50) A carbon tax will raise the price of an energy-intensive good such as steel.
51) A carbon tax would increase the total volume of greenhouse gases.
52) Explain what is meant by “internalizing an externality,” and describe three methods by which
this can be done.
53) What is the purpose of a pollution tax?
54) How does a pollution tax work?
55) Describe the market effects of a carbon tax.
9.7 Traditional Regulation
1) A uniform-abatement policy is
A) inefficient because it does not exploit the differences in abatement costs among firms.
B) efficient because an equal amount of pollution is assigned to each firm.
C) inefficient because it incurs relatively low compliance costs.
D) efficient because it helps firms lower their production costs.
2) Suppose that there are two firms, each generating three tons of SO2. Suppose also that the
government has set a target abatement level of two tons. Under a policy of uniform abatement
with permits each firm would receive
A) two non-transferable pollution permits.
B) two pollution permits which they could sell to each other.
C) one pollution permit with a value equal to that firm’s cost of abating one ton of SO2.
D) one pollution permit with a value equal to the market price for a pollution permit.
3) Suppose that there are two firms, each generating three tons of SO2. Suppose also that the
government has set a target abatement level of two tons. Under a policy of uniform abatement
with permits the firm with the lower marginal abatement cost
A) will abate exactly the same amount of SO2 as the firm with the higher marginal abatement
cost.
B) will abate less SO2 than the firm with the higher marginal abatement cost.
C) will abate more SO2 than the firm with the higher marginal abatement cost.
D) will sell its pollution permit to the firm with the higher marginal abatement cost.
4) Compared to a pollution tax, a policy of uniform abatement with permits is
A) less efficient.
B) more efficient.
C) exactly as efficient.
D) either more or less efficient depending on the number of firms affected.
5) If the government attempts to control pollution with a command-and-control policy
A) the government will command each firm to produce no more than a certain level of pollution.
B) the government will control the firm’s entire production process.
C) the government will force the firm to use particular pollution-control technologies.
D) all of the above
6) A command-and-control policy is one in which
A) the government commands each firm to produce no more than a certain level of pollution.
B) the government controls the firm’s advertising policy.
C) the government forces the firm to use particular pollution-control technologies.
D) Both A and C are correct answers.
7) A command-and-control policy
A) usually does not result in the use of the most efficient pollution abatement technology.
B) does not affect the production costs of firms.
C) usually finds the most efficient pollution abatement technology.
D) increases the incentive for firms to develop efficient abatement technologies.
8) A command-and-control policy
A) is unlikely to have any impact on the amount of pollution emitted.
B) does not affect the production costs of firms.
C) usually finds the most efficient pollution abatement technology.
D) decreases the incentive for firms to develop efficient abatement technologies.
9) As compared to a pollution tax, a command-and-control policy will increase production costs
by a ________ amount and increase equilibrium price by a ________ amount.
A) larger; larger
B) larger; smaller
C) smaller; larger
D) smaller; smaller
10) As compared to a pollution tax, a command-and-control policy will
A) increase production costs by a smaller amount.
B) increase price by a smaller amount.
C) shift the supply curve to the left by a smaller amount.
D) shift the supply curve to the left by a larger amount.
11) Command-and-control policies usually
A) result in higher costs for firms when compared to pollution taxes.
B) don’t raise prices as much to consumers as do pollution taxes.
C) result in less pollution being produced than when pollution taxes are used.
D) result in lower costs for firms when compared to pollution taxes.
12) Command-and-control policies usually
A) reduce the production of a polluting good more than do pollution taxes.
B) reduce the production of a polluting good less than do pollution taxes.
C) increase price less than do pollution taxes.
D) decrease the quantity demanded by less than do pollution taxes.
13) Command-and-control policies
A) allow a low-cost firm to abate more pollution.
B) encourage firms to develop more efficient abatement technologies.
C) usually result in relatively low compliance costs.
D) allow us to predict the total amount of pollution that will be discharged.
14) Firms are likely to prefer a pollution tax to a command-and-control policy because the
command-and-control policy will
A) increase the costs of production more than a pollution tax.
B) result in the price of the good rising more than under a pollution tax.
C) result in consumers buying less of the good than under a pollution tax.
D) all of the above
15) An advantage offered by pollution taxes that is NOT offered by command-and-control
policies is that
A) under pollution taxes pollution is usually reduced to zero.
B) a pollution tax decreases the price of the polluting good.
C) under pollution taxes, the government receives tax revenues that may be used to clean up
pollution.
D) pollution taxes decrease the demand for the good generating the pollution.
16) An advantage of pollution taxes that is NOT offered by command-and-control policies is that
A) with a pollution tax zero pollution is produced.
B) a pollution tax decreases the price of the polluting good.
C) with a pollution tax, firms have flexibility in their choice of strategies to use to clean up
pollution.
D) a pollution tax decreases the demands for goods that cause pollution.
17) Tax revenues are an advantage of ________ not offered by command-and-control policies.
A) pollution allowances
B) tradeable pollution permits
C) pollution taxes
D) pollution tax credits
Recall the Application about reducing pollution generated from international shipping to
answer the following question(s).
18) Recall the Application. Of the following CO2 reduction methods for international shipping,
which has the lowest marginal abatement cost (MAC)?
