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Exam 10: Externalities

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Question 51

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Figure 10-6 -Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?

A) P
B) P'
C) Either P or P'. It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price.
D) Some price between P and P'. The equilibrium price depends on the negotiating skills of the interested parties.

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

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Question 52

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In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following statements is correct?

A) Despite the increase in the carbon tax, emissions of greenhouse gases in British Columbia have continued to increase at a rapid rate.
B) Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and corporations.
C) Few, if any, economists favor carbon taxes such as the one that British Columbia has imposed.
D) All of the above are correct.

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

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Question 53

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Suppose the Environmental Protection Agency uses a corrective tax to set a price for pollution. Under this policy, is the supply curve for pollution rights vertical or is it horizontal?

To enhance the well-being of society, a social planner will encourage firms to increase production when

When the government intervenes in markets with externalities, it does so in order to

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?

Which of the following is a problem that keeps people from privately solving externality problems?

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will

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

Which of the following statements is not correct?

Scenario 10-2 The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50^th restored historic building entails the following: • a private cost of $800,000; • a private value of $650,000; • a social value of $800,000. -Refer to Scenario 10-2. Is there an external cost associated with the restoration of the 50^th historic building, or is there an external benefit? What is the amount of that external cost or external benefit?

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

An externality exists whenever

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.

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. Does the production of fire extinguishers convey a positive externality, a negative externality, or neither?

Figure 10-12 -Refer to Figure 10-12. The graph, as drawn, could apply to the market for

Private markets fail to account for externalities because

Economists believe that the optimal level of pollution is zero.

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?