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Chapter 10/Externalities ❖ 41
156. Refer to Figure 10-11. On the
a.
260th unit of output, private value exceeds private cost.
b.
260th unit of output, private value exceeds external value.
c.
300th unit of output, private value exceeds social value.
d.
300th unit of output, private cost exceeds social value.
157. Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus
that can be achieved in this market is
a.
$3,980.
b.
$4,460.
c.
$5,240.
d.
$5,880.
158. Refer to Figure 10-11. Taking only private value and private cost into account, total surplus at the market
equilibrium amounts to
a.
$1,920.
b.
$2,240.
c.
$2,860.
d.
$3,980.
Table 10-4
Quantity
Private Value
Private Cost
External Cost
1
$40
$20
$7
2
$38
$23
$7
3
$36
$26
$7
4
$34
$29
$7
5
$32
$32
$7
6
$28
$35
$7
159. Refer to Table 10-4. The table represents a market in which
a.
there is no externality.
b.
there is a positive externality.
c.
there is a negative externality.
d.
The answer cannot be determined from inspection of the table.
160. Refer to Table 10-4. The social cost of the 2nd unit of output that is produced is
a.
$7.
b.
$23.
c.
$30.
d.
$38.
42 ❖ Chapter 10/Externalities
161. Refer to Table 10-4. The last unit of output for which private value exceeds social cost is the
a.
2nd unit.
b.
3rd unit.
c.
4th unit.
d.
5th unit.
162. Refer to Table 10-4. The market equilibrium quantity of output is
a.
3 units.
b.
4 units.
c.
5 units.
d.
6 units.
163. Refer to Table 10-4. Take into account private and external costs and assume the quantity of output is always
a whole number (that is, fractional units of output are not possible). The maximum total surplus that can be
achieved in this market is
a.
$19.
b.
$21.
c.
$24.
d.
$28.
164. Refer to Table 10-4. Taking into account private and external costs, total surplus in the market equilibrium
amounts to
a.
$15.
b.
$17.
c.
$18.
d.
$20.
165. Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to
the socially optimal equilibrium?
a.
a tax of $2 per unit of output
b.
a subsidy of $2 per unit of output
c.
a tax of $7 per unit of output
d.
a subsidy of $7 per unit of output
Chapter 10/Externalities ❖ 43
Figure 10-12
166. Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?
a.
social cost
b.
social value
c.
private cost
d.
private value
167. Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?
a.
social cost minus social value
b.
social value minus private cost
c.
demand
d.
private cost
168. Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?
a.
social cost
b.
social value
c.
private cost
d.
private value
169. Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?
a.
social cost minus social value
b.
social value minus private cost
c.
demand
d.
private value plus external benefit
Supply
Line 2
Line 1
External
benefit
Q Q
1 2
Quantity
Price
44 ❖ Chapter 10/Externalities
170. Refer to Figure 10-12. An alternative label for the line labeled “Supply” would be
a.
private value.
b.
external value.
c.
private cost.
d.
external cost.
171. Refer to Figure 10-12. An alternative label for the quantity would be
a.
.
b.
.
c.
.
d.
.
172. Refer to Figure 10-12. An alternative label for the quantity would be
a.
.
b.
.
c.
.
d.
.
173. Refer to Figure 10-12. The graph, as drawn, could apply to the market for
a.
automobiles.
b.
aluminum.
c.
robots.
d.
All of the above are correct.
174. Refer to Figure 10-12. The graph, as drawn, could apply to the market for
a.
fire extinguishers.
b.
historic buildings.
c.
robots.
d.
All of the above are correct.
Chapter 10/Externalities ❖ 45
175. Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the
price of education. Then the quantity represents
a.
an inefficiency.
b.
the extent of the negative externality that pertains to the market for education.
c.
the amount of the tax that would be required to correct the negative externality that pertains to the
market for education.
d.
the amount of the subsidy that would be required to correct the positive externality that pertains to
the market for education.
PUBLIC POLICIES TOWARD EXTERNALITIES
Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics.
1. Refer to Figure 10-13. Each unit of plastics that is produced results in an external
a.
cost of $6.
b.
cost of $8.
c.
benefit of $6.
d.
benefit of $8.
2. Refer to Figure 10-13. In order to reach the social optimum, the government could
a.
impose a tax of $2 per unit on plastics.
b.
impose a tax of $6 per unit on plastics.
c.
impose a tax of $8 per unit on plastics.
d.
offer a subsidy of $6 per unit on plastics.
Private Cost
Social Cost
Demand
100 200 300 400 500 Q
4
8
12
16
20
24
28
32
P
46 ❖ Chapter 10/Externalities
3. Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the
a.
social optimum has been reached.
b.
market equilibrium has been reached.
c.
negative externality associated with plastics has been eliminated.
d.
positive externality associated with plastics has been eliminated.
4. Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the
a.
social optimum has been reached.
b.
market equilibrium has been reached.
c.
government must have imposed a corrective tax to guide the market to this outcome.
d.
government must have offered a corrective subsidy to guide the market to this outcome.
5. Refer to Figure 10-13. If the government imposed a corrective tax that successfully moved the market from
the market equilibrium to the social optimum, then tax revenue for the government would amount to
a.
$1,250.
b.
$1,600.
c.
$2,000.
d.
$2,500.
Chapter 10/Externalities ❖ 47
Figure 10-14
6. Refer to Figure 10-14. Which of the following statements is correct?
a.
To induce firms to internalize the externality in this market, the government should impose a tax
measured by P2 - P0.
b.
To induce firms to internalize the externality in this market, the government should offer a subsidy
measured by P2 - P0.
c.
To induce firms to internalize the externality in this market, the government should impose a tax
measured by P2 - P1.
d.
There is no externality in this market.
7. Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the
student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following
statements is correct?
a.
The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b.
The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.
c.
The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.
d.
There is not enough information to answer the question.
8. Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the
student in the form of higher wages. If there are no government subsidies for MBAs, then which of the follow-
ing statements is correct?
a.
The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b.
The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.
c.
The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.
d.
There is not enough information to answer the question.
48 ❖ Chapter 10/Externalities
9. Since almost all forms of transportation produce some type of pollution,
a.
the government should ban all transportation.
b.
the government should ban all pollution.
c.
society has to weigh the cost and benefits when deciding how much pollution to allow.
d.
refrain from intervening because the market can best solve this problem.
10. Some environmentalists argue that we should protect the environment as much as possible, regardless of cost.
Which of the following is not a likely outcome of pursuing such a course of action?
a.
lower levels of nutrition, health care, and housing
b.
a lower standard of living
c.
slowing or reversing technological advancement
d.
the elimination of all pollution
11. The best remedy for market failure is often
a.
a market-based solution.
b.
shutdown of the market.
c.
no government intervention.
d.
externalizing the externalities.
12. Which of the following statements is correct?
a.
Because a clean environment is a public good, a feasible goal is to eliminate all pollution,
regardless of the cost.
b.
Rich countries usually have cleaner environments than poor countries because a clean environment
is like other normal goods in that it has a positive income elasticity.
c.
Clean water and clean air are priceless goods.
d.
All of the above are correct.
13. A command-and-control policy is another term for a
a.
pollution permit.
b.
government regulation.
c.
corrective tax.
d.
Both a and b are correct.
14. If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million, the
policy would be considered a
a.
regulation.
b.
corrective tax.
c.
subsidy.
d.
market-based policy.
Chapter 10/Externalities ❖ 49
15. When the government uses a command-and-control policy to solve an externality, it
a.
is usually the most effective policy option available.
b.
creates policies that directly regulate behavior.
c.
usually involves taxing the consumption of a commodity.
d.
typically refers to the Coase theorem to structure the policy.
16. A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not com-
ply with local clean air standards. This decision provides an example of
a.
a direct regulation of an externality.
b.
corrective taxes.
c.
a Coase theorem solution to an externality.
d.
the misuse of a subsidy.
17. Emission controls on automobiles are an example of a
a.
corrective tax.
b.
command-and-control policy to increase social efficiency.
c.
policy that reduces pollution by allocating resources through market mechanisms.
d.
policy to reduce congestion on urban freeways.
18. If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example
of
a.
a market-based policy.
b.
a command-and-control policy.
c.
tradable pollution permits.
d.
transaction costs.
19. If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the
policy would be considered
a.
a subsidy.
b.
a regulation.
c.
a corrective tax.
d.
an application of the Coase theorem.
20. A gasoline tax is designed to correct each of the following problems except
a.
traffic congestion.
b.
traffic accidents.
c.
air pollution.
d.
EPA regulations.
50 ❖ Chapter 10/Externalities
21. Which of the following statements is correct?
a.
Gasoline taxes are an example of an EPA regulation.
b.
Gasoline taxes are higher in many European countries than in the United States.
c.
Gasoline taxes contribute to global warming.
d.
Gasoline taxes are an example of a command-and-control policy.
22. The tax on gasoline is an example of
a.
a consumption tax.
b.
a corrective tax.
c.
an income tax.
d.
a command-and-control policy.
23. Which of the following statements is correct?
a.
Automotive manufacturers prefer stricter fuel economy regulations to higher gasoline taxes.
b.
Higher gasoline taxes have provided a market-based incentive for Europeans to buy more fuel-
efficient vehicles.
c.
Higher gasoline taxes have had no effect on the U.S. demand for gasoline because the demand for
gasoline is perfectly inelastic.
d.
Fuel efficiency regulations are more effective than gasoline taxes in reducing the demand for
gasoline in the United States and Europe.
24. Which of the following is not an advantage of corrective taxes?
a.
They raise revenues for the government.
b.
They enhance economic efficiency.
c.
They subsidize the production of goods with positive externalities.
d.
They move the allocation of resources closer to the social optimum.
25. Which of the following statements is not correct?
a.
Corrective taxes can be used to place a price on the right to pollute.
b.
Corrective taxes allocate pollution to those producers who face the highest cost of reducing
pollution.
c.
Corrective taxes provide incentives to develop cleaner technologies.
d.
Corrective taxes require the government to set a target level of pollution.
Chapter 10/Externalities ❖ 51
26. Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do
corrective taxes avoid the disadvantages of most other taxes?
a.
Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol.
b.
Because corrective taxes correct for market externalities, they take into consideration the well-
being of bystanders.
c.
Corrective taxes provide incentives for the conservation of natural resources.
d.
Corrective taxes do not affect deadweight loss.
27. Corrective taxes differ from most taxes in that corrective taxes
a.
enhance economic efficiency.
b.
do not raise revenue for the government.
c.
cause deadweight loss.
d.
cannot be divided between the buyer and seller.
28. A corrective tax
a.
allocates pollution to those factories that face the highest cost of reducing it.
b.
is a form of regulation.
c.
works well for all types of externalities.
d.
is inferior to regulatory policy according to most economists.
29. Corrective taxes are unlike most other taxes because they
a.
distort incentives.
b.
move the allocation of resources away from the social optimum.
c.
raise revenue for the government.
d.
move the allocation of resources closer to the social optimum.
30. In Singapore, littering fines are strictly enforced. This is an example of a policy that
a.
relies on moral codes to reduce the pollution externality.
b.
relies on the Coase Theorem.
c.
discriminates against foreigners.
d.
relies on incentives to reduce the pollution externality.
31. Corrective taxes are typically advocated to correct for the effects of
a.
positive externalities.
b.
negative externalities.
c.
patents.
d.
All of the above are correct.
52 ❖ Chapter 10/Externalities
32. With a corrective tax, the supply curve for pollution is
a.
perfectly inelastic.
b.
perfectly elastic.
c.
upward sloping.
d.
downward sloping.
33. A corrective tax is also known as:
a.
a command-and-control regulation.
b.
a Coase tax.
c.
a Pigovian tax.
d.
a Smithian tax.
34. Corrective taxes
a.
encourage consumers to avoid sales taxes by shopping online.
b.
are frequently used to discourage imports.
c.
are less efficient than direct regulation.
d.
give factory owners an economic incentive to reduce pollution.
35. Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a
tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium
quantity and the socially optimal quantity of cigarettes?
a.
They are equal.
b.
The after-tax equilibrium quantity is greater than the socially optimal quantity.
c.
The after-tax equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
36. Suppose that alcohol consumption creates a negative externality. What can the government do to equate the
equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
a.
impose a tax on alcohol that is equal to the per-unit externality
b.
offer a subsidy on alcohol that is equal to the per-unit externality
c.
impose a regulation limiting the amount of alcohol that each consumer can purchase
d.
nothing
Chapter 10/Externalities ❖ 53
37. Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the
per-cigarette externality, then
a.
the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal
quantity of cigarettes smoked.
b.
the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal
quantity of cigarettes smoked.
c.
the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of
cigarettes smoked.
d.
There is not enough information to answer the question.
38. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government impose a $5 per-unit tax on the producers. What is the relationship between the after-tax equilib-
rium quantity and the socially optimal quantity of electricity to be produced?
a.
They are equal.
b.
The after-tax equilibrium quantity is greater than the socially optimal quantity.
c.
The after-tax equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
39. Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell
because the tax makes the producer
a.
externalize the positive externality.
b.
externalize the negative externality.
c.
internalize the positive externality.
d.
internalize the negative externality.
40. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quan-
tity and the socially optimal quantity of electricity to be produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
41. Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the
government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilib-
rium quantity and the socially optimal quantity of electricity to be produced?
a.
They are equal.
b.
The after-tax equilibrium quantity is greater than the socially optimal quantity.
c.
The after-tax equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
54 ❖ Chapter 10/Externalities
42. Suppose that elementary education creates a positive externality. If the government subsidizes education by an
amount equal to the per-unit externality it creates, then
a.
the equilibrium quantity of education will equal the socially optimal quantity of education.
b.
the equilibrium quantity of education will be greater than the socially optimal quantity of education.
c.
the equilibrium quantity of education will be less than the socially optimal quantity of education.
d.
There is not enough information to answer the question.
43. University researchers create a positive externality because what they discover in their research labs can easily
be learned by others who haven't contributed to the research costs. What could the federal government do to
equate the equilibrium quantity of university research and the socially optimal quantity of university research
produced?
a.
tax university researchers
b.
offer grants to university researchers
c.
eliminate subsidized student loans
d.
nothing
44. University researchers create a positive externality because what they discover in their research labs can easily
be learned by others who haven't contributed to the research costs. Suppose that the federal government gives
grants to these researchers equal to the their per-unit production externality. What is the relationship between
the equilibrium quantity of university research and the socially optimal quantity of university research pro-
duced?
a.
The equilibrium quantity is greater than the socially optimal quantity.
b.
They are equal.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
45. Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the
local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then
a.
less than the socially optimal quantity.
b.
greater than the socially optimal quantity.
c.
equal to the socially optimal quantity.
d.
There is not enough information to answer the question.
46. Suppose that cookie producers create a positive externality equal to $2 per dozen. Further suppose that the
government offers a $2 per-dozen subsidy to the producers. What is the relationship between the equilibrium
quantity and the socially optimal quantity of cookies to be produced?
a.
The equilibrium quantity is greater than the socially optimal quantity.
b.
The equilibrium quantity is less than the socially optimal quantity.
c.
They are equal.
d.
There is not enough information to answer the question.
Chapter 10/Externalities ❖ 55
47. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $12 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
48. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
49. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a.
They are equal.
b.
