Question 1

Which of the following statements is not correct?

Accepted Answer

Economists typically prefer corrective taxes to regulations because corrective taxes provide firms with a financial incentive to reduce pollution, while regulations may not provide the same level of incentive.

Question 2

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to

Accepted Answer

The answer of Figure 10-13. On the graph, Q represents...

Question 3

Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action?

Accepted Answer

The elimination of all pollution may not be possible, especially in the short term. While pursuing environmentally friendly policies may reduce pollution, it is unlikely to completely eliminate it. Pursuing such a course of action could result in lower levels of nutrition, health care, and housing due to higher costs associated with environmentally friendly practices. It could also result in a lower standard of living and slow or reverse technological advancement, as funds and resources may need to be redirected towards environmental protection efforts.

Question 4

Since almost all forms of transportation produce some type of pollution,

Accepted Answer

While it is impossible to completely eliminate pollution from transportation, society must consider the benefits of transportation and weigh them against the costs of pollution. A complete ban on transportation would have numerous negative consequences, including impeding economic growth and preventing access to necessary resources. While the government should take steps to reduce pollution from transportation, completely banning it or refraining from intervening are not viable solutions.

Question 5

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. Each unit of plastics that is produced results in an external

Accepted Answer

The answer of Figure 10-13. On the graph, Q represents...

Question 6

Figure 10-14 
-Refer to Figure 10-14. Which of the following statements is correct?

Accepted Answer

To induce firms to internalize the externality, the government should impose a tax equal to the difference between the marginal social cost and the marginal private cost, which is P2 - P0.

Question 7

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

If there are no externalities, the private market already achieves the socially optimal quantity. Subsidies would lead to overproduction, making the equilibrium quantity greater than the socially optimal quantity.

Question 8

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. In order to reach the social optimum, the government could

Accepted Answer

The answer of Figure 10-13. On the graph, Q represents...

Question 9

Once tradable pollution permits have been allocated to firms,

Accepted Answer

Once tradable pollution permits have been allocated to firms, those that can reduce pollution only at high cost will be willing to pay the most for the pollution permits. This allows the firms that can reduce pollution at a lower cost to sell their unused permits to those who need them, promoting cost-effectiveness and market efficiency. The government does not control the price of permits, and the Coase theorem can still be applicable as a solution to reducing pollution through private bargaining. The value of pollution-saving technology may or may not be lower than the market value of a pollution permit, as it depends on the specific circumstances and costs involved.

Question 10

​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $40. Assuming no transaction costs, which of the following represents an efficient solution?

Accepted Answer

A is the efficient solution because it results in both parties being better off. Sophia is willing to pay up to $40 to avoid having her space invaded by a reclining seat, while Gabriel only values the right to recline at $10. Therefore, if Sophia offers Gabriel between $10 and $40 to not recline his seat, Gabriel will accept because he is getting more value than his perceived value of the right to recline. Sophia is also better off because she gets to keep her space and only has to pay between $10 and $40, which is less than her perceived value of $40. Both parties are better off in this scenario, making it efficient.

Question 11

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

Accepted Answer

A fine of $4,000 for each unit of air-pollution released by a fertilizer plant is a form of a corrective tax. Corrective taxes are taxes or charges levied on activities that have negative externalities, such as the pollution caused by a fertilizer plant. The purpose of a corrective tax is to internalize the external cost of the activity, so that the price of the good reflects its true social cost. This approach is preferred over direct regulation because it provides firms with an incentive to find the most cost-effective way to reduce pollution.

Question 12

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. This decision provides an example of

Accepted Answer

The decision to force the plant to stop production is an example of a direct regulation of an externality. The plant was emitting sulfur dioxide, which is a negative externality that affects the local environment and public health. By stopping production, the government is directly addressing the source of the externality and requiring the plant to internalize the costs of their actions.

Question 13

When the government uses a command-and-control policy to solve an externality, it

Accepted Answer

Command-and-control policies directly regulate behavior by imposing specific standards and regulations on individuals and firms. This type of policy is often used to address negative externalities where market solutions are insufficient to address the problem.

Question 14

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the

Accepted Answer

The social optimum has been reached because the marginal social cost (MSC) is equal to the marginal social benefit (MSB) at the quantity of 250 units.

Question 15

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

If there are no government subsidies for MBAs, the cost of obtaining an MBA degree will be fully borne by the student. As a result, the number of students who are willing to obtain an MBA degree will be exactly equal to the number of students for whom the expected return from obtaining an MBA degree is greater than or equal to the cost of obtaining the degree. This is the socially optimal quantity of MBAs because the benefits of an MBA are fully internalized by the student, and there are no positive or negative externalities associated with obtaining an MBA degree. Therefore, the equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.

Question 16

In Singapore, littering fines are strictly enforced. This is an example of a policy that

Accepted Answer

The policy of strictly enforcing littering fines in Singapore relies on incentives to reduce the pollution externality. People who litter face the consequence of paying a fine, which provides an incentive for them to avoid littering in the future. This approach relies on economic theory that assumes individuals respond to incentives and can be a more effective way of reducing negative behaviors than relying solely on moral codes or punishment. The policy does not discriminate against foreigners, as anyone who litters is subject to the same fine regardless of their nationality. The Coase Theorem, which suggests that private bargaining between two parties can lead to an efficient outcome, is not applicable in this situation.

Question 17

By allowing an income-tax deduction for charitable contributions, the government

Accepted Answer

By allowing an income-tax deduction for charitable contributions, the government is encouraging individuals to donate to charities and nonprofits, which in turn can provide goods and services that have positive externalities (such as education or healthcare). This is an example of the government promoting a private solution to a positive-externality problem.

Question 18

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

Accepted Answer

At the intersection of the supply and demand curves, which is where the price is $3.50 and the quantity is 325, market equilibrium has been reached. This means that the market is allocating resources efficiently and no external interventions, such as corrective taxes or subsidies, are necessary.

Question 19

A corrective tax is also known as:

Accepted Answer

A corrective tax is also known as a Pigovian tax as it is based on the economic principles developed by economist Arthur Pigou. This tax is intended to correct a market failure by building the cost of negative externalities, such as pollution, into the price of goods and services.

Question 20

The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

Accepted Answer

The Coase theorem assumes that property rights are well-defined and transferable and that transaction costs are low. However, if the initial distribution of legal rights is skewed in favor of some private parties over others, then the bargaining power will also be skewed, and some parties may be able to exploit others. In such cases, the private market may not solve the externality problem efficiently.

Quiz 10: Externalities

Which of the following statements is not correct?

Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action?

Since almost all forms of transportation produce some type of pollution,

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. Each unit of plastics that is produced results in an external

Figure 10-14 -Refer to Figure 10-14. Which of the following statements is correct?

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. In order to reach the social optimum, the government could

Once tradable pollution permits have been allocated to firms,

​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $40. Assuming no transaction costs, which of the following represents an efficient solution?

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. This decision provides an example of

When the government uses a command-and-control policy to solve an externality, it

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

In Singapore, littering fines are strictly enforced. This is an example of a policy that

By allowing an income-tax deduction for charitable contributions, the government

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

A corrective tax is also known as:

The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $40. Assuming no transaction costs, which of the following represents an efficient solution?