Eco quiz #7b (Modules 34,35) (Week 9)

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,

the market equilibrium quantity will not be the socially optimal quantity.

When a negative externality exists in a market, the cost to producers

will be less than the cost to society.

Refer to Figure 10-11. A benevolent social planner would prefer

---NOT 280 units to any other quantity of output. ---NOT a subsidy of $18 per unit to a subsidy of $12 per unit.

Positive externalities

---NOT result in a larger than efficient equilibrium quantity. result in smaller than efficient equilibrium quantity.?

Negative externalities lead markets to produce

greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.

Refer to Figure 10-13. In order to reach the social optimum, the government could

impose a tax of $8 per unit on plastics.

When the government intervenes in markets with externalities, it does so in order to

protect the interests of bystanders.

Internalizing a positive externality will cause the demand curve to

shift to the right.

Markets are often inefficient when negative externalities are present because

social costs exceed private costs at the private market solution.

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

social costs exceed private costs at the private market solution.

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the

social value exceeds the private value at the private market solution.

Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

"Demand for pollution rights"

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

$1.80 and 35 units, respectively.

Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?

$83

Refer to Table 10-6. If the government charged a fee of $99 per unit of pollution, how many units of pollution would the firms eliminate altogether?

---NOT 12

Refer to Table 10-5. If the government charged a fee of $84 per unit of pollution, how many units of pollution would the firms eliminate altogether?

10

Refer to Table 10-6. If the government charged a fee of $93 per unit of pollution, how many units of pollution would the firms eliminate altogether?

13

Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

2 units

Refer to Figure 10-11. The socially optimal quantity of output is

280 units, since the value to society of the 280th unit is equal to the cost incurred by the seller of the 280thunit.

What is the difference between command-and-control policies and market-based policies toward externalities?

Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that

Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,

Firm A will spend $4,000.

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

Firm B will no longer pollute, and Firm A will not reduce its pollution at all.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

The after-tax equilibrium quantity is less than the socially optimal quantity.

Suppose that electricity producers create a negative externality equal to $5 per unit. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that meat producers create a negative externality. What is the relationship between the equilibrium quantity and the socially optimal quantity of meat to be produced?

The equilibrium quantity is greater than the socially optimal quantity.

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

Which of the following is an example of a positive externality?

The mayor of a small town plants flowers in the city park.

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?

They are equal.

If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy would be considered

a corrective tax.

Corrective taxes differ from most taxes in that corrective taxes

enhance economic efficiency.

Externalities tend to cause markets to be

inefficient

A negative externality

is an adverse impact on a bystander.

A positive externality will cause a market to produce

less than is socially desirable.

A negative externality will cause a private market to produce

more than is socially desirable.

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

$4,500; $3,500

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $12 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

They are equal.

All remedies for externalities share the goal of

moving the allocation of resources toward the socially optimal equilibrium.

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities.

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

offer grants to university researchers