A) weather-sensitive routing
B) switching from diesel to gas-powered engines
C) reducing speed and increasing fleet size
D) installing fixed sails and wings
19) Recall the Application. Of the following CO2 reduction methods for international shipping,
which has the highest marginal abatement cost (MAC)?
A) weather-sensitive routing
B) switching from diesel to gas-powered engines
C) reducing speed and increasing fleet size
D) installing fixed sails and wings
20) Command-and-control policies are undesirable ways of reducing pollution because the
means of abatement they mandate may not be efficient for all firms.
21) Command-and-control policies are desirable because their tough pollution reduction targets
force firms to develop new technologies to survive.
22) Command-and-control policies generally reduce pollution more than pollution taxes do.
23) Command-and-control policies lead to higher prices for consumers than pollution taxes do.
24) What are the benefits of using a pollution tax rather than a command-and-control system to
internalize an externality?
9.8 Marketable Pollution Permits
1) Under a system of marketable pollution permits the government
A) chooses a level of pollution.
B) distributes permits to polluting firms.
C) allows firms to trade permits.
D) all of the above
2) Under a system of marketable pollution permits
A) pollution will increase.
B) firms may trade the right to pollute a certain amount.
C) firms can only buy the right to pollute from the government.
D) the government is not involved.
3) Another name for a system of marketable permits is
A) cap-and-trade.
B) command and control.
C) the Environmental Protection Agency.
D) the carbon tax.
4) Under a system of marketable pollution permits
A) firms with lower costs of reducing emissions are likely to sell permits to those with higher
costs of reducing emissions.
B) environmentalists can decrease pollution by purchasing permits.
C) the government can decrease the amount of pollution to the desired level.
D) All of the above are correct.
5) Under a system of marketable pollution permits
A) firms can trade away their right to pollute.
B) the amount of pollution an individual firm can generate is determined by the number of
permits issued to it by the government.
C) the production costs for firms are not affected.
D) the government controls the production process of firms who pollute.
6) Which of the following is necessary for a system of marketable pollution permits to lead to
beneficial trades between polluting companies?
A) Companies must have common abatement costs.
B) There must be differences in abatement costs between companies.
C) Company owners must have a social conscience and must be devoted to pollution abatement.
D) The government must direct companies toward beneficial trades.
7) If two firms have different abatement costs, in a system of marketable pollution permits
A) the firm with lower abatement costs will sell permits to the firm with higher abatement costs.
B) the firm with lower abatement costs will purchase permits from the firm with higher
abatement costs.
C) no voluntary exchange that makes both firms better off is possible.
D) voluntary exchange will occur, but it is impossible to determine which firm will be the seller
and which will be the purchaser.
8) What is the highest price that a firm would be willing to pay for one marketable pollution
permit?
A) an amount equal to the purchasing firm’s marginal abatement cost
B) an amount equal to the social benefit of pollution reduction
C) an amount determined by supply and demand in the market
D) an amount equal to the selling firm’s marginal abatement cost
9) Suppose Jones’ company and Smith’s company both pollute. Under a system of marketable
pollution permits, which of the following must be true in order for Smith and Jones to benefit
from trading the right to pollute?
A) Smith and Jones must be able to reduce pollution at exactly the same cost.
B) Smith and Jones must have different abatement costs.
C) Smith and Jones must have a social conscience and must be devoted to pollution abatement.
D) The government must direct Smith and Jones toward beneficial trades.
10) Suppose an oil refinery and a paper mill both pollute a river. Under a system of marketable
pollution permits, which of the following must be true in order for both companies to benefit
from trading the right to pollute?
A) They must be able to reduce pollution at exactly the same cost.
B) It must cost the firms different amounts to reduce pollution.
C) They must have a social conscience and must be devoted to pollution abatement.
D) The government must direct them toward beneficial trades.
11) As long as two firms have different abatement costs, they
A) can benefit under a system of marketable pollution permits by trading the right to pollute.
B) will prefer a pollution tax to a system of marketable pollution permits.
C) will decrease the price of their product if taxed on the amount of pollution they emit.
D) will not be able to benefit from trading the right to pollute under a system of marketable
pollution permits.
Table 9.5
12) Given the data in Table 9.5, if Firm A were to reduce pollution from 1,000 gallons of
wastewater per day to 0 gallons per day, production costs
A) would increase by $12.
B) would decrease by $12.
C) would not change.
D) cannot be calculated from the information above.
13) If each firm depicted in Table 9.5 is currently generating 1,000 gallons of wastewater per
day, Firm B would be willing to pay up to ________ to Firm A to be able to generate 2,000
gallons of wastewater per day.
A) $15
B) $20
C) $35
D) $120
14) If each firm depicted in Table 9.5 is currently generating 1,000 gallons of wastewater per
day, Firm A would need to be paid at least ________ from Firm B to reduce wastewater
production to 0 gallons per day.
A) $20
B) $15
C) $12
D) $3
15) Both firms depicted in Table 9.5 can benefit if Firm A sells its pollution permit allowing it to
generate 1,000 gallons of wastewater to Firm B for
A) a price between $12 and $15.
B) a price between $0 and $6.
C) a price greater than $20.
D) It is not possible for firms to benefit if Firm A sells a permit to Firm B.