Question 1

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?
A) No, it would raise the cost of pollution abatement.
B) Yes, it would lower the cost of pollution abatement.
C) It is impossible to say whether this would or would not be an efficient trade.
D) There is no incentive for Alex and Tyler to trade.

Accepted Answer

If Alex pays Tyler $30 for a pound of Tyler's allowance, he can emit one more pound of carbon dioxide, which he is willing to pay $50 for. This means Alex gains a net benefit of $20, while Tyler gains a net benefit of $30. Therefore, both parties are better off and pollution abatement costs are lowered.

Question 2

Which of the following statements is TRUE?
I. The EPA's tradable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradable allowances is that they prohibit nonbusinesses and environmental groups from purchasing the allowances.
III. The tradable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
A) I only
B) II and III only
C) I, II, and III
D) III only

Accepted Answer

Statement I is true. Statement II is false, as nonbusinesses and environmental groups can purchase allowances. Statement III is also false, as the tradable allowances program for sulfur dioxide has been successful in reducing emissions despite increased electricity output.

Question 3

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:
A) air quality that is neither improved nor worsened.
B) an improved air quality.
C) a worsening in air quality.
D) a less efficient market outcome.

Accepted Answer

The tradable allowances program has resulted in an improved air quality as firms have an incentive to reduce their pollution levels in order to trade their allowances at a profit. Therefore, overall emissions have decreased, leading to better air quality.

Question 4

Tradable allowances for pollution:
A) allow firms to reduce pollution levels at lower costs.
B) decrease the availability of resources able to be utilized in other areas of production.
C) typically decrease firms' profits.
D) seem good in theory but have never been successfully enacted in market economies.

Accepted Answer

Tradable allowances for pollution allow firms to reduce pollution levels at lower costs by allowing them to buy and sell pollution permits. This incentivizes firms to find more cost-effective ways to reduce pollution levels and can lead to overall reductions in pollution.

Question 5

Which statement explains the difference between command and control policies and tradable allowances?
A) Command and control policies are a government solution to externalities, whereas tradable allowances are a type of private market solution.
B) Tradable allowances allow for less flexibility than command and control policies.
C) Command and control policies require all firms to reduce pollutants by a specific quantity, whereas tradable allowances allow some firms to pollute more than others by trading for pollution rights.
D) Tradable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control.

Accepted Answer

The answer of Which statement explains the difference between command...

Question 6

The paper industry and brewery industry each emit 60 tons of particulates into the air. It costs the paper industry $1,000 to remove 1 ton of particulates, and it costs the brewery industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate pollution, the government gives each industry tradable allowances worth 50 tons of particulates. We would expect that:
A) the paper industry will buy tradable allowances from the brewery industry at a cost between $1,000 and $1,400 per allowance.
B) the paper industry will buy tradable allowances from the brewery industry at a cost greater than $1,400 per allowance.
C) the brewery industry will buy tradable allowances from the paper industry at a cost between $1,000 and $1,400 per allowance.
D) the brewery industry will buy tradable allowances from the paper industry at a cost greater than $1,400 per allowance.

Accepted Answer

The answer of The paper industry and brewery industry each...

Question 7

The EPA's system of tradable allowances:
A) was unable to internalize the external costs of pollution.
B) actually lead to increased levels of pollution.
C) was moderately successful in helping to decrease pollution levels.
D) is a successful application of the Coase theorem.

Accepted Answer

The answer of The EPA's system of tradable allowances:
A) was...

Question 8

What is the importance of the Clean Air Act of 1990?
A) Under this act, the EPA distributes pollution allowances to electricity producers.
B) Under this act, the EPA sets the maximum amount of pollution that each firm may emit.
C) The act lists the pollutants that are deemed harmful to the environment.
D) The act delineates which firms are allowed to emit more than 1 ton of sulfur dioxide.

Accepted Answer

The answer of What is the importance of the Clean...

Question 9

Use the following to answer questions: Table: Pollution Abatement $$\begin{array} { c c c } 
\hline \text { Firm } & \begin{array} { l } 
\text { Pollution Level } \
\text { (tons of } \mathrm { SO } _ { 2 } \text { ) }
\end{array} & \begin{array} { l } 
\text { Cost of Removing One } \
\text { Ton of Pollution }
\end{array} \
\hline \mathrm { A } & 30 & \$ 100 \
\mathrm {~B} & 30 & \$ 500 \
\hline
\end{array}$$
-(Table: Pollution Abatement) Refer to the table. If the government requires each firm in the table to reduce pollution by 2 tons, what is the total cost of reducing 4 tons of pollution?
A) $400
B) $2,000
C) $1,200
D) $2,400

Accepted Answer

Firm A will incur a cost of $200 (2 tons x $100), and Firm B will incur a cost of $1,000 (2 tons x $500). The total cost is $1,200 ($200 + $1,000).

Question 10

Which statement is TRUE?
A) Mandating that every firm emit no more than X amount of pollutants is the most efficient method of reducing pollution.
B) A system of tradable allowances increases pollution because firms can pay for the right to pollute.
C) To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry.
D) If the EPA cares about the sum of consumer and producer surplus, they should ignore the impact of pollution reduction on the profitability of firms.

Accepted Answer

To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry. This is because some industries may have a lower marginal cost of reducing pollution than others, meaning that it would be more cost-effective for them to reduce pollution. By allowing the burden to vary by industry, the overall cost of reducing pollution would be minimized, resulting in a larger social surplus. Mandating a specific amount of pollutants for every firm (A) may not be the most efficient method because it does not take into account the marginal cost of reducing pollution for each individual firm. A system of tradable allowances (B) does not necessarily increase pollution, but it does allow firms to trade allowances with each other, which can create a market incentive for reducing pollution. Ignoring the impact of pollution reduction on the profitability of firms (D) may not be desirable because it can result in economic inefficiencies and may not result in the maximum social surplus.

Question 11

Tradable pollution permits:
A) have helped reduce sulfur dioxide emissions but not carbon emissions.
B) have helped reduce sulfur dioxide and carbon emissions.
C) have not helped reduce any pollution emissions.
D) are widely viewed as an ineffective way to reduce pollution.

Accepted Answer

Tradable pollution permits have been effective in reducing both sulfur dioxide and carbon emissions. The system allows for market-based incentives for companies to reduce their emissions as they can sell their unused permits to other companies who need to emit more. This encourages companies to reduce their emissions in order to have extra permits to sell, leading to an overall reduction in pollution.

Question 12

The system of tradable allowances for carbon dioxide proposed by President Obama:
I. would be easy to implement today if not for the political in-fighting in Congress.
II. would create incentives for firms to move toward the use of fuels that contribute less to global warming (such as nuclear, solar, and so forth).
III. would create large revenues for the government, but do little to increase economic efficiency.
A) I and II only
B) II and III only
C) II only
D) I, II, and III

Accepted Answer

The answer of The system of tradable allowances for carbon...

Question 13

Use the following to answer questions: Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
-(Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants released into the environment after the two firms have traded allowances?
A) 11
B) 9
C) 20
D) 10

Accepted Answer

The answer of Use the following to answer questions: Exhibit:...

Question 14

Which of answer best explains how the market for tradable allowances in pollution works?
A) Firms are given a particular dollar subsidy value to clean up pollution, and they can trade these subsidies between themselves if they fall below or surpass the limits.
B) Firms are taxed a particular percentage rate according to how much they pollute, and they can trade the pollutants to reduce the effective tax rates they pay.
C) Firms are required to stick to particular production levels, and if they go beyond these production levels, they are charged a percentage of their profits.
D) Firms are given a particular allowance amount of pollutants, and if they fall below or surpass these targets they can trade their available allowances with other firms.

Accepted Answer

Firms are given a particular allowance amount of pollutants, and if they fall below or surpass these targets they can trade their available allowances with other firms. This creates a market for pollution allowances where firms that can reduce pollution at a lower cost can sell their allowances to those that face higher costs of reducing pollution. This creates an incentive for firms to reduce their pollution levels efficiently and for the overall reduction of pollution in the environment.

Question 15

The Clean Air Act:
A) banned the emission of sulfur dioxide.
B) created markets in sulfur dioxide emissions.
C) reduced social surplus.
D) increased sulfur dioxide emissions.

Accepted Answer

The answer of The Clean Air Act:
A) banned the emission...

Question 16

Use the following to answer questions: Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
-(Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading allowances?
A) A gains $650, and B saves $550.
B) A gains $250, and B saves $350.
C) A gains $650, and B saves $1,100.
D) A gains $1,050, and B saves $550.

Accepted Answer

Company B saves $350 because it would have had to spend $1,000 to reduce its pollution by 1 unit, but instead it paid $650 to Company A. Company A gains $250 because it only had to spend $400 to reduce pollution by 1 unit, but instead it was able to sell the unit to Company B for $650. Both companies profit from trading allowances because they are able to achieve the same level of pollution reduction at a lower cost than if each company had to reduce its pollution independently.

Question 17

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?
A) The EPA should limit both firms' pollution to the same level.
B) The EPA should limit High's pollution level to a lower level than Low's in an attempt to entice High to find more efficient ways to lower its costs.
C) The EPA should allow Low to increase its pollution level and trade with High who would cut its pollution to lower than the required level.
D) The EPA should allow High to increase its pollution level and trade with Low who would cut its pollution to lower than the required level.

Accepted Answer

The answer of Suppose that the EPA limits the pollution...

Question 18

The Clean Air Act of 1990:
A) established a tradable allowances program for sulfur dioxide.
B) is an application of the Coase theorem.
C) allows firms to profit by selling their unused pollution allowances.
D) All of the answers are correct.

Accepted Answer

The Clean Air Act of 1990 established a tradable allowances program for sulfur dioxide, which is an application of the Coase theorem. This program allows firms to profit by selling their unused pollution allowances. Therefore, all of the answers are correct.

Question 19

Tradable allowances:
A) are typically hard to pass through the Environmental Protection Agency (EPA) since they allow firms to legally pollute.
B) are an efficient way to reduce pollution at lower costs.
C) decrease the profitability of firms since now they have to pay for the rights to pollute.
D) are equal to the social surplus in the market.

Accepted Answer

Tradable allowances are an efficient way to reduce pollution at lower costs because the market allows for firms to trade their pollution allowances with each other, incentivizing those who can reduce emissions at a lower cost to do so and allowing those who face high costs to purchase allowances instead of reducing emissions. This leads to an overall reduction in pollution at a lower cost. Option A is incorrect because if the EPA sets up a market for tradable allowances, then they are allowing firms to legally pollute up to the allowance amount. Option C is incorrect because if firms can purchase allowances instead of reducing emissions, they may still be able to maintain or increase profitability. Option D is incorrect because the social surplus in the market depends on the demand and supply for allowances, which may not necessarily be equal.

Question 20

If a market for tradable allowances exists, a company that has used up its own allowances can:
A) buy allowances from another firm that has surpassed its limit of pollution.
B) purchase additional allowances from the EPA on a temporary basis.
C) pay a fine to the EPA and purchase additional allowances from other firms.
D) buy allowances from another firm that will not reach its limit of pollution.

Accepted Answer

The answer of If a market for tradable allowances exists,...

Quiz 10: Externalities- When the Price Is Not Right

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

Tradable allowances for pollution:

Which statement explains the difference between command and control policies and tradable allowances?

The EPA's system of tradable allowances:

What is the importance of the Clean Air Act of 1990?

Which statement is TRUE?

Tradable pollution permits:

Which of answer best explains how the market for tradable allowances in pollution works?

The Clean Air Act:

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which statement is correct?

The Clean Air Act of 1990:

Tradable allowances:

If a market for tradable allowances exists, a company that has used up its own allowances can: