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.
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.
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 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.
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.
The use of pollution permits and corrective taxes reduces the cost of environmental protection.
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 goods to which the law of demand applies.
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 glue factory to 75 parts per million, the
policy would be considered a
a.
corrective tax.
b.
subsidy.
c.
command-and-control policy.
d.
market-based policy.
15. 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.
16. In some parts of the United States, sugar beets are grown and harvested. The process of producing usable sugar from
the beets generates foul-smelling smoke. A government policy that limits the emission of smoke by sugar-beet-processing
firms is an example of
a.
a market-based policy.
b.
a command-and-control policy.
c.
tradable pollution permits.
d.
transaction costs.
17. Which of the following problems can not be alleviated by a gasoline tax?
a.
traffic congestion
b.
traffic accidents
c.
the undersupply of goods that produce positive externalities
d.
air pollution
18. 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.
19. The tax on cigarettes is an example of
a.
a consumption tax.
b.
a corrective tax.
c.
an income tax.
d.
a command-and-control policy.
20. If gasoline taxes were significantly increased in the United States, then
a.
some of the government regulations that require automakers to produce more fuel-efficient cars would become
unnecessary.
b.
other taxes, such as income taxes, could be lowered.
c.
it is likely that roads would become safer and the environment would become cleaner.
d.
All of the above are correct.
21. 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.
22. 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.
23. 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.
24. Corrective taxes differ from most taxes in that corrective taxes
a.
reduce economic efficiency.
b.
do not raise revenue for the government.
c.
do not cause deadweight losses.
d.
always result in a high burden on sellers of goods to which the corrective tax applies.
25. 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.
26. 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.
27. 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.
28. With a corrective tax, the supply curve for pollution is
a.
vertical.
b.
horizontal.
c.
upward-sloping.
d.
downward-sloping.
29. 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.
30. 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.
31. 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
32. 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.
33. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium
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.
34. 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.
35. 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 quantity 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.
36. 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 equilibrium
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.
37. 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.
38. 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
39. 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 produced?
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.
40. 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.
41. Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the
government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and
the socially optimal quantity of candy?
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.
42. Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a
$9-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.
43. Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a
$6-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.
44. Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a
$11-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.
45. 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.
Figure 10–15
46. 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
47. 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
48. 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.
49. 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.
50. 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.
51. Regulations to reduce pollution
a.
cause pollution levels to drop below the regulated amount.
b.
are typically 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 the highest costs.
d.
are a better solution for the environment than a corrective tax.
52. 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.
53. 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 are correct.
54. Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution 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 are correct.
55. In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following
statements is correct?
a.
Despite the increase in the carbon tax, emissions of greenhouse gases in British Columbia have continued to
increase at a rapid rate.
b.
Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and
corporations.
c.
Few, if any, economists favor carbon taxes such as the one that British Columbia has imposed.
d.
All of the above are correct.
56. 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.
57. Which of the following is not an effective method of reducing 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
58. 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.
59. In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax