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Page 1
1.
A market economy will produce _____ without any government regulation.
A)
too little pollution
B)
too much pollution
C)
the socially optimal amount of pollution
D)
the amount of pollution that maximizes total surplus
2.
A negative externality:
A)
is any cost above the economic cost.
B)
equals the social cost plus the firm's private cost.
C)
is an uncompensated cost imposed by an individual or firm on others.
D)
equals the opportunity cost minus the social costs.
3.
Which of the following is NOT an activity that generates an externality?
A)
Bob's Service Station dumps used oil in the river.
B)
Bob renovates a run-down house in the neighborhood.
C)
Bob occasionally drives while drunk.
D)
Bob's Service Station donates a car to charity.
4.
Which of the following is an activity generating a negative externality?
A)
You buy a new car, then discover it needs a new transmission.
B)
Your next-door neighbor mows the lawn at 6 A.M.
C)
The only two coffee shops in town conspire to raise prices.
D)
After Jane bought health insurance, she began racing motorcycles on the weekends.
5.
If drivers decide to make phone calls without considering the costs imposed on others,
the:
A)
number of phone calls made while driving will be more than the socially optimal
quantity.
B)
number of phone calls made while driving will be fewer than the socially optimal
quantity.
C)
marginal social cost curve will lie below the marginal cost of production curve.
D)
marginal social benefit curve will lie below the marginal social cost curve.
Page 2
6.
Which of the following is a negative externality?
A)
high prices for necessities such as drinking water in the aftermath of a natural
disaster
B)
the risks to nonsmokers from second-hand smoke
C)
the increased risk of a traffic accident to an individual who uses a cell phone while
driving
D)
unemployment in the steel industry caused by low prices of imported (external)
steel
7.
An externality is said to exist when:
A)
individuals impose costs or benefits on others but have no incentive to take these
costs and benefits into account.
B)
individuals impose costs or benefits on others, and the market provides incentives
to take these costs and benefits into account.
C)
individual actions are affected by external forces like the loss of U.S. jobs because
of competition from abroad.
D)
individual actions are affected by government policies (such as taxes) that are
externally imposed on the market.
8.
If an activity generates external costs, the decision makers generating the activity will:
A)
be faced with its full costs.
B)
be faced with no costs.
C)
not be faced with its full costs.
D)
be faced with excessive costs.
9.
A coal-powered electrical generator that discharges smoke into the air and causes
uncompensated costs and discomfort to residents of a town has a(n):
A)
quasi-public good.
B)
external cost.
C)
external benefit.
D)
specific tax.
10.
Whenever human activity generates a concentration of a substance in the environment
sufficient to cause harm to living things, it is called:
A)
a free good.
B)
an external shock.
C)
a result of human greed.
D)
pollution.
Page 3
11.
Damage to the environment occurs because:
A)
most businesses just don't care about the environment.
B)
consumers want goods and services at the lowest prices no matter what other costs
may be incurred.
C)
pollution results from production of goods and services.
D)
pollution reduces the social cost of production.
12.
Activities that generate external costs will likely be carried out at levels that _____ those
that would be efficient.
A)
are equal to
B)
are less than
C)
exceed
D)
compete with
13.
All of the following are examples of an external cost EXCEPT:
A)
the smoke nuisance of a factory.
B)
zoning restrictions on your property.
C)
land defilement from strip mining.
D)
weeds on your next-door neighbor's lawn.
14.
An industry with production that generates external costs produces a quantity of output
that is:
A)
socially optimal.
B)
smaller than the socially optimal quantity.
C)
larger than the socially optimal quantity.
D)
socially optimal if a specific subsidy is given to buyers.
15.
Which of the following best describes a negative externality?
A)
Your neighbor loves to bake bread and always brings you a loaf fresh and hot from
the oven.
B)
Your neighbor has an ornamental pond that breeds mosquitoes.
C)
Your neighbor has invested in beautiful landscaping, increasing the value of all of
the houses on the block.
D)
Your neighbor has a pool and has given you an open invitation to come over and
swim.
Page 4
16.
A plastics manufacturing plant dumps pollution into the Big River. This leads to higher
costs and disruption for fishermen on the river, for which they are not compensated. In
this situation:
A)
too little of society's resources is being used to produce plastic.
B)
too much of society's resources is being used to produce plastic.
C)
the ideal amount of society's resources is being used to produce plastic.
D)
there is an external benefit to society from plastic production.
17.
Given the general agreement that pollution is undesirable and social welfare is increased
by reducing pollution, the optimal level of pollution in a society is:
A)
zero.
B)
the level that reduces the marginal social costs of pollution to zero.
C)
the level at which the marginal social cost is equal to the marginal social benefit.
D)
the level that minimizes the average total cost of producing the product that
generates the pollution.
18.
The socially optimal amount of pollution occurs where the marginal social benefit of
pollution is _____ the marginal social cost of pollution.
A)
equal to
B)
greater than
C)
less than
D)
There is no socially optimal amount of pollution.
19.
The marginal social benefit of pollution:
A)
is zero, since pollution is not beneficial.
B)
can be measured as the additional gain to society from one additional unit of
pollution.
C)
is easy to estimate, since polluters are required to file this information in their tax
returns.
D)
is equal to the marginal social cost of pollution, since benefits to producers are
equal to costs to consumers.
20.
Pollution has _____ and _____.
A)
no benefits; only costs
B)
benefits; costs
C)
no opposition; only advocates
D)
short-term effects; very little long-term effect
Page 5
21.
There are benefits resulting indirectly from pollution because:
A)
we obtain goods and services we enjoy even though in the process we pollute.
B)
firms pollute the environment only if it allows them to provide people with goods
and services they desire at a higher cost.
C)
businesses and consumers receive a perverse satisfaction from polluting.
D)
it can often be beneficial to wildlife.
22.
The additional cost imposed on society as a whole by an additional unit of pollution is:
A)
the marginal social benefit of pollution.
B)
the marginal social cost of pollution.
C)
the optimal Pigouvian tax.
D)
a technology spillover.
23.
The efficient level of pollution is the quantity at which:
A)
its total benefits exceed its total costs to society by the greatest possible amount.
B)
its total benefits to society equal its total costs to society.
C)
the marginal social benefit of an additional unit of pollution is greater than the
marginal social cost of the additional unit.
D)
the marginal social benefit of an additional unit of pollution is less than the
marginal social cost of the additional unit.
24.
The efficient quantity of pollution emissions occurs where:
A)
there is absolutely no damage done to a pristine environment.
B)
government forces zero pollution to occur, no matter what the cost.
C)
the marginal social benefits of pollution exceed the marginal social costs of
pollution.
D)
the marginal social benefit of pollution is equal to the marginal social cost of
pollution.
25.
As the quantity of pollution rises, its marginal social cost:
A)
remains constant.
B)
falls.
C)
rises.
D)
rises at first but eventually falls.
26.
The socially optimal quantity of pollution is:
A)
zero.
B)
the quantity whose marginal social cost is equal to zero.
C)
the quantity whose marginal social benefit is equal to zero.
D)
the quantity whose marginal social cost is equal to the marginal social benefit.
Page 6
27.
