Practice 2 Externalities PDF

PRACTICE MICROECONOMICS PRACTICE 2: EXTERNALITIES 1. 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. T...

PRACTICE MICROECONOMICS PRACTICE 2: EXTERNALITIES 1. 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 these negotiations do NOT happen is that: a. most individuals are unfamiliar with the Coase theorem. b. agreements arising from such negotiations could not be enforced since the Constitution guarantees all individuals freedom of access to all public roads. c. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive. d. lawyers would find a way to prohibit such negotiations unless they were actively involved, thus making transaction costs prohibitive. 2. 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 these negotiations do NOT happen is that: a. some students don't view loud music as a negative externality. b. music is an experience, not a good. c. most students are unfamiliar with the Coase theorem. d. the transaction costs associated with identifying and establishing communication with students would be high. 3. 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. Pigouvian subsidies. c. command and control. d. tradable pollution permits. 4. Which example illustrates an environmental policy that uses 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 1 c. ignoring pollution and letting private markets operate without government interference d. allowing automobile drivers to buy and sell the right to emit a certain level of automobile emissions 5. Assume that the price of a tradable emissions permit for a ton of sulfur dioxide is $150. Which statement is INCORRECT? a. The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. 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. 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. d. The opportunity cost of emitting a ton of sulfur dioxide is $150 for all firms. 6. Which example illustrates an environmental policy based on tradable emission permits? a. allowing companies to buy and sell the right to a certain level of emissions b. a charge to companies of $1 for every 100 units of pollutants emitted c. ignoring pollution and letting private markets operate without government interference d. paying companies $1 for each 10% reduction in emissions 7. 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 much of society's resources is being used to produce copper. b. the optimal amount of society's resources is being used to produce copper. c. there is an external benefit to society from copper production. d. too little of society's resources is being used to produce copper. 8. (Figure: The Quantity of Pollution) Use Figure: The Quantity of Pollution. If the amount of pollution emitted is 150: Figure: The Quantity of Pollution 2 a. the marginal social benefit is greater than the marginal social cost of pollution. b. this economy is producing at the socially optimal level of pollution. c. this economy would benefit by increasing production of this good. d. the production of pollution is not socially optimal. 9. (Figure: The Quantity of Pollution) Use Figure: The Quantity of Pollution. The socially optimal level of pollution emissions for this economy is: Figure: The Quantity of Pollution a. 100. b. 0. c. 150. d. 50. 10. (Figure: The Quantity of Pollution) Use Figure: The Quantity of Pollution. When this economy produces 50 tons of emissions, it: Figure: The Quantity of Pollution 3 a. finds that the marginal social cost is greater than the marginal social benefit. b. is producing below its socially optimal level of production. c. is not recognizing the marginal private benefits or costs. d. is producing at its socially optimal level of production. 11. (Figure: The Socially Optimal Quantity of Pollution) Use Figure: The Socially Optimal Quantity of Pollution. In the figure, firms are the only beneficiaries of pollution, and costs are borne solely by others in the society. The optimal quantity of pollution could be achieved: Figure: The Socially Optimal Quantity of Pollution a. by subsidizing consumers of the products produced by the firms. b. with a Pigouvian subsidy. c. through a free market solution d. with a Pigouvian tax. 12. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. In the absence of government intervention, the amount of pollution will be _____ tons. Figure: Efficiency and Pollution 4 a. 40 b. 30 c. 20 d. 45 13. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. In the absence of government intervention, the marginal social cost of pollution will exceed the marginal benefit of pollution by: Figure: Efficiency and Pollution a. $0.00. b. $16.67. c. $15.00. d. $25.00. 14. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. In the absence of government intervention, the marginal 5 social cost of pollution will equal _____, and the marginal social benefit of pollution will equal _____. Figure: Efficiency and Pollution a. $25; $5 b. $25; $0 c. $15; $15 d. $5; $25 15. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. The socially optimal quantity of pollution is _____ tons. Figure: Efficiency and Pollution a. 30 b. 20 c. 45 d. 0 6 16. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If this market produced _____ tons of pollution, then _____. Figure: Efficiency and Pollution a. 30; it would be efficient b. 20; marginal social benefit would be less than marginal social cost c. 45; marginal social cost would be less than marginal social benefit d. 20; the marginal social benefit would be $7 17. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. An optimal Pigouvian tax of _____ per ton of pollution can move this market to the socially optimal quantity of pollution. Figure: Efficiency and Pollution a. $25 b. $45 c. $5 d. $15 7 18. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. A Pigouvian tax of $10 per acre of pollution will result in a quantity of pollution for which the: Figure: Efficiency and Pollution a. resources are allocated efficiently. b. marginal social benefit exceeds the marginal social cost. c. marginal social benefit is less than the marginal social cost. d. marginal social benefit equals the marginal social cost. 19. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the government imposed an environmental standard that did not allow the quantity of pollution to exceed 20 tons, there would be: Figure: Efficiency and Pollution a. too little pollution because its marginal social benefit would exceed its marginal social cost. b. too much pollution because any pollution is too much from an economist's perspective. c. a socially optimal quantity of pollution. 8 d. too much pollution because its marginal social cost would exceed its marginal social benefit. 20. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the government imposed an environmental standard that did NOT allow the quantity of pollution to exceed 40 tons, there would be: Figure: Efficiency and Pollution a. a socially optimal quantity of pollution. b. too much pollution because any pollution is too much from an economist's perspective. c. too little pollution because its marginal social benefit would exceed its marginal social cost. d. too much pollution because its marginal social cost would exceed its marginal social benefit. 21. (Figure: Efficiency and Pollution) Use Figure: Efficiency and Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the government imposed an environmental standard that did NOT allow the quantity of pollution to exceed 30 tons, there would be: Figure: Efficiency and Pollution 9 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 any pollution is too much from an economist's perspective. d. too much pollution because its marginal social cost would exceed its marginal social benefit. 22. (Figure: MSB and MSC of Pollution) Use Figure: MSB and MSC of Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. What level of pollution would be emitted in a market economy without government regulation? Figure: MSB and MSC of Pollution a. Q2 b. Q1 c. Q3 d. Q4 23. (Figure: MSB and MSC of Pollution) Use Figure: MSB and MSC of Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. What level of pollution represents the socially optimal level? Figure: MSB and MSC of Pollution 10 a. Q4 b. Q2 c. Q1 d. Q3 24. (Figure: MSB and MSC of Pollution) Use Figure: MSB and MSC of Pollution. Assume that firms are the only beneficiaries of pollution and that costs are borne solely by others in the society. If the current level of pollution is at Q1, _____ pollution is being emitted because _____. Figure: MSB and MSC of Pollution a. the socially optimal amount of; MSB = MSC b. too much; MSB > MSC c. not enough; MSB > MSC d. not enough; MSB < MSC 25. (Figure: Model of a Competitive Market) Use Figure: Model of a Competitive Market. Given the figure, if there are no external benefits or costs, the output at Q will be: Figure: Model of a Competitive Market 11 a. smaller than is socially desirable. b. larger than is socially desirable. c. efficient. d. inefficient. 26. (Figure: Model of a Competitive Market) Use Figure: Model of a Competitive Market. Given the figure, if there are external costs: Figure: Model of a Competitive Market a. resources will be efficiently allocated to the production of the good. b. the price at P will be higher than if there were no external costs. c. resources will be overallocated to the production of the good. d. resources will be underallocated to the production of the good. 27. (Figure: Model of a Competitive Market) Use Figure: Model of a Competitive Market. Given the figure, if there are external costs, a tax imposed on sellers will: Figure: Model of a Competitive Market 12 a. increase the equilibrium quantity. b. have no effect on the equilibrium price. c. decrease the equilibrium quantity. d. decrease the equilibrium price. 28. Assume that 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 example illustrates a(n): a. environmental standard. b. emissions tax. c. Pigouvian tax. d. tradable emissions permit. 29. There are benefits resulting indirectly from pollution because: a. firms pollute the environment only if it allows them to increase the price they can charge consumers. b. we obtain goods and services that we enjoy, even though we pollute in the process. c. businesses and consumers receive a perverse satisfaction from polluting. d. it can often be beneficial to wildlife. 30. The marginal social benefit of pollution: a. is the benefit to society of one more unit of pollution. b. increases as more pollution is emitted. c. equals the marginal social cost of pollution in all markets at equilibrium. d. equals zero when the social optimal quantity of pollution is produced. 13