The equilibrium quantity is greater than the socially optimal quantity.
c.
The equilibrium quantity is less than the socially optimal quantity.
d.
There is not enough information to answer the question.
50. Which of the following statements is not correct?
a.
Tradable pollution permits have an advantage over corrective taxes if the government is uncertain
as to the optimal size of the tax necessary to reduce pollution to a specific level.
b.
Both corrective taxes and tradable pollution permits provide market-based incentives for firms to
reduce pollution.
c.
Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the
price of pollution.
d.
Both corrective taxes and tradable pollution permits reduce the cost of environmental protection
and thus should increase the public's demand for a clean environment.
56 ❖ Chapter 10/Externalities
Figure 10-15
51. Refer to Figure 10-15. Which graph illustrates a pollution permit program?
a.
the left graph
b.
the right graph
c.
both graphs
d.
neither graph
52. Refer to Figure 10-15. Which graph illustrates a corrective tax?
a.
the left graph
b.
the right graph
c.
both graphs
d.
neither graph
53. Refer to Figure 10-15. Which of the following is not necessary in order for the corrective tax and pollution
permit to have equivalent effects?
a.
PB must be equivalent to the corrective tax.
b.
QA must be equivalent to the amount of pollution allowed to the pollution permit holders.
c.
The equilibrium price and quantity of pollution must be the same in both graphs.
d.
The amount of pollution emitted by each firm must be the same.
54. Refer to Figure 10-15. The supply of pollution permits is
a.
elastic and represented by line A.
b.
inelastic and represented by line A.
c.
elastic and represented by line F
d.
inelastic and represented by line F.
Chapter 10/Externalities ❖ 57
55. Which of the following statements is correct?
a.
Corrective taxes are often preferred over direct regulation because they typically reduce
externalities at a lower cost.
b.
Corrective taxes distort economic incentives.
c.
Corrective taxes are often preferred over direct regulation because they typically reduce
externalities at a faster rate.
d.
Both a and b are correct.
56. Regulations to reduce pollution
a.
cause pollution levels to drop below the regulated amount.
b.
are a more costly solution to society than a corrective tax.
c.
allow firms with the lowest cost to reduce pollution by more than those with highest costs.
d.
are a better solution for the environment than a corrective tax.
57. A corrective tax
a.
causes each factory to reduce pollution by the same amount.
b.
assigns a legal pollution limit for firms.
c.
places a price on the right to pollute.
d.
costs society more than pollution regulations.
58. A corrective tax
a.
can be used to internalize a negative externality.
b.
imposed on sellers shifts the supply curve to the left.
c.
imposed on buyers shifts the demand curve to the left.
d.
All of the above.
59. Most economists prefer corrective taxes to regulation to correct the pollution problem because:
a.
the market-based solution is less costly to society.
b.
the market-based solution can result in a greater reduction in pollution.
c.
the market-based solution raises revenue for the government.
d.
all of the above.
60. Which of the following statements is correct?
a.
Taxes are more difficult to administer than regulations.
b.
Taxes provide incentives for firms to adopt new methods to reduce negative externalities.
c.
Command-and-control policies provide incentives for private decisionmakers to solve their
problems on their own.
d.
Corrective taxes distort incentives.
58 ❖ Chapter 10/Externalities
61. Which of the following is not an effective method to reduce negative externalities?
a.
relying on voluntary compliance
b.
taxing the output of industries that pollute
c.
creating legal environmental standards
d.
increasing public spending on cleanup and reduction of pollution
62. What is the difference between command-and-control policies and market-based policies toward externalities?
a.
Command-and-control policies provide incentives for private decisionmakers to solve the problems
on their own, whereas market-based policies regulate behavior directly.
b.
Command-and-control policies rely on taxes, whereas market-based policies rely on quotas.
c.
Command-and-control policies regulate behavior directly, whereas market-based policies provide
incentives for private decisionmakers to change their behavior.
d.
