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Exam 10: Externalities

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Question 1

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Suppose the government issues a limited number of pollution permits in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution?

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With pollution permi...

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Question 2

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Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

A) They are equal.
B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
C) The after-tax equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

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

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Question 3

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Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following: a private cost of $2.83; a social cost of $3.12; a value to consumers of $3.23. -Refer to Scenario 10-1. Let Q_MARKET represent the equilibrium quantity of gasoline, and let Q_OPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?

Figure 10-2 -Refer to Figure 10-2. This market is characterized by

Figure 10-2 -Refer to Figure 10-2. If this market is currently producing at Q₄, then total economic well-being would be maximized if output

Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

In some situations, private economic actors cannot solve the problem of externalities among themselves because of substantial _________ costs.

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

When correcting for an externality, command-and-control policies are always preferable to market-based policies.

An example of a private solution to externalities is charities. The government encourages this private solution by allowing ___________ .

Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Many charities like the Sierra Club are established to deal with externalities.

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality.

The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.

Figure 10-2 -Refer to Figure 10-2. This market

​The majority of economists believe that the social benefit of mandating measles vaccines for all Americans (except those with compelling medical reasons) would exceed the social cost.

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

A former senator remarked that "We cannot give anyone the option of polluting for a fee." Do most economists agree with this statement, or do they disagree with it?