Question 1

Which of the following statements is correct about a market in which pollution is emitted?
A)Both corrective taxes and pollution permits move the market toward the social optimum.
B)Corrective taxes move the market toward the social optimum, but pollution permits do not move the market toward the social optimum.
C)Pollution permits move the market toward the social optimum, but corrective taxes do not move the market toward the social optimum.
D)Neither corrective taxes nor pollution permits move the market toward the social optimum.

Accepted Answer

Both corrective taxes and pollution permits are market-based mechanisms that create incentives for firms to reduce pollution. Corrective taxes increase the cost of pollution, while pollution permits create a market for pollution rights. Both of these mechanisms move the market toward the social optimum in which the marginal cost of reducing pollution is equal to the marginal benefit of reducing pollution.

Question 2

Figure 10-19 
-Refer to Figure 10-19. Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 74th unit of the good is produced and consumed, social well-being
A)decreases by $2.40.
B)decreases by $1.60.
C)increases by $1.00.
D)increases by $1.40.

Accepted Answer

Social value decreases by $1.00 with each additional unit of the good that is consumed, and private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 74th unit of the good is produced and consumed, social well-being decreases by $2.40 ($1.00 + $1.40).

Question 3

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be re-labeled as
A)"Demand for clean air."
B)"Demand for pollution rights."
C)"Price of pollution."
D)"Rate of subsidy."

Accepted Answer

The line labeled "Corrective tax" represents the price of pollution, which is the amount of money that must be paid per unit of pollution emitted. As the price of pollution increases, the quantity of pollution decreases, as indicated by the downward-sloping line. This is the basic mechanism by which a corrective tax reduces pollution.

Question 4

Figure 10-19 
-Refer to Figure 10-19. Which of the following decreases as the quantity of the good is increased?
A)the private cost of the good
B)the social cost of the good
C)the private value of the good
D)the external benefit of the good

Accepted Answer

The private value of the good typically decreases as the quantity of the good is increased due to diminishing marginal utility.

Question 5

Which of the following policies is an example of a command-and-control policy?
A)subsidies to education
B)maximum levels of pollution that factories may emit
C)tradable pollution permits
D)None of the above is an example of a command-and-control policy.

Accepted Answer

A command-and-control policy is a policy approach that sets specific regulations or standards that must be followed, with penalties for non-compliance. Maximum levels of pollution that factories may emit is an example of a command-and-control policy because it sets specific limits on pollution emissions that industries must follow, with penalties for exceeding those limits. Subsidies to education and tradable pollution permits are examples of market-based policies.

Question 6

Figure 10-19 
-Refer to Figure 10-19. Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 59th unit of the good is produced and consumed, social well-being increases by
A)$28.00.
B)$31.40.
C)$33.60.
D)$36.00.

Accepted Answer

At the 59th unit of the good, the private value is $59, private cost is $82.60, and social value is $59. The difference between social value and private cost is the social well-being, which is $59 - $82.60 = -$23.60.

To calculate the change in social well-being when the 60th unit is produced and consumed, we need to compare the social value of the 60th unit to its private cost. The social value of the 60th unit is $58, because social value decreases by $1 with each additional unit. The private cost of the 60th unit is $84, because private cost increases by $1.40 with each additional unit.

The difference between social value and private cost for the 60th unit is $58 - $84 = -$26. This means that producing and consuming the 60th unit reduces social well-being by $26.

Therefore, the increase in social well-being from the production and consumption of the 59th unit is $23.60, which is closest to $33.60 (answer choice C).

Question 7

The business activities of Firm A confer positive externalities on Firm B, and the business activities of Firm B confer positive externalities on Firm A. If the two firms merged, then
A)their respective markets would move closer to the social optimum.
B)their respective markets would move further away from the social optimum.
C)total surplus in their respective markets would decrease.
D)the merger would serve as an example of a misguided public policy toward externalities.

Accepted Answer

Since the firms confer positive externalities on each other, their merger would lead to greater coordination and communication between the two firms, resulting in a more efficient allocation of resources and a movement closer to the social optimum.

Question 8

Figure 10-19 
-Refer to Figure 10-19. Each additional unit of the good that is produced yields an external
A)benefit of $15.
B)benefit of $36.
C)cost of $15.
D)cost of $36.

Accepted Answer

The answer of Figure 10-19 
-Refer to Figure 10-19. Each...

Question 9

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States, in 2015 dollars, would be about
A)$0.50 per gallon.
B)$0.90 per gallon.
C)$2.58 per gallon.
D)$2.78 per gallon.

Accepted Answer

The answer of In summarizing the research on the externalities...

Question 10

Which of the following statements is true of both pollution permits and corrective taxes?
A)Both policies internalize the externality of pollution.
B)Both policies require firms to pay for their pollution.
C)Both policies lead to the establishment of an equilibrium price of pollution.
D)All of the above are correct.

Accepted Answer

Both pollution permits and corrective taxes internalize the externality of pollution by making firms accountable for their pollution output. Both policies also require firms to pay for their pollution, either through purchasing permits or paying a tax. Additionally, both policies lead to the establishment of an equilibrium price of pollution in the market. Therefore, all of the statements are correct.

Question 11

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?
A)"Demand for clean air"
B)"Demand for pollution rights"
C)"Supply of pollution permits"
D)"Tax paid to government"

Accepted Answer

The label for the downward-sloping line on the graph is "Demand for pollution rights". This line represents the market demand for pollution permits, which decrease in quantity as the price of pollution increases due to the corrective tax.

Question 12

Which of the following policies is not an example of a command-and-control policy?
A)subsidies
B)Pigovian taxes
C)tradable pollution permits
D)None of the above is an example of a command-and-control policy.

Accepted Answer

Command-and-control policies are regulations that directly mandate specific actions or technologies. Tradable pollution permits, on the other hand, are a market-based instrument that allows firms to trade pollution allowances, providing them with flexibility in meeting environmental standards.

Question 13

Figure 10-19 
-Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of
A)$15.
B)$23.
C)$36.
D)$89.

Accepted Answer

The external benefit of each additional unit produced is shown by the vertical distance between the social benefit curve and the private benefit curve. At producing Q=5 units, the external benefit is $36 ($64-$28). This is the optimal level of production that maximizes social welfare.

Question 14

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. 
-Refer to Figure 10-18. The tax depicted on the graph
A)gives polluting firms an incentive to develop cleaner technologies.
B)is viewed by most economists as less effective than a command-and-control policy as a means of reducing pollution.
C)has the effect of moving the allocation of resources further from the social optimum than it would be in the absence of the tax.
D)All of the above are correct.

Accepted Answer

The tax depicted on the graph gives polluting firms an incentive to develop cleaner technologies. As the price of pollution increases, firms will be motivated to invest in technologies that reduce pollution in order to avoid paying the higher tax. This aligns their private interest (reducing costs by reducing pollution) with the social interest (reducing pollution for the benefit of society as a whole).

Question 15

Figure 10-19 
-Refer to Figure 10-19. The social optimum can be reached if
A)a subsidy of $36 is applied to each unit of the good.
B)a subsidy of $23 is applied to each unit of the good.
C)a tax of $23 is applied to each unit of the good.
D)a tax of $15 is applied to each unit of the good.

Accepted Answer

A subsidy of $36 would shift the supply curve to the right, increasing the quantity supplied and lowering the price to the social optimum.

Question 16

Which of the following statements is correct about a market in which pollution is emitted?
A)Both corrective taxes and pollution permits internalize the externality of pollution.
B)Corrective taxes internalize the externality of pollution, but pollution permits do not internalize that externality.
C)Corrective taxes fail to internalize the externality of pollution, but corrective taxes internalize that externality.
D)Neither corrective taxes nor pollution permits internalize the externality of pollution.

Accepted Answer

Corrective taxes and pollution permits both aim to internalize the externality by making firms account for the social cost of pollution.

Question 17

Figure 10-19 
-Refer to Figure 10-19. The socially optimal quantity of output is
A)58 units.
B)73 units.
C)between 73 and 94 units.
D)94 units.

Accepted Answer

The socially optimal quantity of output is where the marginal social benefit (MSB) equals the marginal social cost (MSC), which is at the intersection of the MSB and MSC curves. This occurs at output level Qs = 73 units, which is where the vertical distance between the two curves is smallest. Any output level above or below Qs will result in a deadweight loss to society.

Question 18

Figure 10-19 
-Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?
A)fewer than 58
B)58
C)73
D)94

Accepted Answer

At the market equilibrium, the quantity supplied equals the quantity demanded. In Figure 10-19, this occurs at point E, where the supply curve and demand curve intersect. The quantity produced at this point is 58 units.

Question 19

The tax on gasoline
A)reduces efficiency by causing large deadweight losses.
B)reduces efficiency by decreasing consumer surplus and producer surplus.
C)enhances efficiency by serving as a corrective device in a market with positive externalities.
D)enhances efficiency by serving as a corrective device in a market with negative externalities.

Accepted Answer

The tax on gasoline enhances efficiency by serving as a corrective device in a market with negative externalities. The negative externality associated with gasoline use is pollution, which imposes costs on society by damaging the environment and public health. By taxing gasoline, the government can internalize the external cost and make consumers pay for the full social cost of their consumption. This incentivizes consumers to use gasoline more efficiently, switch to alternative modes of transportation, or adopt cleaner technologies, leading to a more efficient allocation of resources and a reduction in the negative externality.

Question 20

Taxes that are enacted to mitigate the effects of negative externalities are sometimes called
A)control taxes.
B)command levies.
C)Pigovian taxes.
D)Marshallian taxes.

Accepted Answer

Taxes that are enacted to mitigate the effects of negative externalities are known as Pigovian taxes, named after the economist Arthur Pigou. These taxes are intended to internalize the external costs of certain economic activities and provide an economic incentive for individuals and firms to reduce their negative impact on society.

Quiz 10: Externalities

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The line labeled "Corrective tax" could accurately be re-labeled as

Figure 10-19 -Refer to Figure 10-19. Which of the following decreases as the quantity of the good is increased?

Which of the following policies is an example of a command-and-control policy?

The business activities of Firm A confer positive externalities on Firm B, and the business activities of Firm B confer positive externalities on Firm A. If the two firms merged, then

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external

In summarizing the research on the externalities associated with driving cars, a 2007 Journal of Economic Literature article concluded that the optimal corrective tax on gasoline in the United States, in 2015 dollars, would be about

Which of the following statements is true of both pollution permits and corrective taxes?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

Which of the following policies is not an example of a command-and-control policy?

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. The tax depicted on the graph

Figure 10-19 -Refer to Figure 10-19. The social optimum can be reached if

Which of the following statements is correct about a market in which pollution is emitted?

Figure 10-19 -Refer to Figure 10-19. The socially optimal quantity of output is

Figure 10-19 -Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?

The tax on gasoline

Taxes that are enacted to mitigate the effects of negative externalities are sometimes called