Exam 10: Externalities- When the Price Is Not Right

A number of cities and states have banned smoking in bars because of secondhand smoke. In cities without the ban, the bar owner decides whether smoking is permitted. If smokers have a greater willingness to pay to smoke than nonsmokers have to avoid smoke, then bar owners will ______ smoking, which is an ______ outcome.

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

In the presence of external costs, the social cost curve lies ______ the supply curve.

A Pigouvian tax:

Use the following to answer questions: Figure: Softella -(Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what is the dollar amount of deadweight loss that would be removed from this market?

Which statement illustrates the concept of external cost?

If a market solution provides greater marginal social benefits than marginal social costs, then:

If a market solution generates marginal social benefits equal to marginal social costs, then:

Why are taxes on pollutants and tradable allowances considered to have similar effects in solving externality problems?

Under the EPA's tradable allowances program, clean energy is ______ and dirty energy is ______.

Tradable pollution permits:

When external costs are present in a market:

Figure: Negative Externality The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions. a. What is the market quantity in this market? b. What is the social cost of the product? c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the tax has been imposed?

Fewer people get flu shots than is efficient because:

In the case of an external cost, the social value curve lies ______ the demand curve.

When the number of tradable allowances is set equal to the efficient market quantity:

When external benefits are significant:

Which answer suggests that private markets can be effective in dealing with external costs and benefits?

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?

The Coase theorem posits that externality problems can be solved without government intervention: