Question 1

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 are designed to internalize the externality of pollution by making polluting firms pay for their pollution, thereby reducing the amount of pollution emitted. This payment will create a market for pollution rights or set a price for the pollution, thus establishing an equilibrium price of pollution. Therefore, all of the above statements are true for both policies.

Question 2

Figure 10-17 
-Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?
A)An amount equal to P' minus P.
B)An amount equal to P'.
C)An amount equal to P.
D)An amount equal to the external cost.

Accepted Answer

The answer of Figure 10-17 
-Refer to Figure 10-17. How...

Question 3

Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103. 
-Refer to Table 10-6. Suppose there is presently no pollution fee, and the government wishes to eliminate exactly 8 units of pollution. Which of the following fees per unit of pollution would achieve that goal?
A)$65
B)$75
C)$80
D)$88

Accepted Answer

The answer of Table 10-6
The following table shows the total...

Question 4

Which of the following is not a negative externality associated with driving cars?
A)congestion
B)pollution
C)repairs
D)accidents

Accepted Answer

Repairs are not necessarily a negative externality associated with driving cars because they do not impose a cost on a third party who is not directly involved in the transaction. Repairs are part of the normal cost of car ownership and are borne by the owner of the vehicle.

Question 5

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. 
-Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?
A)$67
B)$68
C)$81
D)$83

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 6

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

The answer of Which of the following policies is not...

Question 7

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. 
-Refer to Table 10-5. If the government wanted to eliminate exactly 11 units of pollution, which of the following fees per unit of pollution would achieve that goal?
A)$75
B)$87
C)$90
D)$106

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 8

Which of the following require firms to pay to pollute?
(i)corrective taxes
(ii)tradable pollution permits
(iii)pollution regulations
A)(i) only
B)both (i) and (ii)
C)(iii) only
D)both (ii) and (iii)

Accepted Answer

Corrective taxes and tradable pollution permits both require firms to pay to pollute. Corrective taxes impose a cost per unit of pollution, while tradable permits allow firms to buy and sell the right to emit a certain amount of pollution. Pollution regulations, on the other hand, typically set limits or standards without necessarily involving a payment.

Question 9

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?
A)$3,000; $1,500
B)$4,500; $3,500
C)$4,500; $4,000
D)$4,500; $2,500

Accepted Answer

If firms are not allowed to buy and sell pollution permits from each other, each firm will eliminate 20 tons of pollution each (since they each have 20 permits). Firm A will spend $100 per ton, so their total cost will be $100 x 20 = $2,000. Firm B will spend $50 per ton, so their total cost will be $50 x 20 = $1,000. Therefore, the total cost of reducing pollution is $2,000 + $1,000 = $3,000.

If the firms are allowed to buy and sell permits from each other, Firm A will be willing to pay up to $50 per permit to Firm B because that is cheaper than eliminating pollution themselves. Firm B will be willing to sell their permits for anything above $0 because it is cheaper than eliminating pollution themselves. Therefore, they will reach a price of $50 per permit, and Firm A will buy all 20 permits from Firm B for a total cost of $1,000. Firm A will eliminate all 40 tons of pollution (their 20 permits plus Firm B's 20 permits) for a total cost of $100 x 40 = $4,000. Firm B will eliminate the remaining 10 tons of pollution for a total cost of $50 x 10 = $500. Therefore, the total cost of reducing pollution is $4,000 + $500 = $4,500.

Question 10

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,
A)Firm B will spend $3,500.
B)Firm A will spend $4,000.
C)Firm A will spend $4,500.
D)Firm B will spend $3,000.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 11

Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103. 
-Refer to Table 10-6. Suppose the government wanted to reduce pollution from 16 units to exactly 6 units. Which one of the following fees per unit of pollution would achieve that goal?
A)$65
B)$70
C)$75
D)$95

Accepted Answer

To reduce pollution from 16 units to exactly 6 units, we need to eliminate 10 units of pollution. 
We can find the total cost for each firm to eliminate 10 units of pollution:
- Firm A: $46 + $57 + $82 + $132 + $191 + $279 = $787
- Firm B: $51 + $68 + $95 + $130 + $169 + $234 + $339 = $1086
- Firm C: $59 + $79 + $108 + $149 + $193 + $249 + $339 + $467 = $1683
- Firm D: $72 + $100 + $142 + $200 + $287 + $399 + $568 + $815 = $2383

To achieve the goal at the lowest cost, we need to choose the fee per unit of pollution that corresponds to the firm with the lowest total cost for eliminating 10 units of pollution. In this case, that is Firm A, which has a total cost of $787. 
The fee per unit of pollution for Firm A to eliminate 10 units of pollution is:
($46 + $57 + $82 + $132 + $191 + $279) / 10 = $78.7
Rounding up to the nearest dollar, the answer is $75. Therefore, choice C is the best choice.

Question 12

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 13

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that
A)Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.
B)Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200.
C)Both firms will use their own pollution permits.
D)Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 14

Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103. 
-Refer to Table 10-6. If the government charged a fee of $85 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A)10
B)12
C)14
D)16

Accepted Answer

The answer of Table 10-6
The following table shows the total...

Question 15

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. 
-Refer to Table 10-5. Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal. Which of the following is a likely auction price of the permits?
A)$69
B)$81
C)$83
D)$97

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 16

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 called Pigovian taxes, named after economist Arthur Pigou. These taxes are meant to correct market failures by internalizing the costs of negative externalities, such as pollution, and encouraging individuals and companies to reduce their negative impact on society.

Question 17

Table 10-6
The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103. 
-Refer to Table 10-6. If the government charged a fee of $93 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A)10
B)12
C)14
D)16

Accepted Answer

To determine the number of units of pollution each firm will eliminate, we need to find the point where the marginal cost of each firm is equal to the fee charged by the government ($93). For Firm A, this occurs at 2 units of pollution ($103). For Firm B, this occurs at 3 units of pollution ($129). For Firm C, this occurs at 4 units of pollution ($186), and for Firm D, this occurs at 5 units of pollution ($255). Thus, the total number of units of pollution eliminated by all four firms is 2 + 3 + 4 + 5 = 14. Therefore, the best choice is C.

Question 18

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. 
-Refer to Table 10-5. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A)7
B)8
C)9
D)10

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Question 19

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that
A)Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
B)Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
C)Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river.
D)Firm A will increase its pollution and Firm B will reduce its pollution.

Accepted Answer

The answer of Two firms, A and B, each currently...

Question 20

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. 
-Refer to Table 10-5. If the government charged a fee of $84 per unit of pollution, how many units of pollution would the firms eliminate altogether?
A)7
B)8
C)9
D)10

Accepted Answer

The answer of Table 10-5
The following table shows the marginal...

Quiz 10: Externalities

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

Figure 10-17 -Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Which of the following is not a negative externality associated with driving cars?

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

Which of the following require firms to pay to pollute? (i) corrective taxes (ii) tradable pollution permits (iii) pollution regulations

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

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