The marginal social cost of pollution rises as the quantity of pollution emissions:
A)
remains constant.
B)
falls.
C)
rises.
D)
rises but subsequently gradually falls.
28.
The marginal benefit of pollution emissions _____ as the quantity of pollution emissions
_____.
A)
decreases; increases
B)
increases; increases
C)
decreases; decreases
D)
remains unchanged; goes up or down
29.
The marginal social benefit from pollution _____ as the quantity of pollution emissions
_____.
A)
remains constant; increases
B)
decreases; increases
C)
increases; increases
D)
remains constant; decreases
30.
The efficient rate of emissions occurs when:
A)
there is absolutely no damage done to a pristine environment.
B)
government forbids all pollution no matter what the cost.
C)
the marginal social benefits of pollution exceed the marginal social costs of
pollution.
D)
the change in social benefits and the change in social costs due to an additional unit
of emissions are equal.
31.
The marginal social cost of pollution emissions _____ as the quantity of pollution
emissions _____.
A)
decreases; increases
B)
increases; increases
C)
increases; decreases
D)
remains constant; decreases
Page 7
32.
If at the current amount of pollution, its marginal social benefit is greater than its
marginal social cost:
A)
there is too little pollution.
B)
there is too much pollution.
C)
society is achieving the optimal amount of pollution.
D)
the externality is minimized.
33.
A copper mining operation discharges waste products into a river and causes higher
costs and discomfort to downstream users of the water for which they are not
compensated. In this case:
A)
too little of society's resources is being used to produce copper.
B)
too much of society's resources is being used to produce copper.
C)
the optimal amount of society's resources is being used to produce copper.
D)
there is an external benefit to society from copper production.
34.
If the marginal social benefit received from pollution is equal to its marginal social cost:
A)
society's well-being can be improved if the quantity of pollution increases.
B)
society's well-being can be improved if the quantity of pollution decreases.
C)
society has achieved its socially optimal level of pollution.
D)
the market is producing too much pollution.
35.
If the marginal social benefit received from pollution is less than its marginal social
cost:
A)
society's well-being can be improved if the quantity of pollution increases.
B)
society's well-being can be improved if the quantity of pollution decreases.
C)
society has achieved its socially optimal level of pollution.
D)
the market is producing too little pollution.
36.
The marginal social benefit received from pollution is equal to its marginal social cost in
the market for highly polished glass. In this situation:
A)
society's well-being can be improved if the quantity of pollution decreases.
B)
firms in the market produce too much pollution.
C)
firms in the market produce too little pollution.
D)
firms in the market produce the socially optimal level of pollution.
Page 8
37.
The marginal social benefit received from pollution is less than its marginal social cost
in the market for highly polished glass. In this situation:
A)
firms in the market produce the socially optimal level of pollution.
B)
society's well-being cannot be improved by changing the quantity of pollution.
C)
firms in the market produce too much pollution.
D)
firms in the market produce too little pollution.
38.
If the marginal social benefit received from pollution is greater than its marginal social
cost in a market:
A)
society's well-being can be improved if the quantity of pollution decreases.
B)
firms in the market produce the socially optimal level of pollution.
C)
firms in the market produce too much pollution.
D)
firms in the market produce too little pollution.
39.
If a good that involves external costs is priced to take these costs into account, then its
price will:
A)
fall, and output will go up.
B)
rise, and output will fall.
C)
not change, but output will fall.
D)
rise, but output will stay the same.
40.
If external costs exist, the competitive free market:
A)
allocates resources inefficiently.
B)
allocates resources efficiently.
C)
automatically corrects an overallocation of resources.
D)
automatically corrects an underallocation of resources.
41.
When farmers raise hogs, there are a number of external costs. In particular, hogs
generate methane gas. Without government regulation, the equilibrium price and
quantity of pigs raised means that:
A)
too few hogs will be raised.
B)
the price will be less than the marginal social cost.
C)
the price will be less than the marginal benefit.
D)
the price will be less than the marginal cost to hog farmers.
Page 9
42.
When farmers raise hogs, there are a number of external costs. In particular, hogs
generate methane gas. If the marginal external cost is $100 per hog and the government
imposes a tax of $200 per hog, then at the equilibrium price and quantity of hogs:
A)
too few hogs will be raised.
B)
the price will be less than the marginal social cost.
C)
the price will be less than the marginal social benefit.
D)
the price will be less than the marginal cost to hog farmers.
43.
A familiar example of a negative externality is traffic congestion. In principle, it should
be possible to internalize this externality by permitting drivers to negotiate rights to
drive during particular times. The most likely reason that this does NOT happen is that:
A)
most individuals are unfamiliar with the Coase theorem.
B)
the transaction costs associated with identifying and establishing communication
among the many interested parties would be prohibitive.
C)
agreements arising from such negotiations could not be enforced, since the
Constitution guarantees all individuals freedom of access to all public roads.
D)
lawyers would find a way to prohibit such negotiations unless they were actively
involved, and this would make transaction costs prohibitive.
44.
The Coase theorem states that in the presence of externalities, a market economy will:
A)
always reach an efficient solution.
B)
never reach an efficient solution.
C)
reach an efficient solution if transaction costs are sufficiently low and property
rights are well-defined.
D)
reach an efficient solution only in the case of government regulation.
45.
An externality is said to be internalized:
A)
when individuals take external costs and benefits into account in their decision
making.
B)
when the Coase theorem is irrelevant or cannot be applied.
C)
when individuals successfully petition the government to ban or restrict activities
that generate negative externalities.
D)
when individuals learn to adapt to negative externalities through introspection or
internal acceptance of what are viewed as unchangeable facts of life.
46.
The proposition that if bargaining is costless, the market can achieve an efficient
outcome is the:
A)
Coase theorem.
B)
property rights paradigm.
C)
market rights theorem.
D)
efficient environment paradigm.
Page 10
47.
When individuals take external costs and benefits into account:
A)
there are no external costs.
B)
they internalize the externality.
C)
the government should intervene in the market.
D)
the market will not reach an efficient solution.
48.
According to the Coase theorem, when negative externalities are present, a market will:
A)
always reach an efficient solution.
B)
reach an efficient solution if transaction costs are low and property rights are
well-defined.
C)
reach an efficient solution only if the government intervenes in the market.
D)
reach an efficient solution only if the negative externalities are offset by positive
externalities.
49.
A familiar example of a negative externality is loud music on a college campus. In
principle, it should be possible to internalize this externality by permitting students to
negotiate rights to play music during particular times. The most likely reason that this
does NOT happen is that:
A)
most students are unfamiliar with the Coase theorem.
B)
the transaction costs associated with identifying and establishing communication
with students would be high.
C)
agreements arising from such negotiations could not be enforced.
D)
most students don't view loud music as a negative externality.
50.
The idea that even in the presence of externalities an economy can reach an efficient
solution as long as transaction costs of making a deal are low and property rights are
well-defined is known as:
A)
a Pigouvian tax.
B)
a network externality.
C)
a technology spillover.
D)
the Coase theorem.
51.
The proposition that if transaction costs are low enough and property rights are
well-defined, the private market can achieve an efficient outcome regardless of which of
the affected parties hold the property rights is known as the:
A)
Coase theorem.
