Exercise 5 - Solution PDF

Exercise 5 Solution
Chapter 5 Externalities, Environmental Policy, and Public Goods

5.1 Externalities and Economic Efficiency

1) Conceptually, the efficient level of carbon emissions is the level for which
A) the marginal benefit of reducing carbon emissions is maximized.
B) the marginal cost of reducing carbon emissions is minimized.
C) the marginal benefit of reducing carbon emissions is equal to the cost of reducing
carbon emissions.
D) the marginal benefit of reducing carbon emissions is minimized and the marginal
cost of reducing carbon emissions is maximized.
Answer: C
Diff: 1 Page Ref: 137-139/137-139
Topic: Cap-and-Trade
Objective: LO1: Identify examples of positive and negative externalities and use
graphs to show how externalities affect economic efficiency.
AACSB: Reflective Thinking
Special Feature: Economics in YOUR LIFE!: What's the "Best" Level of Pollution?

2) Which of the following is a source of market failure?
A) unforeseen circumstances which leads to the bankruptcy of many firms
B) a lack of government intervention in a market
C) incomplete property rights or inability to enforce property rights
D) an inequitable income distribution
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Externalities and Economic Efficiency
Special Feature: None

3) What are property rights?
A) the title to ownership of any physical asset
B) a legal document verifying ownership of intangible assets
C) the rights individuals or firms have to the exclusive use of their property, including
the right to buy or sell it
D) the right of the government to appropriate private assets for the good of society
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 137-139/137-139

4) A negative externality exists if
A) there are price controls in a market.
B) there are quantity controls in a market.
C) the marginal social cost of producing a good or service exceeds the private cost.
D) the marginal private cost of producing a good or service exceeds the social cost.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 137-139/137-139
Topic: Negative Externality

5) Private costs
A) are borne by producers of a good while social costs are borne by government.
B) are borne by consumers of a good while social costs are borne by government.
C) are borne by producers of a good while social costs are borne by society at large.
D) are borne by producers of a good while social costs are borne by those who cannot
afford to purchase the good.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Private Cost

6) If you burn your trash in the back yard in spite of regulations against it, then you are
A) acting economically irrationally and creating a social cost.
B) avoiding the private costs associated with disposing your trash some other way and
creating a social cost.
C) acting rationally and creating a positive externality.
D) saving landfill space and creating a social benefit.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Private Cost

7) A positive externality causes
A) the marginal social benefit to be equal to the marginal private cost of the last unit
produced.
B) the marginal social benefit to be less than the marginal private cost of the last unit
produced.
C) the marginal social benefit to exceed the marginal private cost of the last unit
produced.
D) the marginal private benefit to exceed the marginal social cost of the last unit
produced.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Positive Externality

Figure 5-1

Figure 5-1 shows a market with an externality. The current market equilibrium output
of Q
1
is not the economically efficient output. The economically efficient output is Q
2
.

8) Refer to Figure 5-1. Suppose the current market equilibrium output of Q
1
is not the
economically efficient output because of an externality. The economically efficient
output is Q
2
. In that case, the diagram shows
A) the effect of a positive externality in the production of a good.
B) the effect of a negative externality in the production of a good.
C) the effect of an external cost imposed on a producer.
D) the effect of an external benefit such as a subsidy granted to consumers of a good.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Negative Externality
Skill: Graphing
AACSB: Analytic Skills
9) Refer to Figure 5-1. If, because of an externality, the economically efficient output
is Q
2
and not the current equilibrium output of Q
1
, what does S
1
represent?
A) the market supply curve reflecting external cost
B) the market supply curve reflecting implicit cost
C) the market supply curve reflecting social cost
D) the market supply curve reflecting private cost
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Private Cost
Skill: Graphing

10) Refer to Figure 5-1. If, because of an externality, the economically efficient output
is Q
2
and not the current equilibrium output of Q
1
, what does S
2
represent?
A) the market supply curve reflecting private cost
B) the market supply curve reflecting social cost
C) the market supply curve reflecting external cost
D) the market supply curve reflecting implicit cost
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: Social Cost
Skill: Graphing

11) Which of the following conditions holds in an economically efficient competitive
market equilibrium?
A) The deadweight loss is positive but at a minimum.
B) Producer and consumer surplus are exactly equal in size.
C) There are no positive and no negative external effects from consumption and
production.
D) The marginal benefit of the last unit produced and consumed is maximized.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139

5.2 Private Solutions to Externalities: The Coase Theorem

1) In economics, the optimal level of pollution is
A) zero.
B) the level for which the total benefit from reducing the pollution is the greatest.
C) the level for which the marginal benefit from reducing the pollution is the greatest.
D) the level for which the net benefit from reducing the pollution is the greatest.
Answer: D
Diff: 2 Page Ref: 141/141
Topic: The Optimal Level of Pollution
Objective: LO2: Discuss the Coase Theorem and explain how private bargaining can
lead to economic efficiency in a market with an externality.
Special Feature: Don't Let This Happen to YOU!: Remember That It's the Net Benefit
That Counts

2) Because producers do not bear the external cost of pollution
A) the economically efficient level of production is achieved.
B) private production is below the economically efficient level.
C) private production exceeds the economically efficient level.
D) the market price is too high.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 137-139/137-139
Topic: The Optimal Level of Pollution

Figure 5-2

3) Refer to Figure 5-2. The marginal cost of reducing pollution curve is the same curve
as
A) the supply of pollution reduction curve.
B) the demand for pollution reduction curve.
C) the negative externality curve.
D) the value of pollution reduction curve.
Answer: A
Comment: Recurring
Topic: Marginal Benefit and Marginal Cost of Pollution Reduction
Skill: Graphing
4) Refer to Figure 5-2. The marginal benefit of reducing pollution curve is the same
curve as
A) the supply of pollution reduction curve.
B) the demand for pollution reduction curve.
C) the positive externality curve.
D) the external benefit curve.
Answer: B
Comment: Recurring
Skill: Graphing

5) Refer to Figure 5-2. What is the incremental cost of increasing the quantity of
pollution reduction from Q
B
to Q
E
units?
A) P
E
B) the value of the area Q
B
BEQ
E
C) P
E
Q
E
D) the value of the area BEF
Answer: B
Comment: Recurring
Skill: Graphing

6) Refer to Figure 5-2. What is the incremental benefit of increasing the quantity of
pollution reduction from Q
B
to Q
E
units?
A) P
F
B) P
F
Q
E
C) the value of the area BEF
D) the value of the area Q
B
BFQ
E
Answer: D
Comment: Recurring
Skill: Graphing
7) Refer to Figure 5-2. Which of the following statements is true?
A) At Q
E
the benefits of reducing pollution outweighs the cost of pollution reduction.
B) At Q
B
society is under allocating resources to pollution reduction.
C) The optimal quantity of pollution reduction is Q
B
.
D) The optimal quantity of pollution reduction is Q
E
.
Answer: C
Comment: Recurring
Skill: Graphing

8) According to ________, in a market with an externality, private parties would
voluntarily negotiate an efficient outcome without government intervention.
A) A. C. Pigou
B) Adam Smith
C) Ronald Coase
D) John Maynard Keynes
Answer: C
Comment: Recurring
Topic: The Coase Theorem

9) If the paint on your house was eaten away by the fumes from a factory nearby and
you hired a lawyer to sue the polluting firm, your legal fees would be considered
A) external costs.
B) transaction costs.
C) marginal benefits.
D) social costs of the pollution.
Answer: B
Comment: Recurring
Topic: Transactions Costs

5.3 Government Policies to Deal with Externalities

1) Who was the economist who first proposed that governments use taxes and subsidies
to correct for externalities?
A) Ronald Coase
B) A. C. Pigou
C) Adam Smith
D) David Hume
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 143-145/143-145
Topic: Pigovian Taxes and Subsidies
Objective: LO3: Analyze government policies to achieve economic efficiency in a
market with an externality.

2) Which of the following criteria should be used to evaluate if government
intervention in a market for the purpose of environmental protection is justified?
A) Does the intervention program reduce pollution to zero using the least costly
method?
B) Is the intervention program economically efficient?
C) Does the intervention program make the amount of economic surplus as large as
possible?
D) Is the damage to the environment from government intervention as small as
possible?
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 143-145/143-145
Topic: Government Policies to Deal with Externalities

3) An advantage of imposing a tax on the producer that generates pollution is that
A) it forces the polluting producer to internalize the external cost of the pollution.
B) the government can keep tabs on exactly what is produced in an industry.
C) it will eliminate pollution.
D) a producer can pass the cost of the pollution to consumers.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 143-145/143-145
Topic: Government Policies to Deal with Externalities

Figure 5-3

Companies producing toilet paper bleach the paper to make it white. The bleach is
discharged into rivers and lakes and causes substantial environmental damage. Figure
5-5 illustrates the situation in the toilet paper market.

4) Refer to Figure 5-3. The efficient output is
A) Q
1
.
B) Q
2
.
C) Q
3
.
D) Q
4
.
Answer: B
Skill: Graphing
Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality

5) Refer to Figure 5-3. The private profit-maximizing output level is
A) Q
1
.
B) Q
2
.
C) Q
3
.
D) Q
4
.
Answer: C
Skill: Graphing
6) Refer to Figure 5-3. An efficient way to get the firm to produce the socially optimal
output level is
A) for government to set a quota on the quantity of toilet paper that the toilet paper
industry can produce.
B) to impose a tax to make the industry bear the external costs it creates.
C) to grant a subsidy to enable the industry to internalize the external costs of
production.
D) to assign property rights to the firms in the industry.
Answer: B
Skill: Graphing

7) Refer to Figure 5-3. Suppose the government wants to use a Pigovian tax to bring
about the efficient level of production. What should the value of the tax be?
A) (P
2
-

P
1
) per ton of output
B) (P
2
-

P
0
) per ton of output
C) (P
1
-

P
0
) per ton of output
D) P
1
per ton of output
Answer: B
Skill: Graphing

8) Refer to Figure 5-3. Let's suppose the government imposes a tax of $50 per ton of
toilet paper to bring about the efficient level of production. What happens to the market
price of toilet paper?
A) It rises by $50.
B) It rises by more than $50.
C) It rises by less than $50.
D) It remains the same because the tax is imposed on producers who create the
externality.
Answer: C
Skill: Graphing

5.4 Four Categories of Goods

1) A product is considered to be rivalrous if
A) you can keep those who did not pay for the item from enjoying its benefits.
B) you cannot keep those who did not pay for the item from enjoying its benefits.
C) your consumption of the product reduces the quantity available for others to
consume.
D) it is jointly owned by all members of a community.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 148
Topic: Rivalry
Objective: LO4: Explain how goods can be categorized on the basis of whether they
are rival or excludable, and use graphs to illustrate the efficient quantities of public
goods and common resources.

2) Which of the following displays these two characteristics: rivalry and
nonexcludability?
A) a public good.
B) a private good.
C) a quasi-public good.
D) a common resource.
Answer: D
Comment: Recurring
Topic: Categories of Goods

3) Which of the following displays these two characteristics: nonrivalry and
excludability?
A) public goods
B) private goods
C) quasi-public goods
D) common resources
Answer: C
Comment: Recurring
Topic: Categories of Goods

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Exercise 5 Solution

Chapter 5 Externalities, Environmental Policy, and Public Goods

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