Deck 18: Externalities and Public Goods

Question 1

A positive externality is shown by a marginal social benefit (MSB) curve that is

A) above and to the right of the demand curve for the good that generates it.
B) below and to the left of the demand curve for the good that generates it.
C) above and to the left of the supply curve for the good that generates it.
D) below and to the right of the supply curve for the good that generates it.
E) positively related to both the supply curve and the demand curve for the good that generates it.

Answer 1

A

Question 2

When peach canners process fresh peaches, they produce three products. The first, canned peaches, is sold in the marketplace. The others, liquid and solid wastes, are by-products that must be removed. The liquid is sometimes temporarily kept in holding ponds and later released into a nearby stream or sewer. Liquid dumped in the stream represents a negative externality to downstream users. In the peach growing region, the marginal external costs of the canning process have been estimated as:
MEC = 0.000043Q,
where Q represents output of canned peaches in cases per week. The marginal cost of canning peaches (ignoring MEC) is:
MC = 2.00 + 0.000157Q,
and the demand for canned peaches is:
P = 9.00 - 0.000243Q.
a. How many cases of peaches will be produced per week during the growing season, and what will the selling price per case be if producers ignore the costs imposed on others?
b. If producers are forced to incorporate the marginal external costs into their production decisions, what will the new production rate and selling price be?
c. In taking account of the external costs imposed on others (part b), what was the impact on the selling price and production rate of canned peaches? Explain the impact on market efficiency.

Answer 2

a.
The output rate is determined where the marginal costs of production (supply) equal demand. Equilibrium output rate is:
MC = demand
2.00 + 0.000157Q = 9.00 - 0.000243Q
Q = (9 - 2)/0.00040 = 17,500 case/week
The selling price is determined by demand.
P = 9 - 0.000243(17,500) = 4.7475 = $4.75/case
b.
The MPC and MEC must be added (vertically) to determine the marginal social cost of production (MSC). This expression is equated to demand to determine the production rate.
MSC = MC + MEC
= 2 + 0.000157Q + 0.000043Q
= 2 + 0.0002Q
MSC = 2 + 0.0002Q = 9 - 0.000243Q = demand
Q = (9 - 2)/0.000443 = 15,801 case/week
The new selling price is:
P = 9 - 0.000243(15,801) = $5.16/case
c.
As a result of internalizing the MEC, the canning industry produced fewer cases per week (17,500 - 15,801 = 1,699). Also, the selling price increased form $4.75/case to $5.16/case. Market efficiency was increased when the price increased by increasing price and reducing output. The market is efficient because MSC equals selling price.

Question 3

Because trucking as an industry involves the generation of pollutants in engine exhaust,

A) the supply curve of trucking services overstates the true cost of providing those services.
B) the supply curve of trucking services understates the true cost of providing those services.
C) the demand curve for trucking services overstates the true benefit of providing those services.
D) the demand curve for trucking services understates the true benefit of providing those services.
E) the market for trucking services will always be away from equilibrium by an amount equal to the value of the externality.

Answer 3

B

Question 4

The market for paper in a particular region has the supply and demand curves:
Q_D = 160,000 - 2,000P Q_S = 40,000 + 2,000P,
where Q is measured in hundred-pound lots, and P is price per hundred-pound lot. There is currently no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression:
MEC = 0.0002Q.
a. Calculate the competitive price and output, assuming that no attempt is made to monitor or regulate the dumping of effluent.
b. Determine the socially optimal levels for price and output. If your answers in (a) and (b) are different, explain the source of the difference.
c. Sketch a diagram showing the costs or benefits to society of allowing the market to operate in an unregulated fashion.

Question 5

Due to externalities generated by home landscaping, its price

A) is above the optimal level, and quantity that is below the optimal level.
B) is below the optimal level, and quantity that is above the optimal level.
C) and quantity traded are both above the optimal level.
D) and quantity traded are both below the optimal level.
E) must fall in order for the market to reach equilibrium.

Question 6

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers,

A) the marginal social cost curve is above and to the right of the demand curve.
B) the marginal social cost curve is below and to the left of the demand curve.
C) the marginal social cost curve is above and to the left of the supply curve.
D) the marginal social cost curve is below and to the right of the supply curve.
E) there is a gap between quantity supplied and quantity demanded in equilibrium.

Question 7

Loud music from a neighbor's party is

A) a negative externality whether or not you like it.
B) a positive externality whether or not you like it.
C) a positive externality if you like the music, and a negative externality if you don't.
D) a negative externality if you like the music, and a positive externality if you don't.
E) not an externality.

Question 8

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics and the marginal external cost of the pollutants are both constant with respect to the quantity of plastics produced. If the demand for plastics is downward sloping, what happens to the socially optimal level of output and market price if the demand curve for plastics shifts rightward?

A) Optimal price and quantity increase
B) Optimal price increases, optimal quantity remains unchanged
C) Optimal price remains unchanged, optimal quantity increases
D) Optimal price and quantity remain unchanged

Question 9

Figure 18.1
All producers in the corbomite industry dump wastes in the river in the production of their output.
Given the information in Figure 18.1, the efficient output in the corbomite industry is:

A) 0.
B) Q0.
C) Q1.
D) Q2.

Question 10

Which of the following is a negative externality connected to attending college?

A) The fact that completion of a college degree acts as a signaling mechanism to employers.
B) The fact that other costs, such as books and materials, are incurred in addition to tuition and fees.
C) The fact that your college has required that all individuals living in student housing either get or show they have already obtained vaccinations against all communicable diseases.
D) The fact that the people in the next room play loud music at hours you want to sleep.
E) The fact that you will get benefits from college that you don't currently anticipate.

Question 11

The presence of pollution in the trucking industry leads in the long run to dynamic inefficiencies because

A) marginal external cost rises over time.
B) marginal external cost is constant over time.
C) average private cost in trucking is lower than average social cost, so that some trucking firms remain in the industry (or are induced to enter) when efficiency calls for them to leave (or stay out).
D) average private cost in trucking is higher than average social cost, so that some firms trucking firms exit the industry when efficiency calls for them to stay (or for more firms to enter).
E) fewer resources are devoted to transportation than the economy really needs.

Question 12

Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry cleaning services, the equilibrium price

A) and output are too low to be optimal.
B) and output are too high to be optimal.
C) is too low to be optimal, and equilibrium quantity is too high.
D) is too high to be optimal, and equilibrium quantity is too low.
E) is optimal, but there is an excess supply.

Question 13

Because air cargo as an industry involves the generation of pollutants in engine exhaust, the equilibrium price of air cargo services

A) is above the optimal level, and quantity is below the optimal level.
B) is below the optimal level, and quantity is above the optimal level.
C) and quantity of trucking services are both above the optimal level.
D) and quantity of trucking services are both below the optimal level.
E) must fall in order for the market to reach equilibrium.

Question 14

A plastics factory emits water pollutants into a nearby river. The marginal private cost of producing plastics is constant, the marginal external cost of the pollutants increases with the quantity of plasticis, and the demand for plastics is downward sloping. What happens to the socially optimal level of output and market price if the marginal external cost curve shifts upward?

A) Optimal price and quantity decrease
B) Optimal price increases, optimal quantity remains unchanged
C) Optimal price increases, optimal quantity decreases
D) Optimal price and quantity decline

Question 15

Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D

A) is above the optimal level, and quantity is below the optimal level.
B) is below the optimal level, and quantity is above the optimal level.
C) and quantity of R&D are both above the optimal level.
D) and quantity of R&D are both below the optimal level.
E) must fall in order for the market to reach equilibrium.

Question 16

The presence of pollution in the dry cleaning industry leads in the long run to dynamic inefficiencies because

A) people will buy fewer clothes that need dry cleaning than they otherwise would have.
B) people will develop substitutes for dry cleaning that are wasteful.
C) firms will be induced to leave the industry because of artificially high costs.
D) firms whose average private cost is less than price will stay in (or enter) the dry cleaning industry even though their average social cost exceeds price.
E) firms whose average private cost exceeds the price will exit (or fail to enter) the dry cleaning industry even though their average social cost is less than price.

Question 17

The marginal benefit and marginal private cost curves for aphrodisiacs are given as follows:
MB = 200 - Q MPC = Q
In addition to private costs, there is a marginal external cost of $10 per unit of output. What is the efficient level of output?

A) 0
B) 55
C) 95
D) 100
E) none of the above

Question 18

Which of the following is a negative externality connected to automobile transportation?

A) Driving faster than the 65 mph speed limit is not allowed, even though individuals are able to do it, and many want to.
B) In an accident, a person who chooses not to wear a seatbelt becomes an object moving around the inside of the car, possibly hitting other, belted-in, passengers with lethal force.
C) Gasoline is taxed on a per-gallon basis.
D) Gasoline is imported, and thus increases the trade deficit.
E) While stuck in traffic, you have a chance to listen to your favorite CD, which you haven't had the time to do in other places.

Question 19

Externalities

A) are not reflected in market prices, so they can be a source of economic inefficiency.
B) do become reflected in market prices, so they can be a source of economic inefficiency.
C) are not reflected in market prices, so they do not adversely affect economic efficiency.
D) do become reflected in market prices, so they do not adversely affect economic efficiency.
E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

Question 20

Figure 18.1
All producers in the corbomite industry dump wastes in the river in the production of their output.
Given the information in Figure 18.1, the competitive output in the corbomite industry is:

A) Q0.
B) Q1.
C) Q2.
D) any level as long as price is P0.

Question 21

Use the following statements to answer this question:
I) The efficient amount of recycling of scrap materials is the amount that equates the marginal social cost of scrap disposal to the marginal cost of recycling.
II) The efficient amount of recycling of scrap materials occurs when society recycles all recyclable wastes.

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question 22

The optimum level of pollution emissions

A) is zero.
B) occurs where the marginal external benefit is zero.
C) occurs where no damage to the environment is being done.
D) occurs where the marginal external benefit equals the marginal external cost.
E) occurs where the marginal external cost equals the marginal cost of abatement.

Question 23

Under a transferable emissions permit system,

A) the firms with the lowest marginal abatement cost curves will reduce emissions most.
B) the firms with the highest marginal abatement cost curves will reduce emissions most.
C) the firms with the lowest marginal social cost curves will reduce emissions most.
D) the firms with the highest marginal social cost curves will reduce emissions most.
E) all firms will reduce emissions equally.

Question 24

Use the following statements to answer this question.
I) The bubble concept allows an emitter to sum emission limits for all sources of pollutants within a particular firm, and to set emissions reductions from each source as it pleases as long as the total pollutant limit at the plant is not exceeded.
II) Under an emissions offsets program, a new source of emissions can locate in a region only if their new emissions are accompanied by reduced emissions from existing sources by at least as much.

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question 25

Left alone, with no government interference, a profit-maximizing firm will produce emissions

A) where the MSB curve crosses the MCA curve.
B) at the vertical intercept of the MSB curve.
C) at the horizontal intercept of the MSB curve.
D) at the vertical intercept of the MCA curve.
E) at the horizontal intercept of the MCA curve.

Question 26

Which is NOT an advantage of emissions fees over standards?

A) Fees can give a firm the incentive to reduce emissions below the standard when new technology allows.
B) Fees can reduce the cost of attaining some goal level of emissions when firms all have the same abatement costs.
C) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards can be assigned to different firms.
D) Fees can reduce the cost of attaining some goal level of emissions when firms have different abatement costs and different standards cannot be assigned to different firms.
E) Fees may provide an incentive for a firm to investigate emissions-reduction technology that will reduce emissions below existing standards.

Question 27

When a man invests in controlling weeds and trash that tend to accumulate in his yard, both he and his neighbors benefit from his action. Is an externality associated with his private decision? If so, explain its effect, and determine whether the efficient level of weed control occurs when the individual invests in weed control.

Question 28

If a firm had a fixed proportions technology, then the pollution produced by this firm

A) cannot be reduced.
B) can be reduced only by lowering the level of output (holding technology constant).
C) can be reduced by changing how the output is produced within the bounds of the existing technology.
D) can be reduced only by increasing the number of firms in the industry.
E) can be reduced only by changing the technology.

Question 29

Given that MEC(q) = 2q², what can be inferred about the total cost of pollution as output increases?

A) The total cost of pollution is increasing.
B) The total cost of pollution is positive.
C) The total cost of pollution is growing at a positive rate.
D) The total cost of pollution is growing at an increasing rate.
E) The total cost of pollution is changing.

Question 30

In equilibrium, the price of a transferable emissions permit

A) is constrained to the amount the government first charged for it.
B) equals the marginal cost of abatement for all firms.
C) equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms.
D) equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms.
E) equals the marginal social cost of emissions.

Question 31

Under a transferable emissions permit system with n possible polluters, the government enforces the total amount of emissions allowable at X units by

A) setting a different fee for each firm so that each firm chooses to emit X/n units.
B) setting the same fee for each firm so that each is forced to emit X/n units.
C) setting a different standard for each firm, with X/n being the average.
D) setting the same standard for each firm at X/n.
E) issuing X permits.

Question 32

If error in setting the policy is possible,

A) a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively flat.
B) a standard generates smaller welfare losses than a fee when the MSC and MCA are both relatively steep.
C) a standard generates smaller welfare losses than a fee when the MSC is relatively steep and the MCA is relatively flat.
D) a standard generates smaller welfare losses than a fee when the MSC is relatively flat and the MCA is relatively steep.
E) errors in standards and fees have equal welfare losses, so long as the errors are the same in percentage terms.

Question 33

To enforce the optimum level of emissions a government could set an emissions standard at the quantity

A) where the MSB curve crosses the MCA curve.
B) located at the vertical intercept of the MSB curve.
C) located at the horizontal intercept of the MSB curve.
D) located at the vertical intercept of the MCA curve.
E) located at the horizontal intercept of the MCA curve.

Question 34

To enforce the optimum level of emissions, a government could set an emissions fee, which would be

A) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted.
B) the dollar value indicated by the intersection of the MSB and MCA curves, and would apply to every unit of pollutants the firm emitted above the standard.
C) the vertical intercept of the MSB curve.
D) the vertical intercept of the MCA curve.
E) the vertical distance between the intercepts of the MSB curve and the MCA curve.

Question 35

The food processing industry involves the canning of fruit products, among other things, and the canning process produces canned goods and waste products. The manufacturer of one kind of fruit product produces an external cost for third parties. This external cost is expressed as:
MEC = 0.00005Q,
where MEC represents marginal external cost (dollars/unit), and Q represents cases produced per week. The marginal cost of production (supply), ignoring MEC, at the industry level is:
MC = 2 + 0.000175Q.
The industry demand for the product is:
P = 10 - 0.00025Q,
where price P is in dollars per unit.
a. Determine the output rate and price that would be established by profit maximizing firms.
b. Determine the efficient output rate and price.
c. Determine the cost to society of firms producing at the profit maximizing rate rather than at the efficient output rate.

Question 36

If the MSB/MCA graph indicates that an emissions fee of $10 per unit would lead to the optimum level of emissions, but the government set a fee of $5 per unit, emissions would

A) not be reduced at all.
B) not occur at all.
C) be above the optimum level, but curtailed somewhat from what they would have been with no fee at all.
D) be above the optimum level by 50%.
E) be below the optimum level by 50%.

Question 37

When emissions are measured on the horizontal axis, the marginal cost of abating emissions is

A) downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so.
B) downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.
C) upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so.
D) upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.
E) horizontal because the technology to remove emissions is assumed constant.

Question 38

The demand for injections to immunize against a disease is given as:
P = 13 0.0005Q,
where P = price in dollars, and Q = quantity measured as number of shots per month. The marginal social benefit function has the same vertical intercept as the demand curve and one half the slope (one half in absolute value). The marginal cost of injections is a constant $8.
a. With a competitive market, what price and quantity will prevail, assuming that there is no government intervention?
b. Explain why the demand curve and marginal social benefit functions are different in this case. What is the socially optimal quantity in the market?
c. What government policies could be used to bring about the optimal outcome?

Question 39

A firm will avoid producing additional emissions whenever the fee is

A) less than the MSB.
B) greater than the MSB.
C) less than the MCA.
D) greater than the MCA.
E) equal to the distance between MSB and MCA.

Question 40

As you move rightward on a marginal cost of abatement curve, emissions are

A) falling, and the cost of eliminating the marginal unit falls.
B) rising, and the cost of eliminating the marginal unit falls.
C) falling, and the cost of eliminating the marginal unit rises.
D) rising, and the cost of eliminating the marginal unit rises.
E) rising, and the cost of eliminating the marginal unit is constant.

Question 41

Suppose the current stock of greenhouse gases in the atmosphere is 100 million tons, the stock dissipation rate is 0.02, and we will emit 4 million tons into the atmosphere this year. What is the stock level of greenhouse gases expected to be for next year?

A) 98 million tons
B) 100 million tons
C) 102 million tons
D) 104 million tons

Question 42

Menell's study showed that in terms of effectiveness,

A) mandatory separation of recyclables was best, followed by curbside charges and finally refundable deposits.
B) mandatory separation of recyclables was best, followed by refundable deposits and finally curbside charges.
C) curbside charges were best, followed by refundable deposits and finally mandatory separation of recyclables.
D) curbside charges were best, followed by mandatory separation of recyclables and finally refundable deposits.
E) refundable deposits were best, followed by curbside charges and finally mandatory separation of recyclables.

Question 43

Plants, trees, and soils naturally emit carbon dioxide (CO2) that enters the atmosphere. To form a benchmark level for this greenhouse gas, we can determine the amount of CO2 that would end up in the atmosphere if there were no human activity on the planet. Suppose naturally occurring CO2 emissions are 5 million tons per year, the social discount rate is 5%, and the stock dissipation rate is 2%. What is the eventual level of CO2 in the atmosphere if these natural emissions continue at this rate forever?

A) 100 million tons
B) 250 million tons
C) 25 million tons
D) We do not have enough information to answer this question.

Question 44

If X transferable emissions permits are issued and there are n potential polluters,

A) the government must initially assign each of the potential polluters X/n permits.
B) the government must assign X/n permits to each potential polluter and check periodically that those permits have not moved.
C) emissions will be the same whether or not the permits are split equally, so long as none of the permits are issued outside the group.
D) emissions will be the same no matter who receives them first, so long as the recipient is willing and able to participate in the permit market.
E) emissions will be less if the permits are given initially to firms with lower abatement costs.

Question 45

Use the following statements to answer this question:
I) Stock externalities depend on the accumulated results of actions by producers or consumers, not on the incremental results that may occur in a given period of time.
II) Stock externalities are always negative externalities.

A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II is false.

Question 46

Having a refundable deposit for recyclable material

A) raises the marginal private cost of disposal.
B) raises the marginal social cost of disposal.
C) lowers the marginal private cost of disposal.
D) lowers the marginal social cost of disposal.
E) does not affect disposal costs.

Question 47

In general, the current stock of pollutants (S_t) may be modeled as S_t = E_t + (1 - d)S_t-1 where d is the ________ and E_t is the ________.

A) social discount rate, previous stock level
B) social discount rate, current emissions
C) stock dissipation rate, previous stock level
D) stock dissipation rate, current emissions

Question 48

When new technologies make cleaner production possible,

A) emissions would fall under a system of fees, but would not fall under a system of transferable emissions permits unless the government bought back some of the permits.
B) emissions would fall under a system of permits, but would not fall under a system of fees unless the government raised them.
C) the price of transferable permits would rise.
D) the quantity of transferable permits would rise.
E) the quantity of transferable permits would fall.

Question 49

If households could be charged differently for different types of garbage,

A) the total amount of garbage would be reduced.
B) recycling would be more difficult.
C) costs of collecting garbage could be kept much lower.
D) billing for garbage collection would be much easier.
E) there would be a change in the types of items that are disposed of as garbage.

