Deck 5: Externalities

Question 1

Performance standards work to reduce emissions and are cost effective.

A)True
B)False
C)Uncertain

Answer 1

Uncertain

Question 2

A tax levied on each unit of pollution is

A)an income tax.
B)a flat tax.
C)a Pigouvian tax.
D)an emissions fee.

Answer 2

an emissions fee.

Question 3

Private individuals acting on their own may avoid the inefficiencies of externalities through:

A)establishing social conventions.
B)bargaining between disputing parties.
C)creating a merger of the disputing parties.
D)all of these answers are correct.

Answer 3

all of these answers are correct.

Question 4

An externality occurs when the activity of one entity directly affects the welfare of another that is transmitted by market prices.

A)True
B)False
C)Uncertain

Question 5

A cap-and-trade system

A)caps the total level of pollution allowed.
B)allows polluters to trade permits.
C)has a set number of permits.
D)all of these answers are correct.

Question 6

A carbon tax has been implemented in

A)Canada at the federal level.
B)British Columbia at the provincial level.
C)both Canada at the federal level and British Columbia at the provincial level.
D)no jurisdiction in Canada so far.

Question 7

As a general rule, zero pollution is not socially desirable because

A)pollution does not do any harm.
B)there would be no production.
C)Environment Canada needs to have something to do.
D)all of these answers are correct.

Question 8

Public goods and externalities often occur together.

A)True
B)False
C)Uncertain

Question 9

Command-and-control regulations

A)are less flexible than incentive based regulations.
B)come from the private sector.
C)have technology or performance standards as a type of control.
D)both A and C are correct.

Question 10

A subsidy for pollution not produced can induce producers to pollute at the efficient level.

A)True
B)False
C)Uncertain

Question 11

For market efficiency, SMC must be equated to SMB.

A)True
B)False
C)Uncertain

Question 12

When an activity produces a positive externality, too much of it is produced relative to the efficient level.

A)True
B)False
C)Uncertain

Question 13

An emissions fee ensures that abatement cost is minimized.

A)True
B)False
C)Uncertain

Question 14

In the figure below, if the marginal damages line did not originate at 0,

A)there is no way to find SMC.
B)SMC would not originate at the same intercept as PMC.
C)it would mean that marginal damages did not exist.
D)all of these answers are correct.

Question 15

Externalities can be positive, as well as negative.

A)True
B)False
C)Uncertain

Question 16

A Pigouvian tax is equal to

A)the price that reduces pollution to zero.
B)the marginal damage done at the efficient level of output.
C)the social marginal cost.
D)the marginal benefit done at the efficient level of output.

Question 17

Refer to the figure below. What is the total amount of tax paid by Bart?

A)$15
B)$750
C)$50
D)$0

Question 18

Marginal damages are hard to measure because

A)they are hard to quantify.
B)they can be generated from multiple sources.
C)it can be difficult to determine what causes harm.
D)all of these answers are correct.

Question 19

A Pigouvian subsidy

A)c is generally use to correct a negative externality.
B)moves production to the socially optimal level of output.
C)is the same thing as a Pigouvian tax.
D)reduces production to zero.

Question 20

Externalities can be produced by ________, as well as _.

A)market prices; market incomes
B)efficient markets; inefficient markets
C)consumers; firms
D)none of these answers is correct

Question 21

University education is an example of an activity that generates a positive externality.

A)True
B)False
C)Uncertain

Question 22

List and discuss at least two problems that might arise when using the Coase theorem.

Question 23

A steel factory has the right to discharge waste into a river. The waste reduces the number of fish, causing damage for fisheries. Let Q denotes the quantity of waste dumped. The marginal damage, denoted MD, is given by the equation MD = 2 + 5Q. The marginal benefit (MB)of dumping waste is given by the equation MB = 34 - 3Q.
(a)Calculate the efficient quantity of waste.
(b)What is the efficient fee, in dollars per unit of waste, which would cause the firm to dump only a efficient quantity of waste?
(c)What would be the quantity dumped if the firm did not care about the fishery?

Question 24

Why are command-and-control regulations less flexible than incentive based systems?

Question 25

Externalities can be positive because

A)welfare can be impacted positively as well as negatively.
B)there is no concept for marginal benefit.
C)positive externalities are subsidies.
D)marginal damages do not last over time.

Question 26

Marginal damages

A)must not be considered in social marginal costs.
B)must always be considered in social marginal costs.
C)must sometimes be considered in social marginal costs.
D)have nothing to do with social marginal costs.

Question 27

Finding the Pigouvian tax rate is

A)easy because marginal damages are not difficult to estimate.
B)hard because marginal damages are difficult to estimate.
C)never efficient.
D)impossible because there are no marginal damages.

Question 28

The private marginal benefit for commodity X is given by 15 - X, where X is the number of units consumed. The private marginal cost of producing X is constant at zero. Each unit of X imposes an external cost of 10 on society. In the absence of any government intervention, how much X is produced? What is the gain to society involved in moving from the inefficient to the efficient level of production?

Question 29

Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?

Question 30

Pollution rights can be traded and are always efficient.

A)True
B)False
C)Uncertain

Question 31

Carbon taxes impose an equal burden across households of all income types.

A)True
B)False
C)Uncertain

Question 32

Refer to the figures below to answer this question:
Cap-and-trade versus emissions fee when marginal social benefits are inelastic and costs are uncertai Cap-and-trade versus emissions fee when marginal social benefits are elastic and costs are uncertain:
a)In case of an inelastic marginal social benefit curve, what type of pollution reduction system shoul the government employ? Why?
b)If the social benefit curve is elastic, does your answer change?
c)What are the advantages and disadvantages of cap-and-trade systems over emission fee systems when the inflation and change in marginal costs are considered?

Question 33

Efficiency considerations takes into account welfare and distributional considerations as well.

A)True
B)False
C)Uncertain

Question 34

Which of the following is correct?

A)PMB = SMB + EMB
B)SMC = PMC - MD
C)SMC = PMC + MD
D)SMB = SMC + PMB

Question 35

Suppose the factory Afro-Puffs Inc. produces wigs. As a by-product of this wig production, they also produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hair in place). The De-Lite car factory, down the road, experiences a negative externality from this production process. Suppose that the supply curve (private marginal costs)for the wig factory is X = (2/5)P - 2, and it faces a market demand of Xd = 15 - P/2. The marginal damages caused by the production of wigs can be written as X = P - 1/2.
(a)Find the equilibrium price and quantity in the market for wigs.
(b)Find the socially optimal level of wigs and the corresponding price.
(c)How much should the wig factory be taxed per wig?

Question 36

Pollution rights may be traded if

A)pollution is harmless.
B)polluters try to hide pollution.
C)administrators are uncertain about Pigouvian taxes.
D)there is no market for pollution.

Question 37

Incentive-based regulations provide polluters no incentive to reduce pollution and are thus not used often.

A)True
B)False
C)Uncertain