Question 1

Is it right to say that monetary values can be placed on pollution?

Accepted Answer

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Question 2

Suppose an industry emits a negative externality such as pollution and the possible methods to internalize the externality are command-and-control policies, Pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favoured to least favoured):
A) Pigovian taxes, command-and-control policies, tradable pollution permits.
B) tradable pollution permits, Pigovian taxes, command-and-control policies.
C) tradable pollution permits, command-and-control policies, Pigovian taxes.
D) command-and-control policies, tradable pollution permits, Pigovian taxes.
E) They would all rank equally high because the same result can be obtained from any one of the policies.

Accepted Answer

Economists generally consider tradable pollution permits to be the most efficient way to internalize the externality because they allow firms to trade permits and find the cheapest way of reducing pollution. Also, emissions are capped, so pollution reduction is guaranteed. However, implementation can be complicated because it requires setting up a market for the permits. 
Pigovian taxes are a close second because they provide a clear incentive for firms to reduce pollution, and the government can easily calculate the optimal tax to achieve the desired level of pollution reduction. However, they may be less effective at achieving a specific level of pollution reduction, and they may be more politically difficult to implement than tradable permits.
Finally, command-and-control policies are generally considered the least efficient because they specify exactly how firms must reduce pollution, which may not be the cheapest or most effective way to do so. However, they are easy to implement and enforce and provide clear guidelines for pollution reduction.

Question 3

Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Accepted Answer

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Question 4

Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Accepted Answer

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Question 5

Which of the following is true regarding tradable pollution permits and Pigovian taxes?
A) Pigovian taxes shift the demand curve for the pollution to the left and so lead to a more efficient market solution.
B) Pigovian taxes and tradable pollution permits create an efficient market for pollution.
C) Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can reduce pollution at the lowest cost.
D) To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights.
E) Pigovian taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits.

Accepted Answer

Pigovian taxes and tradable pollution permits both aim to internalize the externality of pollution, creating an efficient market solution by assigning a cost to pollution and allowing firms to choose the most cost-effective way to reduce emissions.

Question 6

Why might government decision-making be flawed by listening to lobbying?

Accepted Answer

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Question 7

Why do economists prefer Pigovian taxes over regulations as a way to protect the environment?

Accepted Answer

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Question 8

Tax avoidance is
A) Illegal when finding loopholes in the system
B) legal when finding loopholes in the system
C) legal and includes the informal economy
D) illegal and includes the informal economy

Accepted Answer

Tax avoidance is the legal practice of minimizing tax liability through legal methods such as taking advantage of tax deductions, credits, and loopholes in the tax code. However, tax evasion, which involves the deliberate failure to pay taxes or understating income, is illegal. The informal economy refers to economic activity that is not reported to the government and is not taxed, so it is not considered tax avoidance or tax evasion.

Question 9

Rent seeking best describes where
A) individuals or groups take actions to redirect resources to generate income for themselves or the group
B) there is rational ignorance
C) Politicians will reflect the interests of the local communities because they want to be re-elected
D) all of the above

Accepted Answer

Rent seeking is the term used to describe when individuals or groups use their power to redirect resources to generate income for themselves or the group. This can include actions such as lobbying for government subsidies, creating monopolies, or engaging in corruption. Rational ignorance pertains to the phenomenon where individuals choose not to gather information about a particular topic if the cost of doing so exceeds the potential benefit of that knowledge. Finally, politicians may not always reflect the interests of their local communities, as they may prioritize the interests of their political party, donors, or other stakeholders.

Question 10

When wealthy alumni provide charitable contributions to their universities to reduce the tuition payments of current students, it is an example of
A) an attempt to internalize a positive externality.
B) an attempt to internalize a negative externality.
C) a Pigovian tax.
D) a command-and-control policy.

Accepted Answer

The wealthy alumni are internalizing a positive externality by providing charitable contributions to reduce tuition payments of current students. This is because the reduction in tuition payments provides a positive benefit to the entire society, as it allows more students to have access to higher education at a lower cost. The alumni's contribution helps to internalize this benefit and allocate resources more efficiently.

Question 11

Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

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Question 12

The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

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Question 13

A Pigovian tax on pollution
A) sets the quantity of pollution.
B) reduces the incentive for technological innovations to further reduce pollution.
C) sets the price of pollution.
D) determines the demand for pollution rights.

Accepted Answer

A Pigovian tax sets the price of pollution by imposing a tax on each unit of pollution emitted. This tax increases the cost of polluting, creating an incentive for firms to reduce emissions. It does not set the quantity of pollution, determine the demand for pollution rights, or reduce the incentive for technological innovations to further reduce pollution.

Question 14

To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increase the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached?

Accepted Answer

The answer of To produce honey, beekeepers place hives of...

Question 15

Tradable pollution permits
A) reduce the incentive for technological innovations to further reduce pollution.
B) set the price of pollution.
C) determine the demand for pollution rights.
D) set the quantity of pollution.

Accepted Answer

Tradable pollution permits set the quantity of pollution that is allowed, as they place a limit on the amount of pollution that can be emitted. The permits can be bought and sold, but the overall amount of pollution allowed remains constant. This creates an incentive for companies to adopt cleaner technologies in order to remain under the limit and avoid having to purchase additional permits.

Question 16

Which of the following is an example of potential flawed government behaviour?
A) voter incentives
B) bureaucrat Incentives
C) the special-interest effect
D) all of the above

Accepted Answer

All of the given options can potentially lead to flawed government behavior. Voter incentives may encourage politicians to implement policies that are popular in the short term but may not be in the long-term interest of the country. Bureaucrat incentives may prioritize personal gain and power over serving the public interest. The special-interest effect occurs when policies are designed to benefit a particular group, often at the expense of the larger population. All of these factors can lead to biased decision-making and undermine the effectiveness of government.

Question 17

Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities?

Accepted Answer

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Question 18

Tax evasion is
A) Illegal and when finding loopholes in the system
B) legal and when finding loopholes in the system
C) legal and includes the informal economy
D) illegal and includes the informal economy

Accepted Answer

Tax evasion involves the deliberate non-payment or underpayment of taxes, which is illegal. This includes not only the formal economy but also the informal economy, such as under-the-table cash transactions. Finding loopholes in the system to avoid paying taxes is considered tax avoidance, which is legal but not necessarily ethical.

Question 19

The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of
A) a tradable pollution permit.
B) an attempt to internalize a positive externality.
C) an application of the Coase theorem.
D) an attempt to internalize a negative externality.

Accepted Answer

The gas-guzzler tax is an attempt to internalize a negative externality, which is the environmental harm caused by vehicles that are very fuel inefficient. By imposing a tax on these vehicles, the government is trying to make the drivers of these vehicles pay for the cost they are imposing on society.

Question 20

Which best describes making political decisions to return favours.
A) short-termism
B) cronyism
C) special interest effect
D) rent seeking

Accepted Answer

Cronyism involves making decisions based on personal relationships and favors rather than merit or the needs of the community.

Quiz 11: Market Failure and Externalities

Is it right to say that monetary values can be placed on pollution?

Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Which of the following is true regarding tradable pollution permits and Pigovian taxes?

Why might government decision-making be flawed by listening to lobbying?

Why do economists prefer Pigovian taxes over regulations as a way to protect the environment?

Tax avoidance is

Rent seeking best describes where

When wealthy alumni provide charitable contributions to their universities to reduce the tuition payments of current students, it is an example of

Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

A Pigovian tax on pollution

Tradable pollution permits

Which of the following is an example of potential flawed government behaviour?

Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities?

Tax evasion is

The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of

Which best describes making political decisions to return favours.