Command-and-control policies are efficient, whereas market-based policies are inefficient.
63. Which of the following statements is not correct?
a.
Patents help internalize the externalities associated with technological advances.
b.
Economists typically prefer regulations to corrective taxes because regulations provide more
incentives for firms to seek continued reductions in pollution.
c.
Allowing firms to trade pollution permits will lower the total cost of reducing pollution.
d.
A big impediment to implementing the Coase theorem in many cases is high transactions costs.
64. In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective
tax because
a.
it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
b.
selling pollution permits create a net increase in pollution.
c.
Corrective taxes distort incentives.
d.
Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.
65. The difference between a corrective tax and a tradable pollution permit is that
a.
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
b.
a corrective tax creates a more efficient outcome than a permit.
c.
a corrective tax sets the quantity of pollution and a permit sets the price of pollution.
d.
a permit creates a more efficient outcome than a corrective tax.
Chapter 10/Externalities ❖ 59
66. In some cases, tradable pollution permits may be better than a corrective tax because
a.
pollution permits allow for a market solution while a corrective tax does not.
b.
pollution permits generate more revenue for the government than a corrective tax.
c.
pollution permits are never preferred over a corrective tax.
d.
the government can set a maximum level of pollution using permits.
67. Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain?
(i)
corrective taxes
(ii)
tradable pollution permits
(iii)
amendments to the Clean Air Act
a.
(i) only
b.
both (i) and (ii)
c.
(iii) only
d.
both (ii) and (iii)
68. With pollution permits, the supply curve for pollution rights is
a.
perfectly elastic.
b.
perfectly inelastic.
c.
upward sloping.
d.
downward sloping.
69. Tradable pollution permits
a.
are widely viewed as a cost-effective way to reduce pollution.
b.
have helped reduce carbon emissions.
c.
have helped reduce sulfur dioxide emissions.
d.
All of the above are correct.
70. Once tradable pollution permits have been allocated to firms,
a.
the government controls the price of permits.
b.
firms that can reduce pollution only at high cost will be willing to pay the most for the pollution
permits.
c.
the value of pollution-saving technology will be lower than the market value of a pollution permit.
d.
the Coase theorem is no longer applicable as a solution to reducing pollution.
71. Tradable pollution permits
a.
have prices that are set by the government.
b.
will be more valuable to firms that can reduce pollution only at high costs.
c.
are likely to create a higher level of total pollution.
d.
are less desirable than corrective taxes in reducing pollution.
60 ❖ Chapter 10/Externalities
72. Which of the following is not a characteristic of pollution permits?
a.
Prices are set by supply and demand.
b.
Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial
allocation.
c.
Real-world markets for pollution permits include sulfur dioxide and carbon.
d.
Firms for whom pollution reduction is very expensive are willing to pay more for permits than
firms for whom pollution reduction is less expensive.
73. When one firm sells its pollution permit to another firm,
a.
both firms benefit.
b.
the total amount of pollution remains the same.
c.
the total amount of pollution decreases.
d.
Both a and b are correct.
74. Which of the following is an advantage of tradable pollution permits?
a.
Each firm is allowed to pollute exactly the same amount.
b.
Revenue from the sale of permits is greater than revenue from a corrective tax.
c.
The initial allocation of permits to firms does not affect the efficiency of the market.
d.
Firms will engage in joint research efforts to reduce pollution.
75. Which of the following is a way to address an externality problem?
a.
command and control solution
b.
corrective tax
c.
corrective subsidy
d.
all of the above.
76. Which of the following is a difference between corrective taxes and tradable pollution permits?
a.
Corrective taxes are a market-based solution while tradable pollution permits are a command-and-
control policy.
b.
With a corrective tax the government sets the price of pollution; with tradable pollution permits,
demand and supply set the price of pollution.
c.
With corrective taxes firms pay for pollution; with tradable pollution permits firms do not.
d.
Corrective taxes internalize the pollution externality while tradable pollution permits do not.
