Deck 8: Government Policies to Regulate Pollution

Question 1

The costs of determining who to bargain with are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Answer 1

search costs.

Question 2

In the context of the environment, the type of transactions costs that includes sampling the emissions of many companies to determine which company or companies are emitting pollution are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Answer 2

search costs.

Question 3

Which of the following best represents search costs?

A) Dinesh has to spend time and effort to make sure that the chemical factory is living up to the agreed upon bargain that it will reduce the pollution it is releasing into the local river by 50 percent.
B) Laila needs to come up with enough cash to pay the owners of the paper manufacturing plant, its attorneys, accountants, and negotiators so that a bargain can be reached with the paper manufacturer to reduce air pollution.
C) Esperanza has to spend time and effort locating and organizing all the other people who have been adversely affected by the strong odors emanating from the local slaughterhouse in order to initiate the bargaining process.
D) Rafael has to spend time determining whether the fertilizer manufacturer, the lead smelter, or the oil refinery is the cause of pollution seeping into the groundwater in his local community.

Answer 3

Rafael has to spend time determining whether the fertilizer manufacturer, the lead smelter, or the oil refinery is the cause of pollution seeping into the groundwater in his local community.

Question 4

Which of the following is an example of search costs?

A) Isabel knows that other neighbors' sleep patterns must also be affected by the howling dogs in her neighborhood and sets out to find those neighbors.
B) Isabel is bound and determined to to find out which of her neighbors owns the howling dogs that are preventing her from getting a full night's sleep.
C) Isabel has to make sure that the owner of the howling dogs lives up to his end of the bargain and keeps the dogs quiet throughout the night, every night.
D) Isabel determines how much it will cost for her and her neighbors to bargain with the owner of the howling dogs to get the owner to keep the dogs quiet at night so everyone else is able to sleep.

Question 5

The costs of organizing all the affected parties so that bargaining can take place are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 6

In the context of the environment, the type of transactions costs that includes finding, coordinating, and motivating victims of pollution emissions to help with the bargaining process are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 7

Which of the following best represents collectivization costs?

A) Dinesh has to spend time and effort to make sure that the chemical factory is living up to the agreed upon bargain that it will reduce the pollution it is releasing into the local river by 50 percent.
B) Laila needs to come up with enough cash to pay the owners of the paper manufacturing plant, its attorneys, accountants, and negotiators so that a bargain can be reached with the paper manufacturer to reduce air pollution.
C) Esperanza has to spend time and effort locating and organizing all the other people who have been adversely affected by the strong odors emanating from the local slaughterhouse in order to initiate the bargaining process.
D) Rafael has to spend time determining whether the fertilizer manufacturer, the lead smelter, or the oil refinery is the cause of pollution seeping into the groundwater in his local community.

Question 8

Which of the following is an example of collectivization costs?

A) Isabel knows that other neighbors' sleep patterns must also be affected by the howling dogs in her neighborhood and sets out to find those neighbors.
B) Isabel is bound and determined to to find out which of her neighbors owns the howling dogs that are preventing her from getting a full night's sleep.
C) Isabel has to make sure that the owner of the howling dogs lives up to his end of the bargain and keeps the dogs quiet throughout the night, every night.
D) Isabel determines how much it will cost for her and her neighbors to bargain with the owner of the howling dogs to get the owner to keep the dogs quiet at night so everyone else is able to sleep.

Question 9

The costs of the actual bargaining process are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 10

In the context of the environment, the type of transactions costs that includes covering all the costs associated with the bargaining process, such as fees for attorneys, negotiators, and accountants, are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 11

Which of the following best represents negotiation costs?

A) Dinesh has to spend time and effort to make sure that the chemical factory is living up to the agreed upon bargain that it will reduce the pollution it is releasing into the local river by 50 percent.
B) Laila needs to come up with enough cash to pay the owners of the paper manufacturing plant, its attorneys, accountants, and negotiators so that a bargain can be reached with the paper manufacturer to reduce air pollution.
C) Esperanza has to spend time and effort locating and organizing all the other people who have been adversely affected by the strong odors emanating from the local slaughterhouse in order to initiate the bargaining process.
D) Rafael has to spend time determining whether the fertilizer manufacturer, the lead smelter, or the oil refinery is the cause of pollution seeping into the groundwater in his local community.

Question 12

Which of the following is an example of negotiation costs?

A) Isabel knows that other neighbors' sleep patterns must also be affected by the howling dogs in her neighborhood and sets out to find those neighbors.
B) Isabel is bound and determined to to find out which of her neighbors owns the howling dogs that are preventing her from getting a full night's sleep.
C) Isabel has to make sure that the owner of the howling dogs lives up to his end of the bargain and keeps the dogs quiet throughout the night, every night.
D) Isabel determines how much it will cost for her and her neighbors to bargain with the owner of the howling dogs to get the owner to keep the dogs quiet at night so everyone else is able to sleep.

Question 13

The costs of ensuring that the parties live up to the promises they made in bargaining are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 14

In the context of the environment, the type of transactions costs that includes overseeing the amount of pollution being emitted once bargaining has taken place and a bargain has been reached and ensuring that the agreed to bargain is being carried out are called

A) search costs.
B) collectivization costs.
C) negotiation costs.
D) monitoring and enforcement costs.

Question 15

Which of the following best represents monitoring and enforcement costs?

A) Dinesh has to spend time and effort to make sure that the chemical factory is living up to the agreed upon bargain that it will reduce the pollution it is releasing into the local river by 50 percent.
B) Laila needs to come up with enough cash to pay the owners of the paper manufacturing plant, its attorneys, accountants, and negotiators so that a bargain can be reached with the paper manufacturer to reduce air pollution.
C) Esperanza has to spend time and effort locating and organizing all the other people who have been adversely affected by the strong odors emanating from the local slaughterhouse in order to initiate the bargaining process.
D) Rafael has to spend time determining whether the fertilizer manufacturer, the lead smelter, or the oil refinery is the cause of pollution seeping into the groundwater in his local community.

Question 16

Which of the following is an example of monitoring and enforcement costs?

A) Isabel knows that other neighbors' sleep patterns must also be affected by the howling dogs in her neighborhood and sets out to find those neighbors.
B) Isabel is bound and determined to to find out which of her neighbors owns the howling dogs that are preventing her from getting a full night's sleep.
C) Isabel has to make sure that the owner of the howling dogs lives up to his end of the bargain and keeps the dogs quiet throughout the night, every night.
D) Isabel determines how much it will cost for her and her neighbors to bargain with the owner of the howling dogs to get the owner to keep the dogs quiet at night so everyone else is able to sleep.

Question 17

Collectivization costs involve ensuring that all parties live up to promises made during bargaining.

Question 18

The costs of the process of bargaining to reach a mutually satisfactory agreement are called negotiation costs.

Question 19

Once a bargain has been reached and involved parties have agreed to an arrangement, there is no need for either party to monitor and enforce the agreement.

Question 20

List and briefly describe the four major types of transactions costs involved when dealing with a negative externality.

Question 21

Anjelica expects that her recent fatigue is being caused by pollution being dumped into a local stream by a factory in her community, and she wants to fix this problem. Briefly explain the transactions costs Anjelica is likely to experience in her quest to clean up the stream.

Question 22

Under what circumstances might it be more effective for people experiencing a negative externality to file a class-action lawsuit than attempt to resolve the problem through bargaining?

Question 23

When dealing with negative externalities, government action is required

A) only if transactions cost are low.
B) for any bargain to be successful.
C) only in environmental disputes.
D) only if transactions costs preclude bargaining between polluter and victim.

Question 24

External costs

A) are borne by the producers of a good or service.
B) are borne by government.
C) are borne by those who cannot afford to purchase the good.
D) are borne by those who do not produce the good or service.

Question 25

Without successful bargaining, economic efficiency will not be achieved when there is a negative externality because

A) too much of the good will be produced.
B) too little of the good will be produced.
C) economic surplus is being maximized.
D) the externality causes consumer surplus to exceed producer surplus.

Question 26

If the social cost of producing a good exceeds the private cost,

A) a negative externality exists.
B) no externalities exist.
C) a positive externality exists.
D) the market is efficient.

Question 27

What does it mean for a producer to internalize an externality?

A) The producer is limiting outsourced production.
B) The producer is prohibited from producing products which generate externalities.
C) The producer must find ways to address externality problems which extend beyond geographic borders.
D) The producer is forced to factor into production costs the cost of the externalities created in their production of output.

Question 28

According to economists, if policymakers are serious about reducing fuel consumption, they need to implement policies that make drivers think carefully about the costs and benefits of every mile driven, and the best way to accomplish this is by

A) increasing the gasoline tax.
B) raising mandatory fuel economy standards.
C) converting all roads to toll roads.
D) limiting the number of miles per year that each driver is allowed to drive.

Question 29

Regulation is necessary when transactions costs are low enough to allow bargaining between a polluter and a victim.

Question 30

The social cost of a good or service includes the producer's private cost and all the external costs.

Question 31

When dealing with negative externalities, what is meant by the term "internalizing an externality"?

Question 32

An efficient way to get a tire manufacturer to produce the socially optimal output level is

A) to impose a tax to make the tire manufacturer bear the external cost it creates.
B) for government to set a quota on the quantity of tires that it can produce.
C) to grant a subsidy to enable the manufacturer to internalize the external costs of production.
D) to assign property rights to the tire manufacturer.

Question 33

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. The ideal outcome for the players would be for Charla to play ________ and for Mirna to play ________.

A) Install; Install
B) Install; Don't Install
C) Don't Install; Install
D) Don't Install; Don't Install

Question 34

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. The dominant strategy for the players would be for Charla to play ________ and for Mirna to play ________.

A) Install; Install
B) Install; Don't Install
C) Don't Install; Install
D) Don't Install; Don't Install

Question 35

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. The Nash equilibrium is found where Charla plays ________ and where Mirna plays ________.

A) Install; Install
B) Install; Don't Install
C) Don't Install; Install
D) Don't Install; Don't Install

Question 36

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. This situation represents a

A) pure coordination game.
B) prisoner's dilemma game.
C) chicken game.
D) battle of the sexes game.

Question 37

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. If each player cooperated with one another, each player would find themselves ________ better off than they are by playing their dominant strategies.

A) $0
B) $280
C) $490
D) $560

Question 38

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. If each player cooperated with one another rather than playing their dominant strategies, the economic pie would grow by

A) $0.
B) $280.
C) $490.
D) $560.

Question 39

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. If Charla and Mirna agree to pay each other $350 to install the pollution-control device on their heating systems, the payoffs in the upper-right and lower-left cells in the payoff matrix would become

A) +350, +350.
B) +140, +140.
C) -560, -560.
D) +840, +840.

Question 40

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. If Charla and Mirna agree to pay each other $350 to install the pollution-control device on their heating systems, the dominant strategy for the players would be for Charla to play ________ and for Mirna to play ________.

A) Install; Install
B) Install; Don't Install
C) Don't Install; Install
D) Don't Install; Don't Install

Question 41

Figure 8.1 Charla and Mirna are the only two inhabitants of an isolated town in the Arctic Circle. Each uses an old coal-fired heating system to keep their homes warm, but those heating systems generate a great deal of pollution. Installing a pollution-control device on such a system costs $700, but Charla and Mirna would each save $490 apiece on their health care expenses for each device installed. The payoff matrix above shows the possible gains and losses, or incentives, for both Charla and Mirna.

-Refer to Figure 8.1. If Charla and Mirna agree to pay each other $350 to install the pollution-control device on their heating systems, the Nash equilibrium would be found when Charla plays ________ and when Mirna plays ________.

A) Install; Install
B) Install; Don't Install
C) Don't Install; Install
D) Don't Install; Don't Install

Question 42

When the government uses a cap-and-trade approach in dealing with pollution, it

A) uses taxes in order to internalize the externalities caused by the pollution.
B) imposes quantitative limits on the amount of pollution firms are allowed to generate.
C) uses subsidies to encourage firms to use new technology that reduces pollution.
D) distributes information to consumers and producers on how to reduce pollution.

Question 43

What is the rationale behind a cap-and-trade emission allowance system?

A) It creates a market for externalities.
B) It disciplines polluting firms by specifying the maximum amount of emissions allowed and gives them permits to pollute up to their allowance.
C) It provides firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance.
D) It raises revenue for the government through the sale of permits.

Question 44

Sulfur dioxide emissions allowances are available for purchase on the Chicago Mercantile Exchange, and several environmental groups have raised money to purchase these certificates, which they subsequently destroy. What would be the impact of these environmental groups purchasing and then destroying these cap-and-trade certificates on the price of these certificates in the market?

A) The price rises.
B) The price falls to zero.
C) The price falls, but not to zero.
D) The price remains unchanged because the certificates are destroyed.

Question 45

To maximize the social pie, a tax on pollution must equal the external cost created by the polluting activity.

Question 46

The market-based system which allocates tradeable pollution permits to companies is known as a cap-and-trade system.

Question 47

Why is a solution to climate change unlikely to stem from private bargaining between the polluters and the victims? Refer to each of the four types of transactions costs discussed in Chapter 8 to answer the question.

Question 48

Amanda and Hector each produce homemade ketchup. Amanda can make ketchup at a cost of materials and labor of $1.25 per bottle, and Hector can do the same at a cost of $1.80 per bottle. People get $4.00 of value from each bottle of ketchup, and every bottle made causes $2.50 of pollution-based damage to the people who live near Amanda and Hector.
a. Would the benevolent social planner like to see either Amanda or Hector make ketchup? Explain.
b. What is the size of the ideal tax that government could implement to reduce the pollution to the ideal amount?
c. If the tax was set at twice the level of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?
d. If the tax was set at half of the ideal amount, would either Amanda or Hector be discouraged from making ketchup?

Question 49

How does a cap-and-trade system:
a. force polluters to internalize an externality?
b. lower transactions costs?
c. give incentive to polluters to find new ways to reduce pollution?
d. make future pollution reductions easy to implement?