Question 50

The social discount rate is an important component in net present value (NPV) calculations for public policies related to stock externalities, but economists do not agree on which value to use for this rate. Suppose a recent study reports that the NPV of a proposed carbon tax intended to reduce carbon dioxide emissions is positive, but the annual net benefits do not become positive until 2060. The authors of the study used a social discount rate of 2%. What can we say about the findings of the study if the research were repeated with a higher social discount rate?

A) NPV would decline, and the annual net benefits would become positive after 2060.
B) NPV would increase, and the annual net benefits would become positive before 2060.
C) NPV would decline, and the annual net benefits would not change.
D) The findings of the study would not change.

Question 51

Which is NOT a weakness of the policy of mandatory separation of recyclables?

A) It actually pays people to use more recyclable material, and thus more material in total.
B) It is costly for households in terms of time spent.
C) It is costly for the government to monitor.
D) Individuals may shift away from recyclable to non-recyclable materials just so they don't have to bother to separate them.
E) Implementation is difficult and consumes household space.

Question 52

If households pay a fixed annual fee for trash disposal,

A) households will all tend to produce the same amount of garbage.
B) households have no incentive to cut back on the amount of garbage they generate.
C) that fee will provide households with an incentive to cut back on the amount of garbage they generate.
D) that fee will discourage households from throwing out reusable materials.
E) that fee will discourage households from throwing out toxic or otherwise harmful materials.

Question 53

Consider a situation in which the government has limited information about costs and benefits of pollution abatement associated with a given industry. However, it is known that the marginal social cost curve for emissions is much steeper than the marginal cost of abatement curve (in absolute terms). In this situation, which method of emissions control is preferable when the greatest concern is with accuracy of control rather than the cost of control? That is, should a fee be used or should a standard be used? Explain.

Question 54

Many states use container redemption programs to encourage reuse of glass bottles and other recyclable containers. Suppose a state has a current redemption program that imposes a 10-cent per container fee, and then the state increases the fee to 15 cents per container. What is the expected impact of this change on the optimal quantity of unredeemed (scrapped) containers?

A) Optimal quantity increases
B) Optimal quantity decreases
C) Optimal quantity remains unchanged
D) We cannot determine the outcome of this policy change without having more information

Question 55

The efficient level of recycling equates the

A) marginal cost of scrap disposal to the marginal benefit from not using virgin materials.
B) marginal cost of recycling to the marginal benefit from not using virgin materials.
C) marginal cost of scrap disposal to the marginal cost of recycling.
D) marginal private cost of disposal to the marginal cost of recycling.
E) per-unit refund from recycled materials to the marginal benefit from not using virgin materials.

Question 56

When new technologies make cleaner production possible,

A) emissions fees rise.
B) emissions fees fall.
C) the price of transferable permits rises.
D) the price of transferable permits falls.
E) the quantity of transferable permits falls.

Question 57

Transferable permits allow emission reduction to be achieved

A) without any impact on the industrial sector, just as a standard would.
B) without any impact on the industrial sector, just as fees would.
C) at the lowest possible cost.
D) with firms monitoring each other, rather than having the government do the monitoring.
E) Both C and D are true.

Question 58

Even if we were able to completely eliminate greenhouse gas (GHG) emissions today, the problems associated with the accumulated stock of GHGs in the atmosphere will persist for a long time because:

A) their dissipation rate is very low.
B) their dissipation rate is very high.
C) the social discount rate is very low.
D) the social discount rate is very high.

Question 59

Many communities use a mixed-flow recycling program in which various types of bottles, cans, and other containers are placed in a single recycling bin. Suppose a community alters its recycling program by mandating that the containers must be sorted by type of material (i.e., glass, aluminum, plastic). What is the expected impact of this change on the optimal quantity of unredeemed (scrapped) containers?

A) Optimal quantity increases
B) Optimal quantity decreases
C) Optimal quantity remains unchanged
D) We cannot determine the outcome of this policy change without having more information

Question 60

The marginal social costs and abatement costs of a certain type of air pollution for a factory are given as:
MSC = -1121 + 22.5Q MCA = 879 - 17.5Q,
where Q = units of pollution per day, and MSC and MCA are measured in dollars. The factory is located in a small town that is currently setting community standards. You have been hired to perform the analysis requested below.
a. If the community wishes to set a pollution standard for the factory, what daily level of pollution should be allowed?
b. As an alternative, some members of the town council favor an emissions tax for the factory. If a tax is implemented, at what level should the tax be set?

