Exam 10: Externalities: When the Price Is Not Right

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market?

Which of the following is an example involving an external benefit?

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

Government solutions to externality problems include:

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 of the following statements is correct?

When external benefits are significant:

(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. Figure: Negative Externality 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?

If an external cost is present in a market, economic efficiency may be enhanced by:

External benefits lead to inefficient market outcomes.

All of the following would be government solutions to externality problems EXCEPT:

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

Which of the following statements is TRUE? I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances. III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

Which of the following answers best explains how the market for tradeable allowances in pollution works?

Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit is:

When external benefits are present in a market:

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:

The prime motivation for low-pollutant firms to enter into the market for tradeable allowances is profit.

The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct?

Tradable pollution permits: