Chapter 16 Quiz - Externalities

If a good that involves external costs is priced to take these costs into account, then its price will: not change, but output will fall. rise, and output will fall. fall, and output will go up. rise, but output will stay the same.

rise, and output will fall.

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 this does NOT happen is that: lawyers would find a way to prohibit such negotiations unless they were actively involved, and this would make transaction costs prohibitive. most individuals are unfamiliar with the Coase theorem. agreements arising from such negotiations could not be enforced, since the Constitution guarantees all individuals freedom of access to all public roads. the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

the transaction costs associated with identifying and establishing communication among the many interested parties would be prohibitive.

[Diagram] The figure shows the marginal social cost (MSC) and marginal social benefit (MSB) for firms that pollute the air with sulfur dioxide. Using the figure, the optimal Pigouvian tax per unit of pollution is: $167 $250 $500 $83

$167

[Diagram] At what tax rate would firm C produce zero tons of pollution? $400, $500, or $700 $500 $700 $400

$400, $500, or $700

[Diagram] If this market, whose sulfur emissions are a result of production, produced _____ units of emissions, then _____. 30; MSC < MSB 40; MSB = MSC 40; MSB < MSC 30; MSB < MSC

40; MSB < MSC

Which of the following statements is CORRECT? If an emissions tax and environmental standards lead to the same total reduction in pollution, then they will also lead to the same reduction in pollution by individual polluters. 𐄂 It is easy to set emissions taxes at the "correct" level, since the relationship between emissions taxes and the reduction in emissions that they induce has been extensively studied and is well known. 𐄂 An environmental standard is a more efficient way to reduce pollution than an emissions tax, because an environmental standard can be structured to equalize the reduction in pollution from all sources. 𐄂 An emissions tax is a more efficient way to reduce pollution than an environmental standard, because an emissions tax equalizes the marginal benefit of pollution from all sources.

An emissions tax is a more efficient way to reduce pollution than an environmental standard, because an emissions tax equalizes the marginal benefit of pollution from all sources.

Suppose the production of roses generates a positive externality in that travelers enjoy the scenic beauty of the garden. An appropriate government policy yielding the efficient outcome would be a: Pigouvian subsidy. Pigouvian tax. system of rose production permits. reduction in transaction costs.

Pigouvian subsidy.

Assume the price of a tradable emissions permit for a ton of sulfur dioxide is $150. Which of the following is INCORRECT? 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. 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. The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. The opportunity cost of emitting a ton of sulfur dioxide is $150 for all firms.

The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms.

Which of the following generates a positive externality? You buy a new car and find $5,000 in the door panel. Joe buys health insurance but decides not to take the time to get a flu shot. Your next-door neighbor mows the lawn at 6 A.M. Your next-door neighbor installs a bat house and the bats eat mosquitoes.

Your next-door neighbor installs a bat house and the bats eat mosquitoes.

Which of the following is an activity generating a negative externality? You buy a new car, then discover it needs a new transmission. Your next-door neighbor mows the lawn at 6 A.M. After Jane bought health insurance, she began racing motorcycles on the weekends. The only two coffee shops in town conspire to raise prices.

Your next-door neighbor mows the lawn at 6 A.M.

Economists believe that there are more efficient ways to deal with pollution than with environmental standards because these standards do NOT: provide for any means of enforcement. allow reductions in pollution to be achieved at minimum cost. reduce pollution enough. internalize the externality.

allow reductions in pollution to be achieved at minimum cost.

The marginal social benefit of pollution: is equal to the marginal social cost of pollution, since benefits to producers are equal to costs to consumers. is easy to estimate, since polluters are required to file this information in their tax returns. is zero, since pollution is not beneficial. can be measured as the additional gain to society from one additional unit of pollution.

can be measured as the additional gain to society from one additional unit of pollution.

Activities that generate external costs will likely be carried out at levels that _____ those that would be efficient. are less than compete with are equal to exceed

exceed

With tradable emissions permits, if the demand for goods that produce emissions shifts to the left, the equilibrium price of permits _____ and the equilibrium quantity _____. increases; stays the same falls; increases falls; stays the same increases; increases

falls; stays the same

Which of the following is an environmental standard? taxes on the level of pollution production subsidies tradable pollution permits legal limits on sulfur dioxide emissions

legal limits on sulfur dioxide emissions

With tradable emissions permits, the main problem is to determine the _____, while with emissions taxes the main problem is to determine the _____. marginal social cost of pollution; optimal tax rate optimal quantity of pollution; optimal tax rate optimal quantity of pollution; marginal social benefit of pollution optimal price of the permits; optimal level of pollution

optimal quantity of pollution; optimal tax rate

An externality is said to be internalized: when individuals take external costs and benefits into account in their decision making. when individuals successfully petition the government to ban or restrict activities that generate negative externalities. when the Coase theorem is irrelevant or cannot be applied. when individuals learn to adapt to negative externalities through introspection or internal acceptance of what are viewed as unchangeable facts of life.

when individuals take external costs and benefits into account in their decision making.