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1. In a competitive market, a free-market approach is always best when an external cost is present. True or false?

2. When externalities are present in a market, the social surplus is maximized. True or false?

3. The Clean Air Act of 1990:

a. established a tradable allowances program for sulfur dioxide.

b. is an application of the Coase theorem.

c. All of the answers are correct.

d. allows firms to profit by selling their unused pollution allowances

 

 

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

Question 3: The Clean Air Act of 1990 established control of sulfur dioxide emissions through the use of tradable permits. Tradable permits work because polluters and victims can trade the rights to pollute in a "market" where transaction costs are low. The program is quite effective in reducing emissions over traditional methods for controlling pollution such as fines and requi ring scrubbers on plants. Let's assume that each permit controls 1 unit of pollution. Only consider 1 unit increments of pollution (i.e. you cannot have one-half, one-third, one-fourth, etc. permits). Using the information in the table below, answer the following questions (15 points).

# of Permits Total benefit to Polluting Farmers Total Cost to Pollution Victims

0 0 0

1 30 10

2 55 30

3 75 60

4 90 100

5 100 150

6 105 210

A. Assume the government begins by giving all the permits to the pollution firms. What will be the efficient number of permits? Explain how the market arrives at this point. Use a diagram to illustrate your argument.

B. Assume the government begins by giving all the permits to pollution victims. What will the efficient number of permits? Explain how the market arrives at this point. Use a diagram to illustrate your argument.

C. Aside from restricting the number of permits, how else can the government influence the level of air pollution?

Question 1

An externality

   

enhances market efficiency.
   

is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
   

is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
   

refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

   

the high price of goods and services
   

individuals; firms
   

market prices; market incomes
   

oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

   

the level of output is too high, and the supply curve should shift to the left to account for the externality.
   

the price of the product is too high, and production should be expanded to lower the price.
   

the level of output is optimal, and there should be no change in the supply curve.
   

the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

   

MSC = MPC - MD
   

MPC = MSC + MD
   

MSC = MPC + MD
   

MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

   

the demand curve will shift to the left.
   

the supply curve will shift to the right.
   

the demand curve will shift to the right
   

the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

   

government intervention is always needed if externalities are present.
   

assigning property rights is the only thing the government should do in a market economy.
   

if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
   

a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

   

the use of private property rights on cattle and common property rights on buffalo.
   

the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
   

cattle existing in Europe also while buffalo were specific to North America.
   

the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

   

cause firms to generate less pollution than their allowed limits.
   

raise the production costs of all firms.
   

cause firms to generate more pollution than their allowed limits.
   

lower the production costs of all firms.

5 points

Question 9

A cap-and-trade policy

   

has a set number of permits.
   

allows polluters to trade permits.
   

caps the total level of pollution allowed.
   

all of the above.

Question 10

A Pigouvian tax corrects for

   

market congestion.
   

market losses.
   

inefficient sales.
   

low market prices.

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

$0.60

$0.40

$0.75

$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

a tax of $5 in Market X and a subsidy of $10 in Market Y.

subsidizing both markets.

taxing Market Y and subsidizing Market X.

taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

eliminated whenever it arises.

regulated to take advantage of economies of scale.

left alone to operate with excess capacity.

taken over by the government.

4.When the size of the production is the most efficient:

total cost is at the minimum.

average cost is at the minimum.

marginal cost is at the minimum.

fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

TR > TC

P < AC

Lifetime expected profit is positive.

Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

$75.

$300.

$225.

$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

too low; too high

equal to the efficient price; too low

too high; too low

equal to the efficient price; too high

8.Which of the following statements is TRUE?

I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

I only

II and III only

I, II, and III

III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

various options.

more quantity.

more discount.

higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

a shortage of 15 units.

a surplus of 15 units.

a supply of 20 units.

no effect on the market.

11.In which of these instances does price function as a signal in the market?

Suppliers invest more in exploration when the price of oil increases.

Consumers complain of price gouging as the price of oil skyrockets.

Government imposes price controls on the skyrocketing price of oil.

All of the answers are correct.

12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.

demand for; decrease; decrease

supply of; increase; increase

supply of; decrease; increase

demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

Cotton growers in California don't pay payroll taxes.

The water used to grow California cotton is highly subsidized by the government.

Cotton growers in California are mostly operated as nonprofit enterprises.

The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

the equilibrium price will fall to $7.50.

competition among buyers will increase the current price.

the current price will fall below $7.50 as sellers compete for market share.

There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

lower pork prices

higher consumer income

higher prices of feed grains used to feed beef cattle

an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States

2

5

Germany

3

9

Reference: Ref 2-8

(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.

two clocks; three clocks

10 clocks; 27 clocks

0.4 clocks; 0.33 clocks

2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

This trade makes Ella worse off by $200.

This trade makes Mark better off by $200.

Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.

This trade creates value by moving the guitar and drum set to people who value them more.

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