Question 61

You share a room in a large apartment complex with three other students, and you want to have an end-of-semester party that may become very noisy. Your lease clearly states that you are not to disturb the other residents, but you believe the Coase Theorem implies that you should be able to bargain with your neighbors and reach an agreement on hosting the party. However, you are wrong and bargaining is unlikely to achieve an efficient outcome. Which condition of the Coase Theorem is not met in your situation?

A) Property rights are not clearly assigned.
B) The costs of bargaining are too high.
C) You must have the property right to host noisy parties for the Coase Theorem to work in this case.
D) All of the Coase Theorem conditions are met.

Question 62

Government water resource specialists have estimated that the Great Lakes currently contain about 200 thousand tons of pesticide pollutants, the amount of new pesticide pollutants that enter the lakes are about 20 thousand tons per year, and the stock of pesticide pollutants was about 200 thousand tons last year. Based on this information, what is the stock dissipation rate?

A) Zero
B) 5 percent
C) 10 percent
D) 20 percent

Question 63

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
Refer to Scenario 18.1. Which of the following is TRUE?

A) The factory will never agree to B, because that would leave them with much less profit than the fishermen.
B) C will never occur because that would leave the fishermen with much less profit than the factory.
C) If the factory refused to install a filter, the fishermen would refuse to install a treatment plant.
D) The factory must install a filter, because they contaminate the water.
E) The profits above indicate profit before any agreement is made, and profit varies enough to make a mutually acceptable agreement possible.

Question 64

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
Refer to Scenario 18.1. It would be acceptable to both parties to have the fishermen pay the factory

A) $0 to install a filter.
B) $500 to install a filter.
C) $4,000 to install a filter.
D) $6,000 to install a filter.
E) any amount greater than $4,000 and less than $6,000 to install the filter and make both parties better off.

Question 65

Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $500 per week. If your neighbor has a right to operate this business, how can you achieve the efficient outcome?

A) You cannot afford to pay him enough money to stop working on motorcycles, and he continues to operate the business.
B) You pay him some value between $0 and $100 to close his home business.
C) You pay him some value between $400 and $500 to close his home business.
D) You pay him at least $500 to close his home business.

Question 66

Which of the following examples is NOT a negative stock externality?

A) Goodwill generated by a company
B) Noise pollution from an airport
C) Odors emitted from a paper mill
D) None of these cases are examples of negative stock externalities

Question 67

A lawsuit seeking compensation for damage from pollution

A) will ruin any chances the Coase theorem has of working to avoid the situation in the first place.
B) is a substitute for bargaining, but an inefficient one.
C) is a substitute for bargaining, and it can lead to the efficient solution.
D) is preferable to switching the property rights between the parties.
E) is how the Coase theorem was meant to work in the first place.

Question 68

When there are externalities, economic efficiency can be achieved without government intervention

A) at no time.
B) when the externality affects many people and property rights are not well defined.
C) when the externality affects many people and property rights are well defined.
D) when the externality affects only a few parties and property rights are not well defined.
E) when the externality affects only a few parties and property rights are well defined.

Question 69

Suppose the Environmental Protection Administration (EPA) proposes a change in automobile exhaust systems that reduces the amount of greenhouse gases (GHGs) emitted into the atmosphere, and they estimate that the net present value (NPV) of this policy change is worth $3 trillion dollars. To form this estimate, the EPA staff members assumed a particular social discount rate and a particular stock dissipation rate for GHGs. What happens to the NPV of this proposed policy if the staff members use a smaller stock dissipation rate?

A) NPV increases
B) NPV declines
C) NPV remains unchanged
D) We do not have enough information to answer this question

Question 70

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
In the case in Scenario 18.1, the Coase theorem specifies that

A) the result will be different if the fishermen are given the right to clean water than it will be if the factory is given the right to use the water as it sees fit, but the result will be inefficient in either case.
B) the efficient result will occur whether the fishermen are given the right to clean water or the factory is given the right to use the water as it sees fit.
C) economic efficiency requires that the fishermen be given the right to clean water.
D) economic efficiency requires that no one may contaminate the water.
E) economic efficiency requires that the fishermen be given the right to clean water and that the factory be given the right to use the water as it sees fit.

Question 71

In which of these situations would the Coase theorem be MOST likely to work?

A) A thousand firms use a lake, there are no other users, all their costs could be reduced somewhat by polluting, but all would have lower water intake costs if the lake were clean.
B) A group of nine firms use a lake, there are no other users, all their costs could be reduced somewhat by polluting, but all would have lower water intake costs if the lake were clean.
C) Worldwide deep sea fishing rights need to be negotiated among thousands of fishermen from different countries.
D) One hundred and fifty nations need to come to an accord about CFC generation to combat ozone depletion.
E) A group of chemical firms high upstream on the Mississippi River have emissions that affect not only communities downstream along the river, but around the Gulf of Mexico as well.

Question 72

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
Refer to Scenario 18.1. If the fishermen are given the right to clean water,

A) the outcome will be more efficient than if the factory is given the right to use the water as it sees fit.
B) the outcome will be less efficient than if the factory is given the right to use the water as it sees fit.
C) the efficient outcome will occur no matter who is given which property right, and the individual gains will be the same in each case.
D) the factory will be forced to shut down.
E) the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining.

Question 73

Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If you have a right to live in peace and quiet, the efficient outcome can be achieved as long as the bargaining costs:

A) are less than $100.
B) are greater than $100.
C) only include opportunity costs.
D) The Coase Theorem assumes zero transaction costs, so the bargaining costs must be zero in order to achieve the efficient outcome.

Question 74

Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If you have a right to live in peace and quiet, how can you achieve the efficient outcome?

A) He cannot afford to pay you enough money to allow him to work on motorcycles.
B) He pays you some value between $0 and $100 to allow his home business.
C) He pays you some value between $300 and $400 to allow his home business.
D) He pays you at least $400 to allow his home business.

Question 75

Common property rights

A) increase efficiency over individual property rights.
B) enable the Coase theorem to work.
C) are responsible for the increasing success of preservation of African elephants.
D) are responsible for the increasing success of preservation of worldwide fishing resources.
E) result in faster depletion of resources than do individual property rights.

Question 76

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
Under Scenario 18.1, suppose the body of water lies on an international boundary, and the fishermen speak a different language than the factory managers. The efficient outcome cannot be achieved if the cost of hiring translators for both parties:

A) is less than $4,000.
B) equals $5,000.
C) is greater than $6,000.
D) none of the above

Question 77

Which of the following factors influence the appropriate value for the social rate of discount used in NPV analysis of stock externalities?

A) Expected rate of economic growth
B) Extent of social risk aversion
C) The society's rate of time preference
D) all of the above

Question 78

Suppose your neighbor likes to repair motorcycles in his front yard during evenings and on weekends, and he earns $400 per week from this work. However, the sight of piles of greasy motorcycle parts and the additional noise and traffic caused by his customers reduces your value of living in this neighborhood by $300 per week. If your neighbor has a right to operate this business, what is the efficient outcome?

A) He continues to operate the business.
B) You can pay him to move the business to another location.
C) He pays you to let him continue working on motorcycles at his home.
D) There is no efficient outcome from this situation.

Question 79

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
Refer to Scenario 18.1. What should the fishermen do if they know the factory will maximize profits and no negotiation is possible?

A) Install a treatment plant.
B) Do not install a treatment plant.
C) It makes no difference if the fishermen do or do not install a treatment plant.
D) Install a filter.
E) Exit the industry.

Question 80

When one party suffers negative external effects due to the actions of another party, a lawsuit may not lead to the efficient outcome if:

A) property rights are not clearly assigned.
B) the parties have incomplete information.
C) the legal costs of the lawsuit are too high.
D) All of the above