ECON Ch. 9 HW & Quiz

The most efficient distribution of pollution abatement is such that the

marginal cost of abatement is the same across all polluters.

Two firms, Industrio and Capitalista, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted. Suppose a permit system has been adopted and each firm has already purchased one permit. Industrio would be willing to pay up to ______ for the right to emit a second ton of smoke, and Capitalista would be willing to pay up to ______ for the right to emit a second ton of smoke.

$200; $110

Two firms, Kegareta Incorporated and Sucio Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. If the government requires each firm to cut its emissions by 50 percent, what would be the total cost to society of this policy?

$225 per day

Two firms, Industrio and Capitalista, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted. If neither firm had any permits, Industrio would be willing to pay up to ______ for the right to emit 1 ton of smoke, and Capitalista would be willing to pay up to ______ for the right to emit 1 ton of smoke.

$300, $200

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The accompanying table shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would be willing to pay Quick Burger as much as ______ per month to NOT operate a drive-through window.

$4,000

Two firms, Industrio and Capitalista, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the accompanying table. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted. Suppose the government decides to auction 6 permits. The government conducts the auction by starting at a price of $1 and asking how many permits each firm wants to buy at that price. If the total is more than 6, it raises the price by $1 and asks again until the total quantity demanded falls to 6. Under this system, each permit will sell for ______ with Industrio buying ______ and Capitalista buying ______.

$41; 4; 2

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. At the private market equilibrium, the price of each dose is

$50

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the accompanying table. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. The villagers will buy a year-old goat if the goat can be sold for a price of at least _____ when it is 2 years old.

$55

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10 percent interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in the accompanying table. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. If the villagers purchase the socially optimal number of goats and bonds, then total village income will be ______.

$70

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The accompanying table shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through window, then the Sunshine Café would have to pay Quick Burger at least ______ per month to not operate a drive-through window.

$9,000

Examples of positional arms control agreements include:

- campaign spending limits - social norms against vanity - binding arbitration agreements

Identify which of the following are social norms that act as positional arms agreements.

- fashion norms - nerd norms - norms against vanity - norms of taste

Select all that apply In professional sports, the rewards people receive typically depend on: - how they perform relative to their rivals. - how they perform in absolute terms. - the type of sports industry. - how much money they spend on training.

- how they perform relative to their rivals. - how they perform in absolute terms.

A payoff matrix that illustrates the outcomes faced by professional athletes' decisions to either take or not take anabolic steroids tells us that ______. - when both participants choose to use anabolic steroids, they each reach the best overall outcome - the rewards athletes receive depend on how they perform in absolute terms - the rewards athletes receive depend on how they perform relative to their closest rivals - when both participants choose to use anabolic steroids, they each reach the second-best overall outcome

- the rewards athletes receive depend on how they perform in absolute terms - the rewards athletes receive depend on how they perform relative to their closest rivals

A payoff matrix that illustrates the outcomes faced by professional athletes' decisions to either take or not take anabolic steroids tells us that ______.

- the rewards athletes receive depend on how they perform relative to their closest rivals - the rewards athletes receive depend on how they perform in absolute terms

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The socially optimal quantity of the vaccine is ______ doses per day.

100

Suppose there are three power-generating plants, each of which has access to 5 different production processes. The accompanying table summarizes the cost of each production process and the corresponding number of tons of smoke emitted each. Suppose the government imposes a tax of $21 on each ton of smoke emitted. To minimize costs, Firm X will emit ______ tons; Firm Y will emit ______ tons, and Firm Z will emit ______ tons.

2; 3; 4

In the picture to the right, the market equilibrium level of output is _____ units per day.

300

In the picture to the right, the market equilibrium level of output is units per day.

300

In the picture to the right, the socially optimal level of output is ______ units per day.

40

At the market equilibrium level of output, the deadweight loss in the market to the right is _____ dollars per day. Enter your answer as a number.

500

At the market equilibrium level of output, the deadweight loss in the market to the right is _______ dollars per day. Enter your answer as a number.

500

In the picture to the right, the socially optimal level of output is _____ units per day.

500

In the picture to the right, the market equilibrium level of output is ______ units per day.

60

If the government imposes a tax on pollution, then firms with the highest marginal cost of pollution abatement will

reduce pollution the least.

If the government taxes pollution, then firms with the lowest marginal cost of pollution abatement will

reduce pollution the most.

True or false: The Coase theorem implies that there is no need for laws and regulations concerning activities that generate externalities because people should be able to arrive at efficient solutions to the problems caused by externalities.

False Reason: The Coase theorem says that people should be able to arrive at efficient solutions to the problems caused by externalities if they can negotiate at no cost the purchase and sale of the right to perform activities that cause externalities. If negotiation is infeasible, however, government intervention may be necessary.

Refer to the figure below. Private markets will provide _____ units of this good per day, and the socially optimal number of units per day is ______.

G; F

If an activity generates a positive externality, one way to improve economic efficiency is to _____ that activity.

Subsidize Reason: By subsidizing activities that generate positive externalities, you induce those engaged in those activities to take into account the benefit they give to others.

Kate and Ali can live together in a two-bedroom apartment for $850 per month, or they can each rent a one-bedroom apartment for $600 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's smoking habit. Kate would be willing to pay up to $300 a month to avoid smelling Ali's cigarettes. Ali would give up smoking cigarettes for no less than $150 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together?

Kate pays $500 per month and Ali pays $350 per month.

Kate and Ali can live together in a two-bedroom apartment for $1,000 per month, or they can each rent a one-bedroom apartment for $800 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's smoke cigarettes in the apartment. Kate would be willing to pay up to $375 a month to avoid smelling Ali's cigarettes. Ali would give up smoking cigarettes for no less than $225 per month. If Kate and Ali decide to live together, is it socially optimal for Ali to smoke cigarettes in the apartment?

No, because the benefit to Ali of smoking cigarettes is less than the cost to Kate.

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains for the three parties are listed in the accompanying table. Suppose that Erie Textiles can only negotiate with one of the affected groups. Will Erie operate with a filter?

No, regardless of which group they negotiate with.

Suppose the owners of Serenity Yoga are upset because loud music from a nearby bar disrupts their yoga classes. If the owners of Serenity Yoga and the owners of the bar can at no cost negotiate the purchase and sale of the right to play loud music, then should the owners of Serenity Yoga and the owners of the bar be indifferent about whether the bar has a legal right to play loud music?

No. Reason: Whether the bar has the legal right to play loud music can affect how (but not whether) the socially efficient outcome is reached.

Which of the following is an example of an activity with an external cost?

Speeding on the interstate

Which of the following investments is part of a positional arms race?

Studying hard for your economics exam because your professor grades on a curve

Which one of the following government actions is intended to generate positive externalities?

Subsidies for planting trees on hillsides

Suppose that a government agency is trying to decide between two pollution-reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Suppose the regulators chose the permit policy instead of the tax policy. What might explain that decision?

The permit policy allows regulators to achieve reduction goals without having detailed knowledge about firms' abatement costs.

Consider the phrase, "once people have to pay for their emissions, they quickly find ingenious ways of reducing them."This refers to which of the following?

Tradable pollution permits work.

Refer to the accompanying figure. The socially optimal quantity in this market is ______ units per day.

W

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The accompanying table shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café cannot negotiate with each other, then will Quick Burger operate a drive-through window?

Yes, because Quick Burger's payoff is higher when it operates a drive-through.

Kate and Ali can live together in a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali to play her music in the apartment?

Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.

One criticism of carbon taxes suggests that they are worthless unless other countries also tax carbon accordingly. What is one solution to this reasonable argument against taxes?

a tax on imported goods from countries that fail to enact carbon taxes at home

If the production of a good generates a positive externality, Social demand is constructed by _____ to every value along Private demand.

adding the external benefit Reason: Negative externalities entail external costs that must be added to Private MC in order to determine Social MC.

If the production of a good generates a negative externality, Social MC is constructed by _____ to every value along Private MC.

adding the external cost Reason: Negative externalities entail external costs that must be added to Private MC in order to determine Social MC.

The Coase theorem states that if people can at no cost negotiate the purchase and sale of the right to perform activities that cause externalities, then they can ____ arrive at efficient solutions to the problems created by externalities.

always

A cost or benefit of an activity that falls on people other than those who pursue the activity is

an externality.

