Deck 5: Economic Solutions to Environmental Problems: the Market Approach

Question 1

The major categories of market instruments are: pollution charges, deposit/refund systems, subsidies, and pollution permit trading systems.

Answer 1

True

Question 2

If firms abate to the point where each firm's MAC equals the marginal tax, an efficient solution will result.

Answer 2

False

Question 3

A pollution charge follows the "polluter-pays principle."

Answer 3

True

Question 4

To effectively internalize the externality, the deposit component of a deposit-refund system must raise the MPC of illegal waste disposal by the MEC measured at the competitive output level.

Question 5

Suppose that for some abatement equipment market, the MSB = 525 - 1.2Q and MPB = 325 - 0.8Q, then the Pigouvian subsidy for that market must equal 200 - 0.4Q at Q_E to achieve an efficient outcome.

Question 6

Compared to an abatement equipment subsidy, a per-unit subsidy on abatement might be less disruptive to the market because it is defined without any influence as to how abatement is achieved.

Question 7

If Firm X is abating 9 units with an MAC_X = 0.6A_X , and Firm Y is abating 11 units with an MAC_Y = 0.9A_Y , then Firm Y should do less of the abating and Firm X should do more in order to lower the overall costs of abatement.

Question 8

If production of a good generates an environmental negative externality, the effect of that externality is captured by the MEC of production.

Question 9

Because polluters ignore the MEC of environmental damage linked to the production of a good, too few resources are allocated to producing that good.

Question 10

If firm 1 and firm 2 each face an marginal abatement cost of MAC₁ = 5A₁ and MAC₂ = 3A₂, respectively, and if the combined abatement level must be 16 units, then firm 1 must abate 6 units and firm 2 must abate 10 units in order to achieve the cost-effective solution.

Question 11

Of all the market-based policy instruments used to combat environmental damage, the pollution charge is the most commonly used worldwide.

Question 12

A Pigouvian tax is a charge on a good whose production generates a negative externality, such that the charge is equal to the MEC at the competitive output level.

Question 13

Suppose that Firm 1 and Firm 2 face marginal abatement costs of MAC₁ = 2.5A₁ and MAC₂ = 1.5A₂, respectively, and that tradeable permits for pollution are issued such that a total of 20 units must be abated. If firm 1 abates 7.5 units, and firm 2 abates 12.5 units, then both firms have an incentive to trade.

Question 14

Major categories of market-based instruments include

A) pollution charges
B) subsidies
C) deposit/refund systems
D) pollution permit trading systems
E) all of the above

Question 15

Suppose that for some abatement equipment market, the MSB = 502 - 1.2Q, and MPB = 302 - 0.8Q, then the Pigouvian subsidy must equal 804 - 2Q at the efficient output level to achieve the efficient output level.

Question 16

In the single-polluter case, a firm faced with an emission charge for pollution implemented as a marginal tax (MT) will abate as long as MAC < MT.

Question 17

A payment or tax concession aimed at lowering the cost of abating is called a pollution charge.

Question 18

In the multiple-polluter case, each firm faced with an emission charge implemented as a marginal tax (MT) abates up to the point where MAC equals MT, which results in a cost-effective solution.

Question 19

According to the textbook application, the United States pays a higher tax rate on gasoline than any nation in the European Union (EU).

Question 20

In a deposit-refund system, the deposit makes the polluter internalize the externality by absorbing the cost of any damage it might generate in advance.

Question 21

The pollution charge

A) is the most commonly used market-based instrument internationally
B) is sometimes implemented as an effluent charge to protect water resources
C) can be used to control noise pollution
D) all of the above
E) none of the above

Question 22

In the multiple-polluter case, each firm faced with an emission charge imposed as a marginal tax (MT) abates as long as

A) its MAC < MT
B) its MAC > MT
C) its MAC is negatively sloped
D) its TAC are lower than its total tax burden

Question 23

According to the model of a deposit-refund system

A) the deposit paid captures the MSC of improper waste disposal (MSC_IW)
B) the refund represents the MPB of improper waste disposal (MPB_IW)
C) if the deposit is set equal to the MEC_IW at the competitive equilibrium, the efficient outcome is achieved
D) the deposit converts the excess amount of illegal waste disposal to legal waste disposal
E) none of the above

Question 24

In the multiple-polluter case for a pollution permit system, suppose Firm 1 and Firm 2 face marginal abatement cost functions of MAC₁ = 4.5A₁ and MAC₂ = 2.25A₂, respectively. If the government issues each firm tradeable pollution permits such that each has to abate 10 units of pollution, then, based on this allocation,

A) the two firms have no incentive to trade
B) firm 1 has an incentive to buy a permit if the price is greater than $45
C) firm 2 has an incentive to buy a permit if the price is above $22.50
D) firm 2 will be willing to sell a permit if the price is above $22.50

Question 25

In the multiple-polluter case for a pollution permit system, suppose two firms, X and Y, face marginal abatement costs of MAC_X = 1.2A_X and MAC_Y = 0.4A_Y, respectively. To meet water quality standards, the government issues each firm pollution permits such that each firm must abate 20 units of pollution. If permit trading were allowed,

A) firm X would have an incentive to buy a permit as long as the price were less than $24
B) firm Y would be willing to sell a permit as long as the price were less than $8
C) at a permit price of $22, firm X would have an incentive to buy, but firm Y would have no incentive to sell
D) no trading would take place because neither firm has an incentive to trade based on this model

