5.2 Test Bank

Refer to Figure 5-8. What is the economically efficient level of pollution reduction?

9 million tons

Refer to Figure 5-8. Suppose the emissions reduction target is currently established at 8 million tons. What is the area that represents the cost of eliminating an additional 1 million tons?

A

Ronald Coase was awarded the 1991 Nobel Prize in Economics primarily for addressing problems related to externalities. Which of the following describes Coase's work?

Coase argued that under some circumstances private solutions to the problems of externalities will occur.

Kenneth Chay and Michael Greenstone examined the impact of reductions in air pollution since the passage of the Clean Air Act of 1970. Which of the following statements summarizes their findings?

In the two years following passage of the Act, fewer infants died than would have died if the Act had not been passed.

According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention.

Ronald Coase

Which of the following statements about the economically efficient level of air pollution is correct?

The economically efficient level of pollution occurs where the marginal cost of pollution reduction equals the marginal social benefit of reduction.

Congressman Murphy made the following proposal: "We should establish policies that completely eliminate air pollution. This is the only way to ensure that none of our citizens suffers the negative effects of air pollution." If Congressman Murphy's proposal was adopted and all forms of air pollution were eliminated, which of the following would be true?

The marginal cost from pollution reductions would exceed the marginal benefit.

Refer to Figure 5-7. Which of the following statements is true?

The optimal quantity of pollution reduction is QB.

Which of the following must be present to reach a private solution to an externality problem?

The transaction costs to negotiate a solution must be relatively low.

Economists Kenneth Chay and Michael Greenstone find that in the two years following the passage of the Clean Air Act of 1970, the sharp reduction in air pollution also led to a decline in infant deaths. Although this and other studies provide compelling evidence of the link between pollution and infant health, it is not clear that reductions from the much lower levels of ambient pollution today would have the same effect. Which of the following reasons could explain this?

When levels of pollution are high, the marginal benefit of reducing pollution also is high. It follows therefore that the benefit of reducing air pollution in 1970 would be much higher than the benefit from a proportional reduction in air pollution today when the level of pollution is much lower.

Refer to Figure 5-8. Suppose the emissions reduction target is currently established at 8 million tons. Should society undertake to reduce an additional 1 million tons so that the total reduction is 9 million tons?

Yes, because the marginal benefit exceeds the marginal costs.

In the United States, many beekeepers travel from state to state, renting out their bee colonies to farmers for pollination services. This is an example of

a Coasian solution to a positive externality problem.

Consider the following characteristics: a. low transaction costs b. small levels of pollution c. high levels of pollution d. clear assignment of property rights. Which of the above are assumptions behind the Coase Theorem?

a and d

Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain then, according to the Coase theorem

an efficient solution can be reached regardless of the initial assignment of property rights.

Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem

an efficient solution can be reached regardless of the initial assignment of property rights.

James Meade, who won the Nobel Prize in Economics in 1977, argued that positive externalities resulted from

apple growing and beekeeping.

Compare two situations. (A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel. (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that

bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation (A) and situation (B).

In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, "There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group?

dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park

If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost

further reduction will make society worse off.

If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost

further reductions will make society better off.

According to Steven Cheung: "Pollination contracts usually include stipulations regarding the number and strength of ...[bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung cites this as evidence that

government intervention is not always necessary to bring about an economically efficient number of apple trees and beehives.

Congress passed the Clean Air Act in 1970. Since this act was passed, emissions of the six main air pollutants

have fallen by more than one-half.

The Coase theorem states that

if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

If there is pollution in producing a product, then the market equilibrium price

is too low and equilibrium quantity is too high.

Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes. According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution.

not necessary; efficient

Because producers do not bear the external cost of pollution

private production exceeds the economically efficient level.

Economists argue that the level of pollution should be

reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society.

Steven Cheung examined the relationship between beekeepers and apple growers. Cheung noted that: "Pollination contracts usually include stipulations regarding the number and strength of ... [bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung's suggests that the relationship between beekeepers and apple growers is an example of

the Coase Theorem.

Refer to Figure 5-7. The marginal benefit of reducing pollution curve is the same curve as

the demand for pollution reduction curve.

In economics, the optimal level of pollution is

the level for which the net benefit from reducing the pollution is the greatest.

If electric utilities continually reduce their emissions of sulfur dioxide

the marginal cost of further emissions will rise.

Refer to Figure 5-7. The marginal cost of reducing pollution curve is the same curve as

the supply of pollution reduction curve.

Refer to Figure 5-7. What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units?

the value of the area QBBEQE

Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units?

the value of the area QBBFQE

Private solutions to the problem of externalities are most likely when

transaction costs are low and the number of bargaining parties is small.

If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered

transaction costs.

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

transaction costs.

Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If the victims of the pollution could not legally enforce the right of their property not to be damaged, the amount of pollution reduction

would be the same as if it would be if the owners of the smelter were legally liable.