Antibiotic use generates a positive externality to the extent that

antibiotic use by one person can prevent others from contracting contagious bacterial infections. Reason: To the extent that others benefit by not becoming ill, antibiotic use generates a positive externality.

Positional externalities occur when:

any improvement in one person's relative standing necessarily worsens the relative standing of others

A positional externality

arises in situations in which rewards depend on relative performance.

Suppose there are 10 people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay 50 cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If the cigar smoker paid each other occupant 50 cents for the right to smoke, the cigar smoker would be ______ and the other occupants would be _______.

better off; just as well off as before the payment

On Saturdays, Lisa goes to the park to play her saxophone. Some of the people in the park love listening to Lisa play, while others find her music really annoying. In this case, Lisa's saxophone playing generates

both positive and negative externalities.

If a commonly held resource can be successfully placed under private ownership, the tragedy of the commons

can be avoided.

The following data show the relationship between the number of drivers who leave for work at 8 a.m., their average commute time, and their marginal benefit of commuting. One way for the government to increase economic efficiency would be for it to

charge a toll to use the highway during rush hour.

Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that the external

cost of using diesel fuel is greater than 10 cents.

This graph shows the marginal cost and marginal benefit associated with roadside litter cleanup. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Picking up the 20th bag of litter would

create deadweight loss.

Suppose Global Inc can emit either 3 or 4 tons of pollution per day depending on which of two production processes they use. Currently they emit 4 tons of pollution per day, and it would cost them $95 per day to cut their emissions to 3 tons per day. If the government imposes a tax of $100 per day on pollution, Global Inc will _____.

cut their emissions to 3 tons per day Reason: If Global Inc cuts their emissions to 3 tons/day, it will only cost them an additional $95/day, and they will save $100/day in taxes, so they will cut their emissions to 3 tons per day because its cheaper to cut their emissions than pay the tax.

The government is more likely to develop laws and regulations concerning activities that generate externalities when it is _____ for people to negotiate the purchase and sale of the right to perform those activities.

difficult Reason: If it is difficult for people to achieve private solutions to externalities, government intervention may be necessary.

Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The town council has proposed putting a meter on each household's pump and charging residents for each gallon of water used. This would

discourage residents from using too much water.

Subsidies _____ lead to a loss in total economic surplus.

do not always

Taxes _____ lead to a loss in total economic surplus.

do not always

If two people are involved in a dispute over the right to perform an activity that causes an externality, then the Coase theorem _____ that the people should be indifferent about who has the legal right to perform the activity.

does not imply Reason: The Coase theorem does not imply that the parties involved in a dispute should be indifferent about each other's legal rights.

Suppose that a government agency is trying to decide between two pollution-reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Because firms face increasing marginal costs to reduce pollution, the demand curve for pollution permits will be

downward sloping.

If the government imposes a tax of $T on each ton of pollution, then firms will reduce pollution up until the point where the marginal cost of reducing pollution by 1 ton is:

equal to $T Reason: If the cost of reducing pollution is less than $T, then it's cheaper for firms to reduce pollution than pay the tax. They will continue to reduce pollution until marginal cost of reducing pollution by 1 ton is equal to $T.

In a market for a good whose production involves no externalities, ______.

equilibrium price and quantity are socially optimal

The market equilibrium quantity will be higher than the socially optimal quantity for a good whose production generates:

external costs

This graph shows the marginal cost and marginal benefit associated with roadside litter cleanup. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. Suppose the state highway department has picked up 15 bags of litter. Protesters have staged a demonstration demanding that the highway department return to pick up the remaining litter. From an economic efficiency perspective, the protesters have a ______ claim because ______.

faulty; the additional resources needed to remove more litter could be better used elsewhere

Refer to the accompanying figure. At the market equilibrium quantity, the social marginal cost of the last ton of paper produced is ______ the marginal benefit of the last ton of paper produced.

greater than

Suppose the government auctions off pollution permits, each of which entitles the bearer emit 1 ton of pollution per day, and no pollution can be emitted without a permit. If each permit costs $P, then firms will want to purchase permits as long as their cost of reducing pollution by 1 ton is:

greater than $P Reason: Right! Whenever the cost of reducing pollution by 1 ton is greater than the price of the permit, firms are better off purchasing permits.

If the government imposes a tax of $T on each ton of pollution, then firms will not reduce their level of pollution if the cost of reducing pollution by 1 ton is:

greater than $T Reason: If the cost of reducing pollution by 1 ton is greater than $T, then it's less costly for firms to not change their level of pollution and instead pay the tax.

If people's consumption of cigarettes imposes a cost on others because of second-hand smoke, then we would expect the equilibrium quantity of cigarettes in an unregulated market to be

greater than the socially optimal quantity. Reason: Since the consumption of cigarettes entails a negative externality, the equilibrium quantity of cigarettes in an unregulated market will be greater than the socially optimal quantity.

If the production of thneeds (the fictitious garment in Dr. Seuss's The Lorax) entails environmental damage, then we would expect the equilibrium quantity of thneeds to be

greater than the socially optimal quantity. Reason: Since the production of thneeds generates a negative externality, the equilibrium quantity of thneeds will be greater than the socially optimal quantity.

Auctioning pollution permits concentrates pollution abatement in the hands of firms that

have the lowest marginal cost of pollution abatement. Reason: Firms with a low marginal cost of pollution abatement will be better off reducing pollution than paying for a permit.

Total economic surplus will be ______ in nations with well-defined property rights than in nations with poorly-defined property rights.

higher

Refer to the accompanying figure. If negotiation is impractical, the socially optimal level of production can be achieved by

imposing a tax on paper equal to the external cost.

When Brady is driving, he throws his cigarette butts out the window, reasoning that other people will clean up the litter on the side of the road. By throwing his cigarette butts out the window, Brady is

imposing an external cost on others.

If a good generates a negative externality, then at the market equilibrium, the marginal social cost of an additional unit _____ the marginal benefit of an additional unit.

is greater than

Suppose that the government requires all firms to cut their emissions of sulfur dioxide by 25 percent. If the marginal cost of cutting sulfur dioxide emissions differs across firms, then this policy

is inefficient. Reason: It is socially optimal for the firms with the lowest cost of pollution abatement to reduce pollution the most.

Although private ownership of natural resources can be a good solution to the tragedy of the commons, private ownership

is not always practical. Reason: Private ownership should lead the resource to be used at its socially optimal level, but private ownership is not always practical. For example, who should own the ocean?

The essential reason some species of whales have nearly been driven to extinction is that

it is difficult to define and enforce property rights to whales.

One advantage of auctioning pollution permits over taxing pollution is that

it's easier to set a target level of pollution with pollution permits than taxes.

Suppose World Energy can either emit 9 or 10 tons of pollution per day depending on which of two production processes they choose. Currently they emit 10 tons of pollution per day, and it would cost them an additional $200 per day to reduce their emissions to 9 tons per day. If the government imposes a tax of $190 per day on each ton of pollution, then World Energy will

keep their emissions at 10 tons per day. Reason: If World Energy cuts their emissions to 9 tons/day, it will cost them an additional $200/day, but they'll only save $190/day in taxes, so they will keep their emissions at 10 tons per day because its cheaper to pay the tax than cut their emissions.

Refer to the accompanying figure. At the private market equilibrium quantity, the marginal cost of the last unit produced is ______ the social marginal benefit of the last unit produced.

less than

Individuals who engage in activities that generate positive externalities will tend to engage in those activities

less than is socially optimal.

If a good generates a positive externality, then the equilibrium quantity of that good will be ______.

less than the socially optimal quantity

When someone receives a vaccination, others who come into contact with that person also benefit because they too are less likely to become ill. Thus, we would expect the equilibrium quantity of vaccinations in an unregulated market to be ______.

less than the socially optimal quantity Reason: Since vaccinations generate a positive externality, the equilibrium quantity in an unregulated market will be less than the socially optimal quantity.

Positional arms control agreements attempt to

limit mutually offsetting investments in performance enhancement

Individuals who engage in activities that generate negative externalities will tend to engage in those activities

more than is socially optimal.

