Chapter 10

In the figure above, the vertical distance between ___________ represents the external ______________

P3 - P1, benefit of a positive externality

Which of the following are true regarding the regulation of positive externalities? a. It is not practical to require consumers to buy more, since they may not have the income to buy more. b. The government may not be able to estimate with any degree of accuracy what the optimal quantity would be. c. Requiring firms to sell more forces them to sell at a loss, prompting them to leave the industry. d. Regulating positive externalities typically yields better outcomes than pigovian subsidies.

a. It is not practical to require consumers to buy more, since they may not have the income to buy more. b. The government may not be able to estimate with any degree of accuracy what the optimal quantity would be. c. Requiring firms to sell more forces them to sell at a loss, prompting them to leave the industry.

According to the Coase theorem, private solutions to externalities can occur only when which of the following conditions are met? a. It is relatively simple for those affected to meet and negotiate. b. Property ownership/rights are clearly defined. c. The government is willing to get involved.

a. It is relatively simple for those affected to meet and negotiate. b. Property ownership/rights are clearly defined.

Which of the following statements is true: a. Pigovian subsidies help bring efficiency to markets that cause external benefits. b. A government should use pigovian taxes and subsidies simultaneously to bring a market into efficiency. c. Pigovian taxes generate deadweight loss. d. Pigovian taxes are better than pigovian subsidies.

a. Pigovian subsidies help bring efficiency to markets that cause external benefits.

Which of the following statements are true regarding the regulation of negative externalities? a. Regulating by imposing technical requirements that firms must use to reduce pollution, will reduce the deadweight loss, but not completely eliminate it. b. Regulating to limit the quantity traded for a good with a negative externality will increase the market price just as a pigovian tax would. c. The two major regulation options for the government on externalities are to impose limits or to set technical requirements. d. Effective regulation of a negative externality should result in a greater quantity traded of the good.

a. Regulating by imposing technical requirements that firms must use to reduce pollution, will reduce the deadweight loss, but not completely eliminate it. b. Regulating to limit the quantity traded for a good with a negative externality will increase the market price just as a pigovian tax would. c. The two major regulation options for the government on externalities are to impose limits or to set technical requirements.

When externalities exist, buyers and sellers a. neglect the external effects of their actions and the market equilibrium is not efficient. b. do not neglect the external effects of their actions and the market equilibrium is not efficient. c. do not neglect the external effects of their actions and the market equilibrium is efficient. d. neglect the external effects of their actions and the market equilibrium is efficient.

a. neglect the external effects of their actions and the market equilibrium is not efficient.

Air pollution creates a negative externality. As such, a. social welfare will be maximized when some, but not necessarily all, air pollution is eliminated. b. social welfare is optimal only when all air pollution is eliminated. c. an optimal outcome in the market can only be obtained if polluting firms are regulated carefully. d. social welfare will be maximized by stopping completely the production of the goods that cause the air pollution

a. social welfare will be maximized when some, but not necessarily all, air pollution is eliminated.

Based on the diagram above, which of the following is true: a. If the government issues pollution permits for 150 tons, the price per permit will be $135. b. If firms are polluting 200 tons, a pigovian tax of 90 would cause them to reduce pollution to 100 tons. c. If the external cost of pollution is $135/ton, the optimal amount of pollution would be 100 tons. d. If all firms combined pollute 150 tons, then every single firm must have the same cost of reducing pollution of $90/ton.

c. If the external cost of pollution is $135/ton, the optimal amount of pollution would be 100 tons.

Which of the following statements is true regarding the tradable pollution permits market, assuming the number of permits issued is socially optimal? a.The supply of permits is determined by the firms. b. Since the government restricts the number of permits, there will always be a shortage of permits in the market. c. The curve that represents the cost of reducing pollution becomes the demand for permits curve. d. The price that the market will set for the permits can be very different from the external cost of pollution.

c. The curve that represents the cost of reducing pollution becomes the demand for permits curve.

Suppose that a steel factory emits a certain amount of air pollution. The social cost of producing the steel is the a. monetary cost of the harm caused by the pollution. b. private cost of producing the steel plus the price consumers pay for the steel. c. private cost of producing the steel plus the monetary cost of the harm caused by the pollution. d. price consumers pay for the steel plus the monetary cost of the harm caused by the pollution.

c. private cost of producing the steel plus the monetary cost of the harm caused by the pollution.

Suppose a market has a deadweight loss due to a negative externality. If a tax equal to the externality is imposed, a. the market will produce more than the optimal level of output, and there will be a deadweight loss. b. the market will produce less than the optimal level of output, and there will be a deadweight loss. c. the market will end up producing the socially optimal level of output, but there will still be a deadweight loss. d. the market will end up producing the socially optimal level of output, and there will no longer be a deadweight loss.

d. the market will end up producing the socially optimal level of output, and there will no longer be a deadweight loss.

When a pigovian subsidy is implemented, the outcome will be a. an increased equilibrium quantity beyond the socially optimal quantity. b. a decreased equilibrium quantity below the socially optimal quantity. c. greatly affected by who the subsidy is given to: firms or households. d. the same, whether the subsidy is given to firms or households.

d. the same, whether the subsidy is given to firms or households.