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Exam 10: Externalities

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Question 121

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The Coase theorem asserts that, if externalities are present and if private parties can bargain over the allocation of resources at no cost, then

A) the private market will reach an equilibrium in which resources are allocated inefficiently.
B) the private market will reach an equilibrium in which resources are allocated efficiently.
C) the private market cannot reach an equilibrium.
D) a mixture of corrective taxes and subsidies is necessary for a socially optimal equilibrium.

E) C) and D)
F) All of the above

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Question 122

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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

E) A) and D)
F) B) and C)

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Question 123

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Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?

When we identify public policies toward externalities, we contrast command-and-control policies with what other type of policies?

Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500^th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. -Refer to Scenario 10-4. What is the social value of the 500^th fire extinguisher?

When a particular negative externality affects a very large number of people, it is likely that

Two farmers, A and B, each apply 100 tons of manure on their fields. To reduce manure runoff, the government has decided to require a permit for each ton of manure applied. The government gives each farmer 50 tradeable permits. Farmer A incurs losses of $25 for each ton of manure he does not apply, and Farmer B incurs losses of $50 for each ton of manure he does not apply. After permit trading, we would expect that

Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is

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?

If education produces positive externalities and the government does not intervene in the market, we would expect

Corrective taxes

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

Figure 10-10 -Refer to Figure 10-10. "The social cost of the last unit produced exceeds the value to buyers of the last unit produced by $3." This statement is correct at which quantity of output?

Figure 10-4 -Refer to Figure 10-4. This market

Which of the following suggests that private markets can be effective in dealing with externalities?

Table 10-2 The following table shows the private value, private cost, and social value for a market with a positive externality. -Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?

Market failure can be caused by

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?

Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities?

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.