If a good generates a negative externality, then the private equilibrium quantity will be

more than the socially optimal quantity.

One way to improve economic efficiency is to tax activities that generate _____ externalities.

negative

If the person sitting near you in the library is bothering you because they are typing loudly on their laptop, then that person's typing generates a

negative externality.

The picture on the right depicts a good that generates a

negative externality. Reason: Since Social MC is greater than Private MC, this good generates a negative externality.

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains for the three parties are listed in the accompanying table. Local fishermen and bird watchers would be willing to compensate Erie Textiles ______ for operating with a filter.

no more than $235,000

The private ownership of natural resources is _____ solution to the tragedy of the commons.

not always a practical

The essential cause of the tragedy of the commons is the fact that

one person's use of a publicly owned resource imposes an external cost on others by lowering its value.

The tragedy of the commons occurs when

one person's use of a publicly owned resource imposes an external cost on others by lowering its value.

Suppose a new law requires all firms to reduce their emissions of nitrogen dioxide by 10 percent. This policy is

only efficient if the marginal cost of reducing nitrogen dioxide emissions is the same for all firms. Reason: If the cost of reducing nitrogen dioxide differs across firms, then it's not socially optimal for them all to reduce their emissions by the same amount--firms with the lowest marginal cost of reducing emissions should reduce their emissions the most.

When the government imposes a tax on a good, total economic surplus will

only increase if the good entails a negative externality.

One solution to the tragedy of the commons is to

place the commonly held resource under private ownership

It's generally easier to set target levels of pollution with

pollution trading permits.

A _________ (Enter one word) arms race occurs when competitors engage in an escalating series of mutually offsetting investments.

positional

Campaign spending limits, binding arbitration agreements, and social norms against vanity are examples of ______.

positional arms control agreements

Nerd norms and norms against vanity both tend to operate as ______.

positional arms control agreements

Collective measures to limit mutually offsetting investments are known as

positional arms control agreements.

If competitors engage in an escalating series of mutually offsetting investments, they are engaged in a _____.

positional arms race

Relative to the social optimum, people tend to make too many performance-enhancing investments when they are engaged in a

positional arms race.

Situations in which people's rewards depend on how well they perform in relation to their rivals give rise to

positional externalities.

One way to improve economic efficiency is to subsidize activities that generate _____ externalities.

positive

A benefit of an activity received by people not participating in the activity is called a(n)

positive externality.

If an activity generates a benefit that is enjoyed by people other than those who pursue the activity, then the activity generates a

positive externality.

If the government auctions off pollution permits, then generally speaking firms with the highest marginal cost of pollution abatement will

purchase the most permits. Reason: Firms with the highest marginal cost of pollution abatement will be better off buying permits than reducing pollution.

If the government auctions pollution permits, then firms with the lowest marginal cost of pollution abatement will

reduce pollution the most. Reason: Firms with a low marginal cost of pollution abatement will be better off reducing pollution than paying for a permit.

If the government imposes a tax of $T on each ton of pollution and the cost to a firm of reducing pollution by 1 ton is less than $T, then the firm will

reduce pollution. Reason: Yes! If the cost of reducing pollution is less than $T, then it's less costly for the firm to reduce pollution than pay the tax. Thus, they will reduce pollution.

Suppose the owners of Serenity Yoga are upset because loud music from a nearby bar disrupts their yoga classes. According to the Coase theorem, whether the owners of Serenity Yoga and the owners of the bar are able to negotiate an efficient solution to this conflict _____ depend on whether the bar has a legal right to play loud music.

should not Reason: According to the Coase theorem, whether people are able to arrive at an efficient solution only depends on whether they are able to negotiate with each other at no cost over the purchase and sale of the right to perform the activity.

According to the Coase theorem, if two people are involved in a dispute over the right to perform an activity that causes an externality, then whether the two people are able to negotiate an efficient solution to the dispute _____ depend on who has the legal right to perform the activity in question.

should not Reason: According to the Coase theorem, whether people are able to negotiate an efficient solution only depends on whether they are able to negotiate with each other at no cost over the purchase and sale of the right to perform the activity.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______.

small; relatively inelastic

Subsidies _____ improve economic efficiency.

sometimes

Taxes _____ improve economic efficiency.

sometimes Reason: If you tax an activity that generates a negative externality, economic efficiency can be improved.

One solution to positive externalities is to _____ activities that generate positive externalities.

subsidize Reason: By subsidizing activities that generate positive externalities, you induce those engaged in those activities to take into account the benefit they give to others.

One solution to negative externalities is to _____ activities that generate negative externalities.

tax Reason: By taxing activities that generate negative externalities, you force those engaged in those activities to take into account the cost they impose on others.

In order to achieve the socially optimal level of output, goods that entail negative externalities should be

taxed.

If the cost of reducing air pollution by one ton is higher for Stark Industries than it is for Wayne Enterprises, then the most efficient way to reduce pollution is to require

the Wayne Enterprises to reduce pollution by one ton. Reason: Since the cost of reducing pollution by 1 ton is lower for Wayne Enterprises than Stark Industries, then it's cheaper for society as a whole if Wayne Enterprises reduces pollution by 1 ton.

The socially optimal level of pollution is

the level at which the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.

The socially optimal level of a negative externality is

the level at which the marginal cost of reducing the externality equals the marginal benefit of reducing the externality.

This graph shows the marginal cost and marginal benefit associated with roadside litter cleanup. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. From the graph, one can infer that:

the marginal benefit of picking up the 10th bag of litter exceed the marginal cost.

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that

the marginal cost of pollution control is the same across all firms.

The optimal quantity of a negative externality is zero if

the marginal cost of reducing the externality is zero.

Suppose Warbucks Industries emits 1 ton of pollution per day. If the government decides to auction off pollution permits, each of which entitles the bearer to emit 1 ton of pollution per day, and no pollution can be emitted without a permit, then Warbucks Industries will only purchase a permit if

the price of the permit is less than the cost of reducing pollution by 1 ton. Reason: Warbucks industries either has to purchase a pollution permit or reduce their emissions by 1 ton. They will do whichever is cheaper.

The most efficient system of pollution abatement is one in which the marginal cost of pollution abatement is

the same for all firms.

The tendency for a resource that has no price to be used until its marginal benefit falls to zero is known as

the tragedy of the commons.

The tendency for a resource that has no price to be used until its marginal benefit falls to zero is referred to as

the tragedy of the commons.

In the presence of a negative externality, ______.

the true cost of producing the last unit exceeds the value to consumers

Suppose Clampett Oil emits 1 ton of pollution per day. If the government decides to auction off pollution permits, each of which entitles the bearer to emit 1 ton of pollution per day, and no pollution can be emitted without a permit, then Clampett Oil will not purchase a permit if

their cost of reducing pollution by 1 ton is less than the price of the permit. Reason: Clampett Oil either has to purchase a pollution permit or reduce their emissions by 1 ton per day. They will do whichever is cheaper.

The Coase theorem states that people can always arrive at efficient solutions to the problems created by externalities if

they can negotiate at no cost the purchase and sale of the right to perform activities that cause externalities.

The tragedy of the commons is the tendency for a resource that has no price

to be used until its marginal benefit falls to zero.

If people are engaged in a positional arms race, they are likely to make ______ performance-enhancing investments relative to the social optimum.

too many

If it is possible to place a commonly held resource under private ownership, then the

tragedy of the commons can be solved.

The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. This situation above illustrates a positional externality because

using atomic weapons improves each country's outcome but hurts the other country.

If the government auctions off pollution permits, then generally speaking the firms who purchase the most permits will be those

with the highest marginal cost of pollution abatement. Reason: Firms with the highest marginal cost of pollution abatement will be better off buying permits than reducing pollution.

Suppose Oscar and Felix share an apartment. Oscar likes to leave his dirty dishes in the sink, and this really bothers Felix. When Oscar leaves his dirty dishes in the sink, Oscar's surplus from their living arrangement is $400 per month, and Felix's surplus is $300 per month. On the other hand, when Oscar does not leave his dirty dishes in the sink, Oscar's surplus from their living arrangement is $350 per month, and Felix's surplus is $325 per month. There are no rules or regulations that prevent Oscar from leaving his dishes in the sink. In this case, the socially optimal outcome can be achieved

without any intervention.