Exam 10: Externalities- When the Price Is Not Right

Use the following to answer questions: Figure: Efficient Market Outcome -(Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium?

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

The social cost is:

In a competitive market, a free market approach is always best when an external benefit is present.

An efficient equilibrium occurs when:

If there were no transaction costs and property rights were always well-defined, there would be no external costs after trade.

Economist James Meade wrote that the market for honey was:

External costs caused by the use of antibiotics are the costs to people who are:

Overproduction occurs in the presence of a negative externality because the external costs are paid by someone other than the producers and consumers.

A properly-set Pigouvian subsidy ______ the price so that the after-subsidy price sends ______ signal.

Which statement is TRUE?

Use the following to answer questions: Exhibit: EPA Regulations There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650. -(Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants released into the environment after the two firms have traded allowances?

When the government intervenes in markets with external costs, it does so in order to:

Which statement is TRUE?

Which statement is INCORRECT?

An external benefit is a benefit received by:

An external cost is built into the market price of a good and thus paid by the consumers.

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?

Markets are always able to find solutions to externality problems and thus maximize social surplus.

The social cost of driving an SUV is equal to: