Deck 24: Externalities: the Free Market Interventionist Battle Continues

Question 1

In the paper-water economy, which of the following is not a condition for Pareto optimality?

A) the MRTS of the paper mill must be greater than the MRTS of the water treatment plant
B) the MRS of paper for water must be the same for each agent in the society
C) the MRS of water and paper must equal the MRTS of water for paper

Answer 1

the MRTS of the paper mill must be greater than the MRTS of the water treatment plant

Question 2

Because of externalities, the competitive market determines the ________ set of prices

A) right
B) socially optimal
C) wrong

Answer 2

wrong

Question 3

Private marginal cost is cost excluding externalities.

Answer 3

True

Question 4

Externalities consist of

A) both costs and benefits
B) only benefits
C) only costs

Question 5

In the presence of externalities, the private competitive market will achieve the socially optimal solution on its own.

Question 6

The only way for a society to solve an externality problem is through some sort of government intervention.

Question 7

Because the cost of the paper mill dumping waste in the river has no direct effect on the mill, the cost is ___________ to the paper mill.

A) internal
B) external
C) explicit

Question 8

Marketable permits comprise a system for a government to intervene in a market with externalities in order to reduce their effects by levying charges on the agents causing the externality in order to force them to reduce the externality to the acceptable level.

Question 9

In markets with externalities, if property rights are assigned unambiguously and if the parties involved can negotiate costlessly, then the Coase theorem suggests that the parties will never arrive at a Pareto-optimal outcome unless the government intervenes.

Question 10

By reducing the costs imposed on the water treatment plant by the externality, the plant can

A) produce more water and compensate the paper mill for its lost revenues
B) produce more water and force the paper mill to lose revenues
C) produce less water and compensate the paper mill for its lost revenues

Question 11

If a market has two polluting firms that have different abilities to reduce pollution, then across-the-board cuts in waste are not the most efficient solution.

Question 12

Because the market does not take into account the costs imposed on water treatment by the paper mill, the economy will not satisfy the Pareto-optimal condition that the marginal rate of substitution of paper for water must be the same for each individual in the society.

Question 13

An externality can lead to

A) market failure
B) an inefficient outcome for society
C) Both answers are correct

Question 14

Marketable pollution permits are a method of government intervention to prevent externalities whereby a government-issued permit allows a firm to pollute the environment up to the firm's private marginal cost.

Question 15

In the absence of any intervention, a paper mill ___________ take the external cost created by its wastes into account when making its production decisions.

A) does
B) must
C) does not

Question 16

To take into account the full marginal cost of producing paper, we must look at the social marginal rate of

A) substitution
B) transformation
C) technical substitution

Question 17

Any cost or benefit generated by one agent in its production or consumption activities but affecting another agent in the economy is known as an externality.

Question 18

To prove that an outcome is not Pareto optimal, we need to find a new outcome that will make at least one agent _________ off without making any other agent _________ off.

A) better, worse
B) better, better
C) worse, worse

Question 19

Pigouvian taxes are government taxes that tax the party causing an externality by an amount equal to the externality.

Question 20

An externality arises because of one agent's

A) consumption only
B) consumption or production
C) production only

Question 21

The goal a standards and charges system is to reduce the externality to the

A) level acceptable to the government
B) socially optimal level
C) level where private marginal cost equals price

Question 22

In markets with externalities, if property rights are assigned unambiguously and if the parties involved can negotiate costlessly, then the ________ theorem suggests that the parties will arrive at a Pareto-optimal outcome regardless of which one owns the property rights.

A) Coase
B) Dolan
C) Pigou

Question 23

Marketable pollution permits are a method of government intervention to prevent externalities whereby a government-issued permit allows a firm to pollute the environment

A) by a specified amount
B) not at all
C) by an amount of the its choosing

Question 24

A firm with a high marginal cost of abatement is willing to pay a _______ amount to buy a marketable pollution permit.

A) low
B) high
C) negligible

Question 25

Which of the following government policies involves the least amount of intervention?

A) standards and charges
B) marketable pollution permits
C) Pigouvian taxes

Question 26

Your neighbor plays loud music every night. The detriment to you of a sleepless night is valued at $3. The benefit to your neighbor of a night of loud music is $2. The two of you should be able to negotiate a quiet night if you offer to pay your neighbor

A) $2.50
B) $3.10
C) $1.95

Question 27

Social marginal cost represents private marginal cost _____________ external costs.

A) minus
B) plus
C) divided by

Question 28

The efficient way to achieve any given set of pollution standards in a multifirm market is to have the firms with a lower cost of abatement reduce their emissions of pollutants by ______________ the firms with a higher cost of abatement.

A) the same amount as
B) more than
C) less than

Question 29

Explain the difference between Pigouvian taxes and a system of standards and charges.

Question 30

Among the interventionist solutions to the externality problem, which requires the least amount of government involvement?

Question 31

In the paper-water economy, a Coasian solution is possible

A) only when the paper mill owns property rights allowing it to use the river for dumping wastes
B) only when the water treatment plant owns property rights to use the river
C) no matter who owns the property rights to use the river

Question 32

The agents in a market distorted by an externality should be able to agree on a mutually beneficial way to _________ the gains that could be achieved by altering the market outcome to the Pareto-optimal level.

A) ignore
B) split
C) reduce

Question 33

The imposition of a Pigouvian tax will force the paper mill to ______________ its externality.

A) internalize
B) ignore
C) externalize

Question 34

A system for a government to intervene in a market with externalities in order to reduce their effects by levying charges on the agents causing the externality in order to force them to reduce the externality to the acceptable level is called

A) Pigouvian taxes
B) standards and charges
C) the Coase theorem

Question 35

Why do you think that the Coase theorem depends on costless negotiation?

Question 36

At equilibrium in a multifirm market, the marginal costs of abatement for the firms are

A) equal
B) unequal
C) unknown

Question 37

What are the three conditions for a Pareto-optimal outcome in a perfectly competitive two-product economy? Which are is not satisfied when an externality is present?

Question 38

Compared to private marginal cost, a firm's marginal cost curve after the imposition of an environmental charge is

A) lower
B) the same
C) higher

Question 39

You live in a house with a group of friends. Your next-door neighbors play loud rap music day or night. Explain whether the music is or is not an externality. What if it is loud classical music?

Question 40

In order to set a Pigouvian tax at the optimal level, the government must know the exact amount of the externality, which is

A) easy to obtain
B) difficult to obtain
C) impossible to obtain