of pollution
c.
a tax on pollution control equipment
d.
itself a form of negative externality
52. In order to increase society’s total welfare (social efficiency), a production process that produces a
negative externality should be:
a.
taxed.
c.
ignored.
b.
provided by the government.
d.
subsidized.
53. A government policy that charges coal producers a fee per ton of coal produced (an “effluent charge”),
where the fee is determined by the amount of pollutants discharged into the air or water, will lead to
a(n):
a.
decrease in the market equilibrium quantity of coal produced.
b.
decrease in the market equilibrium price of coal.
c.
increase in the market equilibrium price of coal.
d.
a and c are correct.
54. Incentive-based regulations:
a.
set an environmental goal, but are flexible on how to achieve the goal.
b.
obtain more efficiency gains is obtainable from CAC regulations.
c.
effluent taxes are an example of incentive-based regulations.
d.
all of the above are true.
e.
none of the above are true.
55. In order to achieve social efficiency, the size of an effluent tax should be based on:
a.
the external cost created by the pollutant.
b.
people’s willingness to pay for a cleaner environment.
c.
the expense of installing new “green” equipment.
d.
the number of free riders in the industry.
56. Which of the following is not a reason why marketable permits may fail to achieve efficiency?
a.
Some firms can reduce emissions at a lower cost than other firms.
b.
A market with a small number of buyers and sellers.
c.
Imperfect information exists on the value of a permit.
d.
There are concerns about the value of permits in the future.
57. Suppose a firm wants to build a new factory that would add pollution to an already polluted area.
Under an offset program, the firm must:
a.
install scrubbers and other government-mandated equipment.
b.
purchase pollution permits from the government.
c.
reduce or eliminate an old pollution source in the area.
d.
pay a tax which depends on the amount of pollution created.
58. Which of the following statements is true?
a.
Emissions-trading is trading that allows firms to buy and sell the right to pollute.
b.
The Coase Theorem is the proposition that private markets can rarely ever achieve social
efficiency.
c.
The free-rider problem refers to those who ride on public transit systems without paying.
d.
Government failure has never occurred in the United States.
59. Tennessee emits sulfur dioxide that flows into North Carolina. In meeting sulfur emissions regulations,
the Tennessee Valley Authority (TVA), which produces electricity, buys sulfur emission permits from
Wyoming. The resulting hot spot problem is:
a.
The citizens of Wyoming will experience higher sulfur emissions as a result of the
emissions trading program.
b.
The citizens of Wyoming will experience lower sulfur emissions as a result of the
emissions trading program.
c.
The citizens of Tennessee will pay more to reduce sulfur emissions than if the government
used a command-and-control approach.
d.
The citizens of North Carolina will suffer higher emissions as a result of the emissions
trading program.
60. The hot spot problem is:
a.
the U.S. obtains the majority of its oil supplies from politically unfriendly countries.
b.
some air pollutants such as sulfur dioxide have a greater effect nearby than further away.
c.
some air pollutants such as carbon dioxide have an equal effect nearby and further away.
d.
nuclear plants heat up nearby water, causing a decline in the native fish population.
Exhibit 14-2 Cigarette smoking data
Jack enjoys smoking, while Jill fears that second-hand smoke will shorten her life. The following table
shows the value Jack places on each cigarette he smokes, and the value Jill places on her shortened
life. Use the table to answer the following question(s):
Days of life lost
1
2
3
4
5
61. As shown in Exhibit 14-2, if smokers have the right to smoke as many cigarettes as they wish, and
non-smokers have the right to negotiate, how many cigarettes will Jack smoke?
a.
1.
c.
5.
b.
3.
d.
more than 5.
62. As shown in Exhibit 14-2, if non-smokers have a right to a smoke-free environment, and smokers have
the right to negotiate, how many days of life will Jill lose?
a.
0.
c.
3.
b.
1.
d.
5.
63. As shown in Exhibit 14-2, what is the socially efficient number of cigarettes?
a.
0.
c.
3.
b.
1.
d.
5.
64. Factors that prevent the Coase Theorem from working include all of the following, except:
a.
private property rights.
c.
income effects.
b.
transaction costs.
d.
more than two individuals affected.
Exhibit 14-3 Impact of flights on house value
Each time Orville flies over Wilber’s house, the noise reduces the value of Wilbur’s house. The table
shows the profits to Orville of each flight, and the value of Wilbur’s house.
Number
of flights
Total
profits
Marginal
profits
Value of Wilbur‘s
house
1
$10,000
$10,000
$100,000
2
18,000
8,000
95,000
3
24,000
6,000
90,000
4
28,000
4,000
85,000
5
30,000
2,000
80,000
65. As shown in Exhibit 14-3, if Orville has the property right to fly over Wilbur’s house, but Wilbur is
allowed to negotiate with Orville on the number of flights, what will be the number of flights?
a.
2.
c.
4.
b.
3.
d.
5.
66. As shown in Exhibit 14-3, if Wilbur has the property right to have no planes flying over his house, but
Orville is allowed to negotiate with Wilber, what will be the number of flights?
a.
2.
c.
4.
b.
3.
d.
5.
67. As shown in Exhibit 14-3, at the socially efficient number of flights, what will be the market value of
Orville’s house?
a.
$100,000.
c.
$90,000.
b.
$95,000.
d.
$85,000.
68. The Coase theorem says that, if the appropriate property right is assigned to ____, an efficient solution
to an externality problem will be achieved.
a.
the party causing the externality
b.
the victim of the externality
c.
the party that can avoid the externality at the higher cost
d.
either one of the parties involved
69. According the Coase Theorem, the private sector can achieve social efficiency if the government:
a.
establishes and enforces property rights.
b.
imposes taxes to serve as proxies for external costs.
c.
set rigorous environmental standards.
d.
encourages competition with antitrust laws.
70. Ronald Coase’s analysis of externalities emphasizes the importance of:
a.
command-and-control regulations.
c.
property rights.
b.
effluent taxes.
d.
international sovereignty.
71. Transactions costs are defined to be the costs of:
a.
negotiating and enforcing contracts.
b.
complying with environmental regulations.
c.
eliminating market and government failures.
d.
finding and obtaining offsets.
72. According to Garrett Hardin’s view of The Tragedy of the Commons:
a.
Externalities will be internalized by the market.
b.
Individuals will use the commons up to the point where marginal benefits equal marginal
social costs.
c.
Individuals will create institutions to prevent the collapse of the commons.
d.
Individual will use the commons beyond the socially efficient point.
73. According to Elinor Ostrom’s view of The Tragedy of the Commons:
a.
The only way to prevent the collapse of the commons is government intervention.
b.
The only way to prevent the collapse of the commons is to privatize the commons so that
it is owned by a single individual.
c.
Individuals will create institutions to prevent the collapse of the commons.
d.
Individuals will use the commons beyond the socially efficient point.
TRUE/FALSE
1. The social marginal cost curve is higher than the private marginal cost curve.
2. Competitive firms consider private costs, but disregard external costs, when making their economic
decisions.
3. When externalities exist, economic efficiency is achieved when marginal private benefit equals
marginal private cost.
4. Reducing pollution to zero emissions would be socially efficient.
5. A pollution tax that is exactly equal to marginal external cost will shift the market supply curve to the
social-cost supply curve. This tax will thus correct the market inefficiency due to negative externalities
by causing price to reflect the full marginal cost of production.
6. The economically efficient car is the one with the lowest emissions.
7. A totally pollution free environment should be a primary social goal.
8. Zero pollution represents an efficiency standard.
9. Requiring cars in Los Angeles to reduce pollution by the same amount as cars in Topeka is inefficient.
10. Voluntary programs are dependable ways to protect the environment.
11. The agency in charge of environmental law is the Environmental Protection Agency.
12. A totally pollution free environment should not be a primary social goal.
13. Requiring cars in Chicago to reduce pollution by the same amount as cars in Topeka is efficient.
14. In the long run, command-and-control (CAC) regulations encourage firms to develop new technology
to lower future emissions.
15. Incentive-based regulations tend to be more efficient than command-and-control regulations.
16. Emission permits allow producers to pollute an unspecified amount.
17. Emission permits allow producers to pollute a specified amount.
18. Effluent taxes are the most common approach used to control pollutants in the United States.
19. Effluent taxes are not the most common approach used to control pollutants in the United States.
20. The Coase Theorem states that the public sector can achieve environmental efficiency, as long as
property rights are clearly assigned.
21. The Coase Theorem states that there is different ways to assign property rights if the private sector is
to achieve environmental efficiency.
22. Combating the “greenhouse effect” does not create classic free-rider problems.
23. The Coase Theorem states that the private sector can achieve environmental efficiency, as long as
property rights are clearly assigned.
24. The Coase Theorem states that there is a single unique way to assign property rights if the private
sector is to achieve environmental efficiency.
25. Combating the “greenhouse effect” has classic free-rider problems.
ESSAY
1. Compare market price and quantity to socially optimal price and quantity if hog farmers ignore the
polluting effect of hog waste on nearby waterways. Use a graph to assist in your explanation.
2. Explain why companies that choose low-pollution technologies will find it hard to survive in a
competitive industry.
3. Cite an advantage and a disadvantage for command-and-control vs. incentive-based approaches. Then
do the same for environmental taxes vs. emissions trading.
4. There is a concern that carbon emissions that are a byproduct of the burning of coal and other fuels
contributes to global warming. One proposed solution is to tax the use of these fuels based on their
carbon content. The following table gives information on the demand and supply of coal:
Price ($/ton)
400
358
300
250
200
Quantity demanded
10
12
14
16
18
Quantity supplied
18
16
14
12
10
What will be the free-market price and quantity, and what will be the price and quantity if the
government requires suppliers to pay a $100 tax for each ton of coal produced?