Question 26

An emission charge

A) takes advantage of firms' natural profit incentive
B) cannot achieve a least-cost solution
C) offers no revenue stream to governments
D) has no effect on product pricing

Question 27

Real-world applications of deposit-refund systems include

A) programs implemented through state bottle bills
B) initiatives aimed at proper disposal of lead-acid batteries
C) programs that create incentives to return scrapped vehicles
D) all of the above
E) none of the above

Question 28

Assume that there are two firms, each emitting 20 units of pollutants into the environment, for a total of 40 units in their region. The government sets an aggregate abatement standard (A_ST) of 20 units. The polluters' cost functions are as follows, where the dollar values are in thousands:
Polluter 1: TAC₁ = 10 + 0.75(A₁)²,
MAC₁ = 1.5A₁

Polluter 2: TAC₂ = 5 + 0.5(A₂)², ,
MAC₂ = A_2.

a. What information does the government need to support an assertion that the 20-unit abatement standard is allocatively efficient?
b. Suppose that the government allocates the abatement responsibility uniformly, requiring each polluter to abate 10 units of pollution. Quantitatively assess the cost implications.
c. Now, assume that the government institutes an emission fee of $16 thousand per unit of pollution. How many units of pollution would each polluter abate? Is the $16 thousand fee a cost-effective strategy for meeting the standard? Explain.
d. If instead the government used a pollution permit system, what permit price would achieve a cost-effective allocation of abatement? Compare the costs of this allocation to the costs of using the uniform standard described in part (b).

Question 29

A pollution permit trading system

A) is not a market-oriented policy instrument
B) is used to combat acid rain in the United States
C) is not viable on an international level
D) is not capable of achieving a cost-effective solution

Question 30

In the single-polluter case, suppose a firm faces an emission charge implemented as a marginal tax (MT) of 12 and that its MAC = 0.8A. Based on this information, the firm

A) is better off paying the tax at abatement levels below 15 units
B) should abate pollution for all abatement levels up to 15 units
C) is better off paying the tax as long as the abatement level is 1.5 units or less
D) none of the above

Question 31

The tax imposed on gasoline

A) is an example of a product charge
B) has no effect on consumption
C) is used exclusively in the United States
D) is set at a relatively high rate in the United States

Question 32

Consider the following abatement cost functions (TAC_O and MAC_O) for a firm using an old abatement (A_O) technology:
TAC_O = 1000 + 0.25(A_O)²
MAC_O = 0.5(A_O),

where A is units of abatement undertaken by the firm, and the cost values are in thousands of dollars.

Further assume that the regulatory authority has set an abatement standard (A_ST) equal to 40 units for each firm and has proposed an emission charge implemented as a constant per unit tax (t) of $10 , where Total Tax = t(A_ST - A_i), and A_i is the existing abatement level.

a. If the state enacts the emission charge, find the associated cost savings to the firm, assuming the use of the old technology.

b. Now suppose that the firm is contemplating the use of a new abatement (A_N) technology, which would generate the following cost functions:
TAC_N = 1000 + 0.125(A_N)²
MAC_N = 0.25(A_N)

Find the cost savings to the firm of using this new technology when faced with the emission charge.

Question 33

A Pigouvian subsidy

A) cannot achieve an efficient outcome
B) is a per-unit payment on a good that is set equal to the marginal external benefit at Q_E
C) achieves efficiency as long as it is set equal to the MEC at the competitive output level
D) lowers the MPB vertically by the amount of the subsidy

Question 34

In a deposit-refund system,

A) the refund component rewards potential polluters for proper disposal or recycling activity
B) the deposit should be set equal to the MSC of illegal waste disposal to achieve efficiency
C) monitoring and enforcement costs are higher than if a pollution charge were used
D) actual polluters are not penalized for actions that harm the environment

Question 35

When comparing a permit trading system to the use of a pollution charge

A) a permit trading system requires more government intervention because the government must determine the permit price
B) a permit trading system is inflexible because the number of permits cannot be adjusted
C) a pollution charge generates revenue for the government on all units of pollution not abated
D) pollution charges might create pollution hot spots

Question 36

The key components of a tradeable pollution permit system include

A) a deposit that covers the MEC of improper waste disposal
B) the issuance of a fixed number of permits
C) a means through which permits can be exchanged among polluters
D) all of the above
E) (b) and (c) only

Question 37

Per-unit pollution reduction subsidies

A) are implemented by paying a polluter for using a particular type of abatement equipment
B) can elevate profits, which encourages entry, and hence can perversely increase aggregate emissions
C) are used exclusively in the United States at the federal level of government
D) are designed to lower the costs of abatement technology

Question 38

A product charge is

A) a fee added to the price of a pollution-generating product based on its contribution to pollution
B) the same as an effluent charge
C) a fee imposed on the actual release of pollution, typically as a tax
D) none of the above

Question 39

A subsidy

A) used in an abatement equipment market can achieve an efficient solution if the subsidy is set equal to the MEB at Q_E
B) on pollution reduction activity encourages firms to reduce pollution below a predetermined standard
C) on abatement equipment can create bias by changing the relative prices of various abatement technologies
D) all of the above
E) (a) and (b) only

Question 40

To promote cleaner air, the federal government in the United States enacted tax incentives for purchasing new electric vehicles or clean-fuel vehicles. These were scheduled to be phased out over time.
a. Graphically illustrate the intended effect of this tax incentive, and explain the expected outcome of phasing it out. (Assume there is no production externality.)
b. An alternative approach is to raise taxes on gasoline and other fuels. What is the economic intuition of this policy?