Question 1

An ideal pollution control policy:
A)​would reduce pollution to zero.
B)​would reduce pollution to the socially efficient level.
C)​discourage firms from wasting time developing abatement technologies.
D)​reduce pollution as quickly as possible, regardless of the cost.

Accepted Answer

A pollution control policy that reduces pollution to the socially efficient level balances the costs of pollution reduction with the benefits of reduced pollution. It takes into account the trade-off between reducing pollution and the cost of reducing pollution, ensuring that the benefits of pollution reduction exceed the costs, creating a net social benefit. This option promotes environmental sustainability while not burdening the industry with unnecessary restrictions.

Question 2

Suppose that your roommate is very untidy. Suppose she/he gets a $100 benefit from being messy but imposes a $200 cost on you. (Assume that there are no regulations against untidiness in your living quarters.) The Coase Theorem would suggest that an efficient solution can be reached where:
A)​you pay your roommate at least $100 but no more than $200 to clean up after her/himself
B)​you pay your roommate at least $201 to clean up after her/himself.
C)​you continue to live with your untidy roommate until you are able to make other living arrangements elsewhere.
D)​your roommate pays you at least $100 to have you clean up after her/him.

Accepted Answer

The Coase Theorem suggests that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In this scenario, paying your roommate between $100 (the benefit they get from being messy) and $200 (the cost imposed on you) to clean up is an efficient solution that compensates them for their loss of benefit while also addressing the cost imposed on you.

Question 3

Which of the following statements is correct?
A)​The ideal solution to a pollution problem is to reduce pollution until it is technologically impossible to reduce it any further.
B)​The ideal and fair solution to a pollution problem is to impose identical compliance standards on all polluting firms.
C)​Charging firms for transferable emissions permits is a more efficient way of dealing with pollution than are compliance standards.
D)​A per-unit pollution tax is a more efficient way of dealing with pollution than is a system of transferable emissions permits.

Accepted Answer

This statement is correct because charging firms for transferable emissions permits creates a market for pollution rights and incentivizes firms to reduce their own emissions if they can do so at a lower cost than purchasing additional permits. Compliance standards may not be as efficient because they do not provide firms with flexibility in how they reduce emissions, and identical standards may not be fair because different firms may have different abilities to reduce pollution. Option A is not ideal because it assumes that there is a limit to how much pollution can be reduced, whereas continued innovation and technological advancements may allow for further reductions. Option D is not the most efficient because a per-unit tax does not provide firms with flexibility in how they reduce emissions and may not incentivize reductions at the same level as transferable permits.

Question 4

According to the Coase Theorem, private solutions to externalities can lead to the socially efficient outcome when:
I.transaction costs are negligible
II.property rights are clearly defined
IiI.the number of parties involved is small
A)​(i), (ii), and (iii)
B)​(i) and (ii) only
C)​(iii) only
D)​(ii) and (iii) only

Accepted Answer

The Coase Theorem suggests that private solutions to externalities can lead to socially efficient outcomes when transaction costs are negligible, property rights are clearly defined, and the number of parties involved is small. These conditions facilitate negotiation and agreement among parties affected by externalities.

Question 5

Which of the following is not true with regard to pollution control through transferable pollution rights?
A)​It does not require the government to know in advance the pollution abatement techniques to be utilized.
B)​It creates an incentive to develop improved pollution abatement technologies.
C)​It ultimately requires all firms to reduce pollution in equal amounts.
D)​It established private property rights that can be sold.

Accepted Answer

Transferable pollution rights do not necessarily require all firms to reduce pollution in equal amounts. The allocation of pollution rights can be based on various factors, such as historical emissions or production levels. The goal is to provide an economic incentive for firms to reduce pollution, rather than to enforce equal reductions across all firms.

Question 6

Pollution abatement is likely to be most costly under:
A)​a compliance standard.
B)​a per-unit pollution tax system.
C)​a system of transferable pollution rights.
D)​Costs are the same under all three pollution control policies.

Accepted Answer

Under a compliance standard, firms are required to meet a specific pollution limit regardless of the cost. This can result in higher costs for the firm as they may need to invest in expensive pollution abatement technology. In comparison, a per-unit pollution tax system incentivizes firms to reduce pollution at the lowest cost possible. A system of transferable pollution rights provides flexibility and allows firms to trade pollution allowances. Therefore, pollution abatement is likely to be most costly under a compliance standard.

Question 7

Private solutions often are not possible due to the costs of negotiating and enforcing these solutions. Such costs are called:
A)​transaction costs.
B)​external costs.
C)​deadweight losses.
D)​social costs.

Accepted Answer

Transaction costs refer to the costs associated with negotiating and enforcing private solutions, such as the costs of hiring a mediator or lawyer. These costs can be prohibitively high for individuals and businesses, making private solutions difficult, if not impossible, to implement. This is why many economic transactions are mediated by the government, which can help to reduce transaction costs and facilitate mutually beneficial outcomes.

Question 8

Assume your roommate is very untidy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she/he gets a $200 benefit from being untidy but imposes a $100 cost on you. The Coase Theorem would suggest an efficient solution can be reached where:
A)​you continue to live with your messy roommate until you are able to make other living arrangements elsewhere.
B)​your roommate stops her/his messy habits or you force her/him to move out.
C)​you pay your roommate at least $100 but no more than $200 to clean up after (her)himself.
D)​your roommate pays you at least $100 but no more than $200 for the right to be untidy (or to have you clean up after her/him).

Accepted Answer

The Coase Theorem suggests that if transaction costs are low, the parties involved can negotiate and reach an efficient solution, regardless of how property rights are initially assigned. In this scenario, transaction costs are low because the parties live together and can negotiate directly.

Option A is not an efficient solution as it does not address the cost of living in an uncluttered apartment.

Option B is not an efficient solution unless the roommate voluntarily chooses to stop being messy or move out. Forcing the roommate to move out may create additional transaction costs, such as finding a new roommate or paying for a new apartment.

Option C is not an efficient solution because it would require you to bear the cost of your roommate's untidiness, which contradicts campus policy.

Option D is an efficient solution because it allows the roommate to internalize the cost of her untidiness by compensating you for the cost it imposes on you to live in an uncluttered apartment. Similarly, you are compensated for allowing your roommate to be untidy. It is important to note that the compensation shouldn't exceed $200 (the benefit received by the roommate for being untidy) or fall below $100 (the cost imposed on you for your roommate's untidiness).

Question 9

If transaction costs of negotiating are ____, the ____ suggests that the private market ____ allocate resources.
A)​high; Externality Theorem; will efficiently
B)​high; Coase Theorem; will not efficiently
C)​low; Coase Theorem; will efficiently
D)​both b and c

Accepted Answer

The Coase Theorem suggests that if transaction costs are low, private negotiations will lead to the efficient allocation of resources despite externalities. However, if transaction costs are high, the theorem indicates that the market will not allocate resources efficiently. Therefore, both B and C are correct interpretations of the Coase Theorem under different conditions of transaction costs.

Question 10

The Coase Theorem suggests that under its assumption, the efficient solution to an externality problem:
A)​depends on who owns property rights to the resources.
B)​is enhanced by government involvement in the negotiations.
C)​can be enhanced through the use of taxes.
D)​does not depend on the distribution of property rights.

Accepted Answer

The Coase Theorem suggests that the efficient solution to an externality problem does not depend on the distribution of property rights. Coase argued that as long as property rights are clearly defined and transaction costs are low, private parties will bargain to reach an efficient solution regardless of who owns the property rights. Therefore, the outcome will be efficient, independent of who owns the property rights.

Question 11

A system of transferable pollution rights:
A)​increases the quantity of pollution generated.
B)​provides firms with an incentive to develop new pollution-abatement technologies.
C)​is not as cost-effective in reducing pollution as a system based on compliance standards.
D)​is characterized by none of the above.

Accepted Answer

A system of transferable pollution rights provides firms with a financial incentive to develop new pollution-abatement technologies as they are able to sell their unused allowances in the market. This promotes innovation and encourages firms to find more efficient ways of reducing pollution. This system has been shown to be cost-effective in reducing pollution compared to a compliance-based system. It does not necessarily increase the quantity of pollution generated as the overall level of pollution is capped and the trade of pollution rights simply redistributes the pollution among firms.

Question 12

Firms buy and sell the right to pollute:
A)​under a system of compliance standards.
B)​under a free market system where there is no government intervention and property rights are not well-defined.
C)​under a system of transferable pollution permits.
D)​under a pollution tax system.

Accepted Answer

Firms buy and sell the right to pollute under a system of transferable pollution permits. This system is also known as cap-and-trade, where a set amount of pollution is allowed and permits are traded among firms for the right to emit pollutants up to that limit. This encourages firms to find ways to reduce their pollution levels and rewards those who are able to emit less than their allotment, as they can sell their unused permits to other firms.

Question 13

If pollution levels exceed the socially efficient level:
A)​the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
B)​the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
C)​the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
D)​nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement.

Accepted Answer

When pollution levels exceed the socially efficient level, it means that the cost to society of the pollution (in terms of health effects, environmental degradation, etc.) is greater than the cost of reducing (abating) that pollution. Therefore, the marginal benefit of reducing pollution (such as improved health, cleaner environment) is greater than the marginal cost of taking actions to reduce the pollution.

Question 14

Nick owns a dog whose barking annoys his neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Nick, and that Jane bears a cost of $700 from the barking. Assume that the city has no ordinance against barking dogs. A possible private solution that would benefit both parties is for:
A)​Jane to pay Nick $450 to get rid of the dog.
B)​Nick to pay Jane $650 for her inconvenience.
C)​Jane to pay Nick $650 to get rid of the dog.
D)​There is no private solution that would improve this situation for both parties.

Accepted Answer

The best private solution in this case is for Jane to pay Nick an amount that compensates him for the benefits he receives from owning the dog, while also compensating Jane for the negative externalities she bears. Since Nick values the dog at $500 and Jane bears a cost of $700, the optimal payment for Jane to make would be somewhere between those two amounts. Choice A, Jane paying Nick $450, does not fully compensate Jane for the cost she bears and may not be sufficient to motivate Nick to give up his dog. Choice B, Nick paying Jane $650, would not incentivize Nick to give up his dog as it doesn't compensate him for the benefits he derives from owning it. Choice C is the optimal solution, as it fully compensates Nick for his gain from owning the dog whilst also fully compensating Jane for her loss caused by the barking. Thus, Jane will pay Nick $650 to get rid of the dog. 
D cannot be the right answer because, as we have seen, there is a private solution that is beneficial for both parties.

Question 15

If pollution is reduced below the socially efficient level:
A)​the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.
B)​the marginal cost of pollution abatement is less than the marginal benefit of pollution abatement.
C)​the marginal cost of pollution abatement equals the marginal benefit of pollution abatement.
D)​nothing can be said about the relationship between the marginal cost and marginal benefit of pollution abatement.

Accepted Answer

Social efficiency is achieved when the marginal cost of pollution abatement is equal to the marginal benefit of pollution abatement. If pollution is reduced below the socially efficient level, it means that the cost of reducing further pollution exceeds the benefits of doing so. Therefore, the marginal cost of pollution abatement exceeds the marginal benefit of pollution abatement.

Question 16

The presence of a negative externality is likely to give rise to significant market failures when:
A)​property rights are not well-defined.
B)​property rights are well-defined.
C)​there are few victims of pollution and few polluters.
D)​transaction costs are relatively low.

Accepted Answer

When property rights are not well-defined, it is difficult to assign responsibility for the negative externality and therefore market mechanisms may not be effective in addressing the problem. This can lead to significant market failures. When property rights are well-defined, it is easier to assign responsibility and implement mechanisms such as taxes or regulations to correct for negative externalities. The number of victims and polluters as well as transaction costs may also impact the severity of market failures, but they are not as critical as the definition of property rights.

Question 17

Nick owns a dog whose barking annoys his neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Nick, and that Jane bears a cost of $500 from the barking. Assume that the city has no ordinance against barking dogs. A possible private solution that would benefit both parties is for:
A)​There is no private solution that would improve this situation for both parties.
B)​Jane to pay Nick $650 to get rid of the dog.
C)​Jane to pay Nick $800 to get rid of the dog.
D)​Nick to pay Jane $600 for her inconvenience.

Accepted Answer

The answer of Nick owns a dog whose barking annoys...

Question 18

Under a system of transferable pollution rights, which of the following firms is most likely to purchase a $500 permit to emit a ton of pollutants in to the atmosphere?
A)​a non-polluting firm
B)​a polluting firm that can reduce emissions at a cost of $500 per ton
C)​a polluting firm that can reduce emissions at a cost of $200 per ton
D)​a polluting firm that can reduce emissions at a cost of $600 per ton

Accepted Answer

A firm that faces a higher cost ($600) to reduce emissions than the cost of the permit ($500) would find it more economical to purchase the permit rather than reduce emissions.

Question 19

Nancy loves to landscape her yard, but her neighbor Tom places a low value on his landscaping. When Tom's grass is neglected and gets long, Nancy will mow for Tom. This is an example of:
A)​the fallacy of composition.
B)​a pollution tax.
C)​a private solution to a negative externality problem.
D)​how lazy Tom is.

Accepted Answer

Nancy is voluntarily taking actions to address the negative externality created by Tom's neglected landscaping. This is an example of a private solution to the problem, as opposed to a government-imposed regulation or tax (option B) or the fallacy of composition (option A). The fact that Tom is lazy (option D) may be a contributing factor, but it is not relevant to the economic concept being illustrated.

Question 20

Which objective of an ideal pollution control policy would involve the principle of continuing to reduce pollution by one more unit only as long as the value of the improved environmental quality is greater than the value of ordinary goods that are sacrificed?
A)​achieving pollution reduction at least cost
B)​motivating advances in abatement technology
C)​achieving the efficient level of pollution
D)​achieving a zero level of pollution

Accepted Answer

This objective involves the concept of achieving the efficient level of pollution, which means reducing pollution until the marginal cost of pollution reduction equals the marginal benefit of environmental quality improvement. This involves weighing the value of improved environmental quality against the cost of sacrificing ordinary goods or economic activity. The objective of achieving a zero level of pollution or motivating advances in abatement technology may not necessarily take into account the cost-benefit analysis of reducing pollution. The objective of achieving pollution reduction at least cost is also related to efficiency but does not explicitly account for the value of the improved environmental quality.

Quiz 8: Market Failure

An ideal pollution control policy:

Suppose that your roommate is very untidy. Suppose she/he gets a $100 benefit from being messy but imposes a $200 cost on you. (Assume that there are no regulations against untidiness in your living quarters.) The Coase Theorem would suggest that an efficient solution can be reached where:

Which of the following statements is correct?

According to the Coase Theorem, private solutions to externalities can lead to the socially efficient outcome when: I.transaction costs are negligible II.property rights are clearly defined IiI.the number of parties involved is small

Which of the following is not true with regard to pollution control through transferable pollution rights?

Pollution abatement is likely to be most costly under:

Private solutions often are not possible due to the costs of negotiating and enforcing these solutions. Such costs are called:

Assume your roommate is very untidy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she/he gets a $200 benefit from being untidy but imposes a $100 cost on you. The Coase Theorem would suggest an efficient solution can be reached where:

If transaction costs of negotiating are , the suggests that the private market allocate resources.

The Coase Theorem suggests that under its assumption, the efficient solution to an externality problem:

A system of transferable pollution rights:

Firms buy and sell the right to pollute:

If pollution levels exceed the socially efficient level:

If pollution is reduced below the socially efficient level:

The presence of a negative externality is likely to give rise to significant market failures when:

Under a system of transferable pollution rights, which of the following firms is most likely to purchase a $500 permit to emit a ton of pollutants in to the atmosphere?

Nancy loves to landscape her yard, but her neighbor Tom places a low value on his landscaping. When Tom's grass is neglected and gets long, Nancy will mow for Tom. This is an example of:

Which objective of an ideal pollution control policy would involve the principle of continuing to reduce pollution by one more unit only as long as the value of the improved environmental quality is greater than the value of ordinary goods that are sacrificed?