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Exam 10: Externalities

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Question 71

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Figure 10-7 -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. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

A) 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.
B) 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air.
C) 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air.
D) 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

E) None of the above
F) All of the above

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Question 72

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Scenario 10-3 ​ Suppose the equation for the demand curve in a market is P = 120 - (1/5) Q^D , where Q^D is the quantity demanded and $P$ is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) Q^S , where Q^S is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What particular tax or subsidy would move the market to the social optimum?

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A tax of $12 per uni...

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Question 73

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Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

Scenario 10-3 ​ Suppose the equation for the demand curve in a market is P = 120 - (1/5) Q^D , where Q^D is the quantity demanded and $P$ is the price. Also, suppose the equation for the supply curve in the same market is P = (1/10) Q^S , where Q^S is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve?

Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip

Laws that are passed that either require or forbid certain behaviors are examples of command-and-control policies.

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

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. -Education yields positive externalities. For example,

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. In order to reach the social optimum, should fire extinguishers be taxed or subsidized? What is the appropriate amount of the tax or subsidy on each fire extinguisher?

Table 10-3 ​ ​ $\begin{array} { | c | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Private Value } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Private Cost } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { External Benefit } \\\text { (Dollars) }\end{array} \\\hline 1 & 22 & 12 & 10 \\\hline 2 & 20 & 15 & 10 \\\hline 3 & 18 & 18 & 10 \\\hline 4 & 16 & 21 & 10 \\\hline 5 & 14 & 24 & 10 \\\hline 6 & 12 & 27 & 10 \\\hline\end{array}$ -Refer to Table 10-3. The table represents a market in which

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

When firms internalize a negative externality, the market supply curve shifts to the left.

Figure 10-4 -Refer to Figure 10-4, Graph (b) and Graph (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by

At any given quantity, the cost of the marginal seller is the height of the __________.

As a means of dealing with pollution, do economists generally prefer corrective taxes or do they prefer regulations?

The tax on gasoline causes deadweight losses, as is the case with all taxes.

Figure 10-4 -Refer to Figure 10-4, Graph (b) and Graph (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Government intervention is necessary to correct all externalities.