B)
property rights paradigm.
C)
market rights theorem.
D)
green environment paradigm.
Page 11
52.
According to the Coase theorem, the private market can achieve an efficient outcome:
A)
as long as the enforcement of property rights costs less than the marginal benefit of
emissions.
B)
only if the property right to clean air is assigned to the polluter.
C)
only if the property right to clean air is assigned to the party harmed by pollution.
D)
if bargaining costs are low and property rights are well-defined.
Use the following to answer questions 53-58:
Figure: Pollution and Efficiency
53.
(Figure: Pollution and Efficiency) Point _____ in the figure Pollution and Efficiency
represents an efficient solution in this market, where sulfur emissions are a result of
production.
A)
A
B)
B
C)
E
D)
F
54.
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this
market, whose sulfur emissions are a result of production, an efficient solution takes
place at a price of _____ and a quantity of _____.
A)
$5; 40
B)
$15; 30
C)
$25; 30
D)
$15; 15
Page 12
55.
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this
market, whose sulfur emission is a result of production, an efficient solution is one in
which:
A)
MSB < MSC.
B)
MSC < MSB.
C)
total cost = total benefit.
D)
MSC = MSB.
56.
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. If this
market, whose sulfur emission is a result of production, produced _____ units of
emissions, then _____.
A)
30; it would be efficient
B)
30; MSB > MSC
C)
45; total cost would equal total benefits
D)
45; MSC = 0
57.
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. If this
market, whose sulfur emissions are a result of production, produced _____ units of
emissions, then _____.
A)
40; MSB = MSC
B)
30; MSB < MSC
C)
40; MSB < MSC
D)
30; MSC < MSB
58.
(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this
market, whose sulfur emission is a result of production, too much pollution is found
when the price is _____ and the quantity is _____.
A)
$5; 15
B)
$5; 40
C)
$25; 20
D)
$5; 30
Page 13
Use the following to answer questions 59-71:
59.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. The efficient quantity
of pollution is _____ tons.
A)
0
B)
2
C)
4
D)
8
60.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. At the efficient
quantity of pollution the marginal social cost of pollution is _____ the marginal social
benefit of pollution.
A)
greater than
B)
equal to
C)
less than
D)
unrelated to
Page 14
61.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. At the efficient
quantity of pollution the marginal social cost of pollution is:
A)
$0.
B)
$100.
C)
$200.
D)
$400.
62.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. At the efficient
quantity of pollution the marginal social benefit of pollution is:
A)
$400.
B)
$300.
C)
$200.
D)
$100.
63.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. The
market-determined quantity of pollution is _____ tons.
A)
0
B)
2
C)
4
D)
8
64.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. At the
market-determined quantity of pollution, the marginal social benefit of pollution is:
A)
$800.
B)
$400.
C)
$200.
D)
$0.
65.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. At the
market-determined quantity of pollution, the marginal social cost of pollution is:
A)
$800.
B)
$400.
C)
$200.
D)
$0.
Page 15
66.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution
is produced, the marginal social benefit is _____, and the marginal social cost is _____.
A)
$0; $800
B)
$300; $500
C)
$400; $400
D)
$800; $0
67.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution
is produced, the outcome is _____ because _____.
A)
efficient; MSB = MSC
B)
efficient; MSB > MSC
C)
inefficient; MSB > MSC
D)
inefficient; MSB < MSC
68.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution
is produced:
A)
too much pollution is produced.
B)
the efficient amount of pollution is produced.
C)
not enough pollution is produced.
D)
the socially optimum amount of pollution is produced.
69.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. If 2 tons of pollution
is produced, the marginal social benefit is _____, and the marginal social cost is _____.
A)
$600; $200
B)
$500; $300
C)
$400; $400
D)
$800; $0
70.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. If 2 tons of pollution
is produced, the outcome is _____ because _____.
A)
efficient; MSB = MSC
B)
efficient; MSB > MSC
C)
inefficient; MSB > MSC
D)
inefficient; MSB < MSC
Page 16
71.
(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social
benefit and cost of various amounts of pollution from a coal mine. Two tons of pollution
is:
A)
too much.
B)
the efficient amount.
C)
not enough.
D)
the socially optimum amount.
72.
According to many economists, the government should:
A)
reduce the level of carbon emissions as far as possible.
B)
use its policies to achieve the least-cost reduction of carbon emissions.
C)
set policy to achieve the efficient level of pollution by reducing the costs of
pollution, which will always increase the benefits to society.
D)
reduce carbon emissions whenever the marginal cost exceeds a predetermined level
set by the courts.
73.
The principal government agency in the United States responsible for enforcing national
environmental policies is the:
A)
Department of Agriculture.
B)
Department of the Interior.
C)
Environmental Protection Agency.
D)
Department of Justice.
74.
Which of the following is an environmental standard?
A)
tradable pollution permits
B)
taxes on the level of pollution
C)
legal limits on sulfur dioxide emissions
D)
production subsidies
75.
Laws that require vehicles to have catalytic converters or that restrict or prohibit leaf
burning are:
A)
Pigouvian taxes.
B)
internalization of externalities.
C)
transaction costs.
D)
environmental standards.
Page 17
76.
Economists believe that there are more efficient ways to deal with pollution than with
environmental standards because these standards do NOT:
A)
reduce pollution enough.
B)
allow reductions in pollution to be achieved at minimum cost.
C)
internalize the externality.
D)
provide for any means of enforcement.
77.
When the government attempts to reduce the noise from airplanes by restricting the
noise level from a jet engine to less than 50 decibels, it is using a(n):
A)
environmental standard.
B)
emissions tax.
C)
Pigouvian tax.
D)
tradable emissions permit.
78.
When government attempts to reduce climate change by establishing a minimum level
of fuel efficiency on new cars, it is using a(n):
A)
environmental standard.
B)
emissions tax.
C)
Pigouvian tax.
D)
tradable emissions permit.
79.
Your community requires the sewage treatment plant to process raw sewage so that it is
safe to return the water to the environment. This is:
A)
an emissions tax.
B)
the Coase theorem.
C)
a tradable emissions permit.
D)
an environmental standard.
80.
Automobile emissions generate pollution, have costs, and cause discomfort to residents
of a city. In this case:
A)
too little of society's resources is being used to operate automobiles.
B)
the externality can be internalized by imposing a specific tax on drivers.
C)
there is an external benefit to society from operating automobiles.
D)
the externality can be internalized by granting a specific subsidy to drivers.
Page 18
Use the following to answer question 81:
Figure: Environmental Standards versus Emissions Taxes
81.
(Figure: Environmental Standards versus Emissions Taxes) In the figure Environmental
Standards versus Emissions Taxes, if the goal is to limit the total emissions of the two
firms, A and B, to 600 tons, the most efficient solution is an _____, and total pollution
would be _____ tons.
A)
environmental standard; 300
B)
emissions tax; 600
C)
environmental standard; 600
D)
emissions tax; 200
82.
Suppose government officials have set an emissions tax to reduce pollution. Assume the
optimal tax would be $1,500 but government officials have set the tax at $500. At the
equilibrium with the $500 tax:
A)
there will be too much pollution.
B)
the marginal social cost of pollution will be less than $500.
C)
the marginal social benefit of pollution will be less than $500.
D)
the marginal social benefit of pollution will be more than $500.
83.
Suppose government officials have set an emissions tax to reduce pollution. Assume the
optimal tax would be $500 but government officials have set the tax at $900. At the
equilibrium with the $900 tax:
A)
there will be too much pollution.
B)
the marginal social cost of pollution will be less than $900.
C)
the marginal social benefit of pollution will be $900.
D)
the marginal social benefit of pollution will be more than $900.
Page 19
84.
If government officials set an emissions tax too high:
A)
there will be too little pollution.
B)
there will be too much pollution.
C)
the marginal social cost of pollution will exceed the marginal social benefit of
pollution.
D)
pollution will be unabated.
85.
Suppose government officials have set an emissions tax to reduce pollution. Further
suppose that with the emissions tax, the marginal social cost of pollution exceeds the
marginal social benefit of pollution. The emissions tax is:
A)
too low.
B)
too high.
C)
optimal.
D)
efficient.
86.
Which of the following statements is CORRECT?
A)
An emissions tax is a more efficient way to reduce pollution than an environmental
standard, because an emissions tax equalizes the marginal benefit of pollution from
all sources.
B)
An environmental standard is a more efficient way to reduce pollution than an
emissions tax, because an environmental standard can be structured to equalize the
reduction in pollution from all sources.
C)
If an emissions tax and environmental standards lead to the same total reduction in
pollution, then they will also lead to the same reduction in pollution by individual
polluters.
D)
It is easy to set emissions taxes at the “correct” level, since the relationship
between emissions taxes and the reduction in emissions that they induce has been
extensively studied and is well known.
87.
Suppose an emissions tax is imposed on all dairy farms in Wisconsin. This tax would:
A)
encourage the dairy farmers to lower prices.
B)
increase the level of emissions.
C)
reduce the supply of milk in Wisconsin.
D)
increase the supply of milk in Wisconsin.
Page 20
Use the following to answer questions 88-90:
Figure: Three Firms That Pollute
88.
(Figure: Three Firms that Pollute) Look at the figure Three Firms That Pollute. If each
company is allowed to emit only 300 tons of pollution per day, which company will be
most adversely affected?
A)
firm A
B)
firm B
C)
firm C
D)
They are equally affected.
89.
(Figure: Three Firms that Pollute) Look at the figure Three Firms That Pollute. If the
city imposes a tax of $400 per ton of pollution, firm B will produce _____ of mercury,
and firm A will produce _____ mercury than firm C.
A)
600 tons; 200 tons less
B)
700 tons; 200 tons less
C)
300 tons; 500 tons more
D)
300 tons; 200 tons less
90.
(Figure: Three Firms that Pollute) In the figure Three Firms That Pollute, at what tax
rate would firm C produce zero tons of pollution?
A)
$400
B)
$500
C)
$700
D)
$400, $500, or $700
Page 21
91.
Pigouvian taxes are designed to reduce:
A)
the marginal cost of production.
B)
the marginal benefit of consumption.
C)
external costs.
D)
external benefits.
Use the following to answer question 92:
Figure: The Optimal Quantity of Pollution
92.
(Figure: The Optimal Quantity of Pollution) The figure The Optimal Quantity of
Pollution shows the marginal social cost (MSC) and marginal social benefit (MSB) for
firms that pollute the air with sulfur dioxide. Using the figure, the optimal Pigouvian tax
per unit of pollution is:
A)
$500.
B)
$250.
C)
$167.
D)
$83.
93.
If an emissions tax is too low:
A)
there will be too little pollution.
B)
there will be too much pollution.
C)
the marginal social cost of pollution will be less than the marginal social benefit of
pollution.
D)
there could be either too much or too little pollution.
Page 22
94.
Taxes are a more effective method of controlling pollution than environmental standards
because:
A)
standards allow greater flexibility.
B)
standards require less information.
C)
standards never require the efficient level of output.
D)
taxes encourage reducing pollution at the lowest possible cost.
95.
The government has adopted an emissions tax if it:
A)
transfers the ownership of city air to a private firm that charges automobile drivers
a profit-maximizing price, based in part on the pollution capacity of the
atmosphere.
B)
charges automobile drivers $0.10 for each unit of automobile emissions.
C)
pays automobile drivers $0.10 for each 10% reduction in automobile emissions.
D)
specifies the type of catalytic converter that must be used to reduce automobile
emissions.
96.
For the same amount of pollution emitted, an emissions tax is said to be more efficient
than an environmental standard because all polluters:
A)
emit pollution up to the point at which the marginal benefit of polluting is equal to
the emissions tax.
B)
emit the same amount of pollution, regardless of the marginal benefit of polluting.
C)
pay the same total tax bill for their pollution.
D)
reduce pollution emissions to zero.
97.
The licenses that are exchangeable and that enable the holder to pollute up to a specified
amount during a given period are called:
A)
emissions taxes.
B)
environmental standards.
C)
tradable emissions permits.
D)
Pigouvian taxes.
98.
Tradable pollution permits are a(n):
A)
tax system for internalizing pollution costs to the market.
B)
subsidy system for charging consumers for the use of common property resources.
C)
system of voluntary negotiations between polluters and damaged parties.
D)
system of exchangeable licenses that enable the holder to pollute up to a specified
amount during a given period.
Page 23
99.
Suppose the federal government determines the total level of municipal sewage that can
be discharged by cities along a river. If the cities are able to buy and sell rights to the
total discharge level among themselves, then the government's environmental policy
includes:
A)
emissions taxes.
B)
regulations.
C)
tradable pollution permits.
D)
command and control.
100.
Which of the following is an environmental policy based on tradable pollution permits?
A)
a charge of $0.10 to automobile drivers for a given level of emitted emissions
B)
paying automobile drivers $0.10 for each 10% reduction in automobile emissions
C)
allowing automobile drivers to buy and sell the right to a certain level of
automobile emissions
D)
ignoring pollution and letting private markets operate without government
interference
101.
Assume the price of a tradable emissions permit for a ton of sulfur dioxide is $150.
Which of the following is INCORRECT?
A)
A firm that buys permits has an incentive to limit pollution to the point at which the
marginal benefit of emissions is equal to $150.
B)
A firm that has more permits than it plans to use has an incentive to limit pollution
to the point at which the marginal benefit of emissions is equal to $150.
C)
The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms.
D)
The opportunity cost of emitting a ton of sulfur dioxide is $150 for all firms.
102.
With tradable emissions permits, the price of the permit is determined by:
A)
the government.
B)
the supply of and demand for permits.
C)
environmental protection organizations.
D)
the World Trade Organization.
103.
The licenses that can be bought and sold by polluters and that enable the holder to
pollute up to a specified amount during a given period are called:
A)
emissions taxes.
B)
Pigouvian taxes.
C)
tradable emissions permits.
D)
environmental standards.
Page 24
104.
Which of the following best describes tradable emissions permits?
A)
tax system for internalizing emission costs to the market
B)
subsidy system for encouraging production of goods with positive externalities
C)
system of voluntary negotiations between polluters and damaged parties
D)
licenses that can be bought and sold and that enable the holder to pollute up to a
specified amount during a given period
105.
Assume the federal government determines the total level of pollutants that can be
discharged by city industries. A city is able to buy and sell the rights to this total
discharge level with other cities. This is an:
A)
emissions tax.
B)
Pigouvian tax.
C)
tradable emissions permit.
D)
environmental standard.
106.
When tradable emissions permits are used, if the demand for goods that produce
emissions shifts to the right, the equilibrium price of permits _____ and the equilibrium
quantity _____.
A)
falls; increases
B)
increases; stays the same
C)
falls; falls
D)
stays the same; increases
107.
With tradable emissions permits, if the demand for goods that produce emissions shifts
to the left, the equilibrium price of permits _____ and the equilibrium quantity _____.
A)
increases; stays the same
B)
falls; increases
C)
falls; stays the same
D)
increases; increases
108.
An advantage of tradable emissions permits is that:
A)
pollution costs are easier to measure than emissions taxes.
B)
nondegradable pollutants can be more easily controlled than degradable pollutants.
C)
the value that future generations place on pollution damages can be determined.
D)
they provide incentives for firms to develop technologies that are less polluting.
Page 25
109.
Which of the following is an environmental policy based on tradable emission permits?
A)
a charge to companies of $1 for every 100 units of pollutants emitted
B)
paying companies $1 for each 10% reduction in emissions
C)
allowing companies to buy and sell the right to a certain level of emissions
D)
ignoring pollution and letting private markets operate without government
interference
110.
If the number of available tradable emissions permits is decreased, the equilibrium price
of the permits _____ and the equilibrium quantity of emissions _____.
A)
decreases; decreases
B)
increases; increases
C)
increases; decreases
D)
decreases; increases
111.
If the number of available tradable emissions permits increases, the equilibrium price of
the permits _____ and the equilibrium quantity _____.
A)
increases; does not change
B)
increases; increases
C)
decreases; does not change
D)
decreases; increases
112.
There are two plants in an industry. To reduce pollution, the government has imposed
environmental standards forcing each plant to cut emissions by 60%. At the emissions
standard, the marginal social benefit of pollution for plant A is $500, and the marginal
social benefit of pollution for plant B is $125. The same level of pollution can be
achieved at a lower cost by:
A)
forcing plant A to reduce emissions and allowing plant B to increase emissions.
B)
allowing plant A to pollute more and requiring plant B to pollute less.
C)
forcing both plants to reduce emissions.
D)
allowing both plants to pollute more.
113.
With tradable emissions permits, the main problem is to determine the _____, while
with emissions taxes the main problem is to determine the _____.
A)
optimal quantity of pollution; optimal tax rate
B)
optimal price of the permits; optimal level of pollution
C)
optimal quantity of pollution; marginal social benefit of pollution
D)
marginal social cost of pollution; optimal tax rate
Page 26
Use the following to answer questions 114-117:
Figure: City with Two Polluters
114.
(Figure: City with Two Polluters) Look at the figure City with Two Polluters. If the
government does not intervene in the pollution market, equilibrium will occur where
firm A produces _____ tons and firm B produces _____ tons of pollution, for a total of
_____ tons.
A)
2,000; 2,000; 4,000
B)
0; 1,000; 1,000
C)
1,000; 0; 1,000
D)
800; 1,400; 2,200
115.
(Figure: City with Two Polluters) Look at the figure City with Two Polluters. If the
government wants to limit total pollution to 2,200 tons, it could impose an emissions tax
of _____ on both firms.
A)
$100
B)
$200
C)
$300
D)
$400
Page 27
116.
(Figure: City with Two Polluters) Look at the figure City with Two Polluters. If the
government imposed an emissions tax of $400, firm A would produce _____ tons of
emissions and firm B would produce _____ tons of emissions.
A)
200; 400
B)
400; 1,200
C)
800; 1,400
D)
1,200; 1,600
117.
(Figure: City with Two Polluters) Look at the figure City with Two Polluters. If the
government issued licenses to emit a total of 1,600 tons of pollution, the market price to
emit 1 ton of emissions would equal:
A)
$100.
B)
$200.
C)
$300.
D)
$400.
118.
With use of _____ to reduce emissions, the marginal benefit of an additional unit of
pollution is the same for all polluters.
A)
an environmental standard
B)
an emissions tax
C)
a tradable emissions permit
D)
an emissions tax or a tradable emissions permit
119.
An external benefit is a:
A)
negative externality.
B)
benefit that accrues to domestic firms as a result of the actions of foreign (external)
firms.
C)
benefit that accrues to foreign (external) firms as a result of the actions of domestic
firms.
D)
benefit that individuals or firms confer on others without receiving compensation.
120.
External benefits are associated with the production of batteries. Without government
regulation, the market will:
A)
produce too many batteries.
B)
price batteries at less than the marginal social cost.
C)
price batteries at less than the marginal social benefit.
D)
price batteries above the marginal social cost.
Page 28
121.
Which of the following generates a positive externality?
A)
You buy a new car and find $5,000 in the door panel.
B)
Your next-door neighbor mows the lawn at 6 A.M.
C)
Your next-door neighbor installs a bat house and the bats eat mosquitoes.
D)
Joe buys health insurance but decides not to take the time to get a flu shot.
122.
Which of the following is a positive externality?
A)
Sam dug a pond so he could go fishing, but the pond has contributed to an
explosion of mosquitoes in your neighborhood.
B)
Sam has dozens of cats, and they come into your yard to hunt the birds that come to
your birdbath.
C)
Sam buys a dilapidated house, renovates it, and increases the property values of all
houses in the neighborhood.
D)
Liquid waste from Sam's chicken farm flows into a neighbor's well water.
123.
A Pigouvian subsidy is:
A)
designed to discourage activities generating externalities.
B)
designed to encourage activities generating external benefits.
C)
appropriate when the marginal social cost curve is above the marginal cost of
production curve.
D)
appropriate when the marginal social cost curve and the marginal social benefit
curve intersect at an inefficient level.
124.
Suppose the production of roses generates a positive externality in that travelers enjoy
the scenic beauty of the garden. An appropriate government policy yielding the efficient
outcome would be a:
A)
Pigouvian tax.
B)
Pigouvian subsidy.
C)
system of rose production permits.
D)
reduction in transaction costs.
125.
Betsy loves to garden, and her rose garden is enjoyed by everyone in her neighborhood.
Because her consumption of rosebushes provides a positive externality to the
community, the government should _____ because the market quantity of rosebushes is
_____ than the socially optimal quantity.
A)
provide a subsidy; greater
B)
impose a tax; lower
C)
provide a subsidy; lower
D)
impose a tax; greater
Page 29
126.
Which of the following is a solution to externalities?
A)
The city government imposes rent control. The externality is that housing's
quantity demanded exceeds the quantity supplied at the current price.
B)
The federal government imposes a minimum wage. The externality is that firms
pay too little to their workers.
C)
The government offers free childhood immunizations. The externality is that an
immunized child cannot transmit disease to others.
D)
The federal government provides national defense. The externality is that people
can't be excluded from national defense even if they don't pay for it.
127.
Which of the following is usually associated with a positive externality?
A)
smoking cigarettes
B)
listening to a new CD with earbuds
C)
innovation in the semiconductor industry
D)
an indoor classical music concert with tickets that cost $50
128.
When innovations by one firm are quickly emulated and improved on by rival firms in
the same industry or in other industries, this is:
A)
industrial espionage.
B)
illegal under most patents.
C)
technology spillover.
D)
technology takeover.
Use the following to answer questions 129-139:
Page 30
129.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. Without government intervention, the amount of land dedicated to
the public park will be _____ acres.
A)
0
B)
1
C)
3
D)
9
130.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. Without government intervention, at the amount of land dedicated
to the public park the marginal social benefit will be:
A)
$225.
B)
$150.
C)
$100.
D)
$0.
131.
(Table: Externalities from Parks) The table shows the marginal social benefit and the
marginal social cost of preserving various amounts of land in a city for a public park.
Without government intervention, at the amount of land dedicated to the public park the
marginal social cost will be:
A)
$225.
B)
$150.
C)
$100.
D)
$0.
132.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. The socially optimum amount of land dedicated to the public park
will be _____ acres.
A)
0
B)
1
C)
3
D)
9
Page 31
133.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. At the socially optimum amount of land dedicated to the public
park the marginal social benefit will be:
A)
$225.
B)
$150.
C)
$100.
D)
$0.
134.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. At the socially optimum amount of land dedicated to the public
park the marginal social cost will be:
A)
$225.
B)
$150.
C)
$100.
D)
$0.
135.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. If the government wants to achieve the optimum amount of land
for the park, it could use a Pigouvian _____ of _____.
A)
tax; $300
B)
tax; $150
C)
subsidy; $150
D)
subsidy; $450
136.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. If 1 acre is dedicated to the park, this outcome is _____ because
_____.
A)
efficient; MSB = MSC
B)
efficient; MSB > MSC
C)
inefficient; MSB > MSC
D)
inefficient; MSB < MSC
Page 32
137.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. If 1 acre is dedicated to the park, the park is:
A)
too large.
B)
the socially optimum size.
C)
too small.
D)
the efficient size.
138.
(Table: Externalities from Parks) The table Externalities from Parks shows the marginal
social benefit and the marginal social cost of preserving various amounts of land in a
city for a public park. If 5 acres is dedicated to the park, this outcome is _____ because
_____.
A)
efficient; MSB = MSC
B)
efficient; MSB > MSC
C)
inefficient; MSB > MSC
D)
inefficient; MSB < MSC
139.
(Table: Externalities from Parks) The table shows the marginal social benefit and the
marginal social cost of preserving various amounts of land in a city for a public park. If
5 acres is dedicated to the park, the park is:
A)
too large.
B)
the socially optimum size.
C)
too small.
D)
the efficient size.
140.
Tony has a cell phone, and his service provider is Verizon. When he calls his wife,
Meleah, another Verizon customer, he does not have to pay for those minutes. The more
Verizon customers there are in the market, the more benefit Tony receives. This is:
A)
a network externality.
B)
the Coase theorem.
C)
a Pigouvian subsidy.
D)
a technology spillover.
Page 33
Use the following to answer questions 141-143:
Figure: The Socially Optimal Quantity of Pollution
141.
(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal
Quantity of Pollution, the optimal level of pollution is:
A)
zero, since no pollution is best for society.
B)
where the marginal social benefit curve intersects the quantity axis.
C)
where the marginal social cost curve intersects the quantity axis.
D)
where the marginal social benefit curve intersects the marginal social cost curve.
142.
(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal
Quantity of Pollution, without government intervention:
A)
firms will continue to pollute until the marginal social benefit is zero.
B)
firms will continue to pollute until the marginal social benefit is $200.
C)
the optimal quantity of pollution will occur.
D)
The outcome cannot be determined without more information.
143.
(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal
Quantity of Pollution, the optimal quantity of pollution:
A)
could be achieved with a Pigouvian subsidy.
B)
is unlikely to be achieved without government intervention.
C)
could be achieved with a Pigouvian tax.
D)
is unlikely to be achieved without government intervention, but it could be
achieved with a Pigouvian tax.
Page 34
Use the following to answer questions 144-153:
Figure: Efficiency and Pollution
144.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. In the
absence of government intervention, the amount of pollution will be _____ tons.
A)
20
B)
30
C)
40
D)
45
145.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. In the
absence of government intervention, the marginal social cost of pollution will exceed
the marginal benefit of pollution by:
A)
$25.00.
B)
$16.67.
C)
$15.00.
D)
$0.00.
Page 35
146.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. In the
absence of government intervention, the marginal social cost of pollution will equal
_____ and the marginal social benefit of pollution will equal _____.
A)
$25; $5
B)
$5; $25
C)
$15; $15
D)
$25; $0
147.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. The
socially optimal quantity of pollution is _____ tons.
A)
0
B)
20
C)
30
D)
45
148.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If this
market produced _____ tons of pollution, then _____.
A)
30; it would be efficient
B)
45; marginal social cost would be less than marginal social benefit
C)
20; marginal social benefit would be less than marginal social cost
D)
20; the marginal social benefit would be $7.
149.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. An
optimal Pigouvian tax of _____ can move this market to the socially optimal quantity of
pollution.
A)
$5
B)
$15
C)
$25
D)
$45
150.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. A
Pigouvian tax of $10 will result in a quantity of pollution for which the:
A)
marginal social benefit is less than the marginal social cost.
B)
marginal social benefit exceeds the marginal social cost.
C)
marginal social benefit equals the marginal social cost.
D)
resources are allocated efficiently.
Page 36
151.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the
government imposed an environmental standard that did not allow the quantity of
pollution to exceed 20 tons, there would be:
A)
a socially optimal quantity of pollution.
B)
too little pollution, because its marginal social benefit would exceed its marginal
social cost.
C)
too much pollution, because its marginal social cost would exceed its marginal
social benefit.
D)
too much pollution, because any pollution is too much from an economist's
perspective.
152.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the
government imposed an environmental standard that did NOT allow the quantity of
pollution to exceed 40 tons, there would be:
A)
a socially optimal quantity of pollution.
B)
too little pollution, because its marginal social benefit would exceed its marginal
social cost.
C)
too much pollution, because its marginal social cost would exceed its marginal
social benefit.
D)
too much pollution, because any pollution is too much from an economist's
perspective.
153.
(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the
government imposed an environmental standard that did NOT allow the quantity of
pollution to exceed 30 tons, there would be:
A)
a socially optimal quantity of pollution.
B)
too little pollution, because its marginal social benefit would exceed its marginal
social cost.
C)
too much pollution, because its marginal social cost would exceed its marginal
social benefit.
D)
too much pollution, because any pollution is too much from an economist's
perspective.
Page 37
Use the following to answer questions 154-157:
Figure: MSB and MSC of Pollution
154.
(Figure: MSB and MSC of Pollution) Look at the figure MSB and MSC of Pollution.
What level of pollution would be emitted in a market economy without government
regulation?
A)
Q1
B)
Q2
C)
Q3
D)
Q4
155.
(Figure: MSB and MSC of Pollution) Look at the figure MSB and MSC of Pollution.
What level of pollution represents the socially optimal level?
A)
Q1
B)
Q2
C)
Q3
D)
Q4
156.
(Figure: MSB and MSC of Pollution) Look at the figure MSB and MSC of Pollution. If
the current level of pollution is at Q1, _____ pollution is being emitted, as _____.
A)
not enough; MSB > MSC
B)
not enough; MSB < MSC
C)
too much; MSB > MSC
D)
the socially optimal amount of; MSB = MSC
Page 38
157.
(Figure: MSB and MSC of Pollution) Look at the figure MSB and MSC of Pollution.
Suppose pollution is unregulated. What level of emissions tax would move the level of
pollution to the socially optimal level?
A)
$100
B)
$800
C)
$500
D)
$300
Use the following to answer questions 158-161:
Figure: Model of a Competitive Market
158.
(Figure: Model of a Competitive Market) Given the figure Model of a Competitive
Market, if there are no external benefits or costs, the output at Q will be:
A)
larger than is socially desirable.
B)
smaller than is socially desirable.
C)
efficient.
D)
inefficient.
159.
(Figure: Model of a Competitive Market) Given the figure Model of a Competitive
Market, if there are external costs:
A)
resources will be underallocated to the production of the good.
B)
resources will be overallocated to the production of the good.
C)
resources will be efficiently allocated to the production of the good.
D)
the price at P will be higher than if there were no external costs.
Page 39
160.
(Figure: Model of a Competitive Market) Given the figure Model of a Competitive
Market, if there are external costs, a tax imposed on sellers will:
A)
decrease the equilibrium quantity.
B)
increase the equilibrium quantity.
C)
have no effect on the equilibrium price.
D)
decrease the equilibrium price.
161.
(Figure: Model of a Competitive Market) Given the figure Model of a Competitive
Market, if a tax is imposed on sellers, the equilibrium price will _____ and the
equilibrium quantity will _____.
A)
increase; decrease
B)
remain the same; increase
C)
remain the same; decrease
D)
increase; increase
162.
A principal cause of market failure is actions generating side effects that are not
properly taken into account by the market.
A)
True
B)
False
163.
The total external cost of air pollution in Tennessee affects the final price of goods in
Tennessee, assuming that the government does not intervene in the marketplace.
A)
True
B)
False
164.
Externalities exist when individuals impose costs or confer benefits on others but don't
have an incentive to take those costs or benefits into account.
A)
True
B)
False
165.
The marginal social benefit of pollution is always zero.
A)
True
B)
False
166.
Economists and environmentalists agree that pollution is undesirable and that
government policy should aim to achieve a zero-pollution society.
A)
True
B)
False
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167.
If at the current amount of pollution its marginal social benefit is greater than its
marginal social cost, then there is too little pollution.
A)
True
B)
False
168.
The economically efficient level of an externality is zero.
A)
True
B)
False
169.
According to the Coase theorem, only when transaction costs are extremely high can
two parties internalize a negative externality.
A)
True
B)
False
170.
According to the Coase theorem, the inefficiencies caused by externalities can be
removed by the private sector if individuals enter into appropriately structured deals,
provided that the transaction costs of such deals are sufficiently low.
A)
True
B)
False
171.
If externalities are fully internalized, an outcome is efficient even without government
intervention.
A)
True
B)
False
172.
Environmental standards ensure that the marginal benefit of pollution is equal for all
sources of pollution.
A)
True
B)
False
173.
The efficient way to reduce pollution is to impose strict environmental standards on all
polluters.
A)
True
B)
False
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174.
Since talking while driving generates a negative externality, banning talking while
driving would be economically efficient.
A)
True
B)
False
175.
Taxes on sulfur dioxide emissions, excise taxes on gas, and sales taxes are all examples
of Pigouvian taxes.
A)
True
B)
False
176.
The optimal Pigouvian tax is equal to the marginal social cost of pollution at the socially
optimal quantity of pollution.
A)
True
B)
False
177.
Emissions taxes and tradable emissions permits both ensure that any given reduction in
total pollution is achieved at the lowest possible cost. This is not the case for
environmental standards, since they fail to ensure that those who can reduce pollution
most cheaply are in fact the ones to do so.
A)
True
B)
False
Use the following to answer question 178:
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178.
(Table: The Marginal Social Benefit of Computer Chips) Look at the table The
Marginal Social Benefit of Computer Chips. The production of computer chips
generates an external benefit in the form of a technology spillover. If the marginal social
benefit is indicated by MSB, the optimal Pigouvian subsidy is equal to $10.
A)
True
B)
False
179.
What is meant by a negative externality? Use an example in your explanation.
180.
What is meant by a positive externality? Use an example to assist your explanation.
181.
If pollution is such a bad thing, why do economists argue that the optimal amount of
pollution is greater than zero?
182.
Brad and Angelina are neighbors. Brad never mows his yard, rakes his leaves, or trims
his hedges. His overgrown yard not only is an eyesore, it is pulling down the value of
Angelina's house. How could the Coase theorem be used to remedy this negative
externality? Does it matter whether Brad has the right to ignore his yard or Angelina has
the right to force him to clean it up?
183.
Industrial production of goods causes pollution that damages the environment. Suppose
the marginal social cost of pollution can be represented by the function MSC = 2T,
where T represents tons of pollution. Suppose the marginal social benefit of pollution
can be represented by the function MSB = 1,000 – 2T.
A) In an unregulated market, how many tons of pollution will be emitted?
B) Solve for the socially optimal amount of pollution.
C) What level of Pigouvian tax will reduce pollution to the optimal level?
184.
In an unregulated market, how much pollution will be emitted as goods and services are
produced? Why is this market outcome inefficient?
185.
Why do economists argue that an emissions tax is a more efficient way to reduce
pollution than an environmental standard?
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Use the following to answer question 186:
186.
(Table: Pollution and Marginal Cost of Reduction) Look at the table Pollution and
Marginal Cost of Reduction. There are two large firms in your community, Big
Chemical and Mega Manufacturing, and each is a significant source of pollution.
Combined, they are producing 500 tons of pollution, and the EPA has determined that
emission levels should be reduced by half. The marginal cost of reducing pollution is
constant.
A) If the EPA dictated that each firm must emit only 125 tons of pollution, how much
total cost would the firms incur to meet this environmental standard?
B) If the EPA distributes 125 pollution permits to each firm, each permit giving the
firm the right to emit 1 ton of pollution, which firm will sell pollution permits, and
which firm will buy them?
C) Under this system, what is the total cost to the firms of reducing pollution to a total
of 250 tons?
187.
Economists say that when an activity provides a positive externality to the community,
the market does not produce enough of that activity. Why?
188.
Some politicians are pushing for development of a car that is powered by hydrogen fuel
cells rather than gasoline. How could the absence of a network externality hinder the
adoption of this vehicle?
189.
The marginal social cost of a unit of pollution:
A)
is the additional cost imposed on society by that unit.
B)
is easy to calculate, since pollution produces costs.
C)
is often overestimated.
D)
remains constant as more of a good is produced.
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190.
The marginal social benefit of pollution:
A)
increases as more pollution is emitted.
B)
equals zero when the social optimal quantity of pollution is produced.
C)
equals the marginal social cost of pollution in all markets at equilibrium.
D)
is the benefit to society of one more unit of pollution.
Use the following to answer questions 191-193:
Figure: The Quantity of Pollution
191.
(Figure: The Quantity of Pollution) Look at the table The Quantity of Pollution. If the
amount of pollution emitted is 150:
A)
this economy would benefit by increasing production of this good.
B)
the marginal social benefit is greater than the marginal social cost of pollution.
C)
the production of pollution is not socially optimal.
D)
this economy is producing at the socially optimal level of pollution.
192.
(Figure: The Quantity of Pollution) Look at the table The Quantity of Pollution. The
socially optimal level of pollution emissions for this economy is:
A)
0.
B)
50.
C)
100.
D)
150.
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193.
(Figure: The Quantity of Pollution) Look at the table The Quantity of Pollution. When
this economy produces 50 tons of emissions, it:
A)
is producing below its socially optimal level of production.
B)
finds that the marginal social cost is greater than the marginal social benefit.
C)
is not recognizing the marginal private benefits or costs.
D)
is producing at its socially optimal level of production.
194.
An emissions tax will:
A)
ensure that the marginal benefit of pollution is equal for all sources of pollution.
B)
set standards to which all producers must adhere regardless of their production
costs.
C)
cause all polluters to reduce emissions by the same amount.
D)
increase pollution, but not in the most efficient cost-saving way.
195.
Firm A and firm B both produce a good whose manufacture causes pollution, but the
firms differ in their marginal benefit from pollution. In this case, an emissions standard
would:
A)
reduce pollution in the most effective manner.
B)
lead to an unequal reduction in pollution for both firms.
C)
not be efficient, since it does not take into account differences in marginal benefits.
D)
be preferred to an emissions tax, since it takes into account differences in marginal
benefits.
196.
Pigouvian taxes:
A)
tax the profits of polluting firms.
B)
are designed to reduce external costs.
C)
are essentially the same as emissions standards.
D)
are tradable emissions permits.
197.
Markets for the right to pollute are:
A)
established by individual firms when they reduce emissions.
B)
established by government when it issues tradable pollution permits.
C)
likely to result in fewer incentives to develop and implement technology that
reduces pollution.
D)
a means by which more pollution is encouraged.
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198.
Both emissions taxes and tradable emissions permits:
A)
are efficient cost-minimizing methods of pollution reduction.
B)
work only if they are coupled with environmental standards.
C)
encourage more pollution.
D)
are usually less effective than environmental standards.
199.
Positive externalities are:
A)
similar to negative externalities in their ease of measuring marginal benefits.
B)
likely to be solved with the use of a Pigouvian tax.
C)
difficult to measure, since marginal social benefits are hard to observe.
D)
result from greater than optimal production of a good.
200.
Flu vaccines often provide both private benefits to individuals and positive external
benefits to other members of society. As a result, without government intervention one
would find:
A)
too many doses of flu vaccine being produced, since external benefits would not be
considered.
B)
too few doses of flu vaccine being produced, since external benefits would not be
considered.
C)
the optimal amount of doses of flu vaccines being produced, since external benefits
would not be considered.
D)
a shortage of doses of flu vaccine, because their marginal social benefit is
overestimated.
201.
Suppose each person in a community had to pay for his or her own education from
kindergarten through high school. One would expect that:
A)
less education would be acquired, since society has not considered the positive
external benefits of education.
B)
more education would be acquired, since society has not considered the positive
external benefits of education.
C)
the optimal amount of education would be acquired by community members, since
they each paid for the amount of education they wanted.
D)
a Pigouvian tax would ensure the optimal amount of education.
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202.
To encourage consumption of a good that generates positive externalities, the best
option for policymakers would be to:
A)
impose a tax on the amount consumed to achieve the socially optimal level.
B)
mandate consumption of the good at the socially optimal level.
C)
provide a subsidy per unit of the good consumed to achieve the socially optimal
level.
D)
do nothing, since the market will achieve the socially optimal level without
government intervention.
203.
A good is subject to a network externality when:
A)
the value of the good to an individual is less when a large number of other people
also use the good.
B)
the value of the good is determined only by marginal private benefits.
C)
an increase in the number of other people using the good increases its value to an
individual.
D)
a good yields negative externalities.
204.
Network externalities are often:
A)
separate from positive feedback.
B)
a reason for natural monopolies.
C)
less likely to occur in the communications or technology industries than in other
industries.
D)
not likely to move toward market domination.
Use the following to answer questions 205-207:
Scenario: Private and External Benefits
A small community finds that tidy lawns and neighborhoods provide both private and external
benefits. They determine that the marginal private benefit (MPB) of lawns can be represented by
the equation MPB = 50 – 0.5Q, where Q is the number of hours spent on keeping lawns tidy. The
marginal private cost (MPC) of such lawn upkeep is represented by the equation MPC = 0.5Q,
where Q is again the number of hours engaged in lawn upkeep.
205.
(Scenario: Private and External Benefits) Look at the scenario Private and External
Benefits. How many hours of lawn upkeep will occur in this community, and what will
be the marginal private benefit of such upkeep?
A)
50 hours; $50
B)
45 hours; $20
C)
50 hours; $25
D)
100 hours; $50
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206.
(Scenario: Private and External Benefits) Look at the scenario Private and External
Benefits. The community estimates the marginal social benefit from lawn upkeep to be
$15. Given this information, what is the socially optimal amount of lawn upkeep for this
community?
A)
0 hours
B)
45 hours
C)
50 hours
D)
65 hours
207.
(Scenario: Private and External Benefits) Look at the scenario Private and External
Benefits. The community decides that given all the benefits of lawn upkeep, it is
important to maintain the socially optimal number of lawn upkeep hours. To achieve
this, the community will:
A)
require community lawn service of 45 hours.
B)
subsidize everyone who contributes to lawn upkeep with a payment of $15.
C)
implement a Pigouvian lawn tax of $65.
D)
provide no additional funds to lawn upkeep.
Use the following to answer questions 208-210:
Figure: Marginal Private Benefits and Marginal Social Benefits
208.
(Figure: Marginal Private Benefits and Marginal Social Benefits) Look at the figure
Marginal Private Benefits and Marginal Social Benefits. Without government
intervention, this market will produce _____ units at a price of _____.
A)
Q0; P0
B)
Q1; P0
C)
Q1; P2
D)
Q2; P1
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209.
(Figure: Marginal Private Benefits and Marginal Social Benefits) Look at the figure
Marginal Private Benefits and Marginal Social Benefits. If government does intervene
and encourages the market to produce and price at the socially optimal level, what will
be the output and price?
A)
Q0; P0
B)
Q1; P0
C)
Q1; P2
D)
Q2; P1
210.
(Figure: Marginal Private Benefits and Marginal Social Benefits) Look at the figure
Marginal Private Benefits and Marginal Social Benefits. One way for the government to
achieve this socially optimal level is by:
A)
imposing a per-unit tax equal to P1 – P2.
B)
providing a per-unit subsidy of P0 – P2.
C)
mandating consumption at output level Q1.
D)
leaving the quantity at the initial private market-clearing quantity and price.
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