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because
a.
it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
b.
selling pollution permits create a net increase in pollution.
c.
Corrective taxes distort incentives.
d.
Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.
60. The difference between a corrective tax and a tradable pollution permit is that
a.
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
b.
a corrective tax creates a more efficient outcome than a permit.
c.
a corrective tax sets the quantity of pollution and a permit sets the price of pollution.
d.
a permit creates a more efficient outcome than a corrective tax.
61. In some cases, tradable pollution permits may be better than a corrective tax because
a.
pollution permits allow for a market solution while a corrective tax does not.
b.
pollution permits generate more revenue for the government than a corrective tax.
c.
pollution permits are never preferred over a corrective tax.
d.
the government can set a maximum level of pollution using permits.
62. Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain?
(i)
corrective taxes
(ii)
tradable pollution permits
(iii)
amendments to the Clean Air Act
a.
(i) only
b.
both (i) and (ii)
c.
(iii) only
d.
both (ii) and (iii)
63. With pollution permits, the supply curve for pollution rights is
a.
perfectly elastic.
b.
perfectly inelastic.
c.
upward sloping.
d.
downward sloping.
64. Tradable pollution permits
a.
are widely viewed as a cost-effective way to reduce pollution.
b.
have helped reduce carbon emissions in Canada.
c.
have helped reduce sulfur dioxide emissions in the United States.
d.
All of the above are correct.
65. Tradable pollution permits
a.
have prices that are set by the government.
b.
will be more valuable to firms that can reduce pollution only at high costs.
c.
are likely to create a higher level of total pollution.
d.
are less desirable than command-and-control policies to reduce pollution.
66. Which of the following is not a characteristic of pollution permits?
a.
Prices are set by supply and demand.
b.
Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.
c.
Real-world markets for pollution permits include sulfur dioxide and carbon.
d.
Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom
pollution reduction is less expensive.
67. When one firm sells its pollution permit to another firm,
a.
both firms benefit.
b.
the total amount of pollution remains the same.
c.
the total amount of pollution decreases.
d.
Both a and b are correct.
68. Which of the following is an advantage of tradable pollution permits?
a.
Each firm is allowed to pollute exactly the same amount.
b.
Revenue from the sale of permits is greater than revenue from a corrective tax.
c.
The initial allocation of permits to firms does not affect the efficiency of the market.
d.
Firms will engage in joint research efforts to reduce pollution.
69. Which of the following is a way to address an externality problem?
a.
command and control solution
b.
corrective tax
c.
corrective subsidy
d.
all of the above.
70. Which of the following is a difference between corrective taxes and tradable pollution permits?
a.
Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control
policy.
b.
With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and
supply set the price of pollution.
c.
With corrective taxes firms pay for pollution; with tradable pollution permits firms do not.
d.
Corrective taxes internalize the pollution externality while tradable pollution permits do not.
Figure 10-16
71. Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the
marketplace. The equilibrium price of pollution is
a.
$50
b.
$500
c.
$1,000
d.
$2,000
72. Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the
marketplace. The equilibrium number of permits is
a.
50
b.
100
c.
1,000
d.
2,000
73. Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the
marketplace. In the absence of a pollution permit system, the quantity of pollution would be
a.
25
b.
50
c.
75
d.
100
74. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the
pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government
gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of
pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it
eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would
expect that Firm A will emit
a.
20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.
b.
100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air.
c.
50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air.
d.
20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.
75. Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the
pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government
gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of
pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it
eliminates before it is emitted into the air. It is likely that
a.
Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.
b.
Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200.
c.
Both firms will use their own pollution permits.
d.
Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.
76. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It
costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each
ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits.
Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the
total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the
total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?
a.
$3,000; $1,500
b.
$4,500; $3,500
c.
$4,500; $4,000
d.
$4,500; $2,500
77. Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The
government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for
each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it
eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect
that
a.
Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
b.
Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
c.
Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river.
d.
Firm A will increase its pollution and Firm B will reduce its pollution.
78. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The
government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates
before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river.
Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and
the cost of additional pollution abatement,
a.
Firm B will spend $3,500.
b.
Firm A will spend $4,000.
c.
Firm A will spend $4,500.
d.
Firm B will spend $3,000.
79. Which of the following require firms to pay to pollute?
(i)
corrective taxes
(ii)
tradable pollution permits
(iii)
pollution regulations
a.
(i) only
b.
both (i) and (ii)
c.
(iii) only
d.
both (ii) and (iii)
Figure 10-17
80. Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium
outcome to the socially-optimal outcome?
a.
An amount equal to P' minus P.
b.
An amount equal to P'.
c.
An amount equal to P.
d.
An amount equal to the external cost.
Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from
their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A
to eliminate a second unit of pollution it would cost an additional $67.
Firm
Unit to be eliminated
A
B
C
D
First unit
54
57
54
62
Second unit
67
68
66
73
Third unit
82
86
82
91
Fourth unit
107
108
107
111
81. Refer to Table 10-5. If the government charged a fee of $69 per unit of pollution, how many units of pollution would
the firms eliminate altogether?
a.
7
b.
8
c.
9
d.
10
82. Refer to Table 10-5. If the government charged a fee of $84 per unit of pollution, how many units of pollution would
the firms eliminate altogether?
a.
7
b.
8
c.
9
d.
10
83. Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following
fees per unit of pollution would achieve that goal?
a.
$67
b.
$68
c.
$81
d.
$83
84. Refer to Table 10-5. If the government wanted to eliminate exactly 11 units of pollution, which of the following fees
per unit of pollution would achieve that goal?
a.
$75
b.
$87
c.
$90
d.
$106
85. Refer to Table 10-5. Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8
pollution permits to achieve this goal. Which of the following is a likely auction price of the permits?
a.
$69
b.
$81
c.
$83
d.
$97
Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their
production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to
eliminate two units of pollution, it would cost a total of $103.
Firm
Unit to be eliminated
A
B
C
D
One unit
46
45
42
49
Two units
103
100
98
108
Three units
180
173
169
188
Four units
282
263
258
285
86. Refer to Table 10-6. If the government charged a fee of $85 per unit of pollution, how many units of pollution would
the firms eliminate altogether?
a.
10
b.
12
c.
14
d.
16
87. Refer to Table 10-6. If the government charged a fee of $93 per unit of pollution, how many units of pollution would
the firms eliminate altogether?
a.
10
b.
12
c.
14
d.
16
88. Refer to Table 10-6. Suppose the government wanted to reduce pollution from 16 units to exactly 6 units. Which one
of the following fees per unit of pollution would achieve that goal?
a.
$65
b.
$70
c.
$75
d.
$95
89. Refer to Table 10-6. Suppose there is presently no pollution fee, and the government wishes to eliminate exactly 8
units of pollution. Which of the following fees per unit of pollution would achieve that goal?
a.
$65
b.
$75
c.
$80
d.
$88
90. Which of the following is not a negative externality associated with driving cars?
a.
congestion
b.
pollution
c.
repairs
d.
accidents
91. In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature
article concluded that the optimal corrective tax on gasoline in the United States, in 2015 dollars, would be about
a.
$0.50 per gallon.
b.
$0.90 per gallon.
c.
$2.58 per gallon.
d.
$2.78 per gallon.
92. Which of the following policies is not an example of a command-and-control policy?
a.
subsidies
b.
Pigovian taxes
c.
tradable pollution permits
d.
None of the above is an example of a command-and-control policy.
