Economics for Today 2nd edition Irvin B Tucker by gabyion


									  Chapter 14
 Practice Quiz
Environmental Economics

1. Suppose the city of New Orleans discovered
  chemical compounds in its drinking water.
  The source is the waste discharges of
  industrial plants upstream. This is an example
  a. an external cost imposed on the citizens of
     New Orleans by the industrial plants
   b. a market failure where the market price of
     the output of these industrial plants does
     not fully reflect the social cost of producing
     these goods.
   c. an externality where the marginal social
     costs of producing these industrial goods
     differ from the marginal private costs.
   d. all of the above.
D. The upstream firm is releasing chemicals
 into the water, an external cost to the citizens
 of New Orleans. The upstream firm is not
 including these costs when pricing its
 product; hence, the market price is too low.
 Marginal social costs would include the
 marginal private cost of the industrial
 product (their costs of labor, capital,
 materials, etc.) and the external cost of the
 chemicals released into the water. Choices
 (a), (b), and (c)each are correct, so that all of
 the above is the correct choice.
2. A government policy that charges steel
  firms a fee per ton of steel produced (an
  effluent charge) where the fee is determined
  by the amount of pollutants discharged into
  the air or water will lead to
  a. a decrease in the market equilibrium
     quantity of steel produced.
   b. a decrease in the market equilibrium
     price of steel.
   c. an increase in the market equilibrium
     price of steel.
   d. the results in (a) and (b).
   e. the results in (a) and (c ).
E. Essentially, the government is employing an
  effluent tax to reduce pollution. The tax
  increases the cost of production. Supply
  decreases, leading to a higher price and
  smaller quantity. So choice (e), where (a)
  quantity decreases and (c)price increases, is
  the best choice.

3. Social costs are
   a. the full resource costs of an economic
   b. usually less than private costs.
   c. the costs of an economic activity borne by
     the producer.
   d. all of the above.

A. Social costs include both private costs (the
 costs of the firm’s inputs, including labor,
 capital, land, etc.) and external costs (the
 costs to third parties, such as pollution
 emitted by the producer). Social costs are at
 least as large as private costs. Producers will
 not consider external costs, which are a part
 of social costs, unless they are forced to do so
 by government or court.

4. As a general rule, if pollution costs are
  external, firms will produce
   a. too much of a polluting good.
   b. too little of a polluting good.
   c. an optimal amount of a polluting good.
   d. an amount that cannot be determined
     without additional information.

A. Private firms will make their production
 decision using private costs. If there are
 external costs, social costs exceed private
 costs. If production decisions included
 external costs, supply would be smaller than
 when private costs alone are considered. So
 if external costs are ignored, the firm will
 produce too much, as compared to the social
 efficient level.

5. Many economists would argue
   a. the optimal amount of pollution is
     greater than zero.
   b. all pollution should be eliminated.
   c. the market mechanism can handle
     pollution without any government
   d. central planning is the most efficient
     way to eliminate pollution.

A. The optimal amount of pollution is where
 marginal social cost equals marginal social
 benefit. This amount typically exceeds zero.
 The marginal cost of eliminating all pollution
 would likely be very high. For example, we
 would have to eliminate all cars. However,
 firms tend to ignore external costs such as
 pollution, in an unfettered market. While
 government is likely to be needed, pollution
 has actually been worse in centrally planned

6. Which of the following used marketable
  pollution permits as an incentive for
  reducing pollution?
   a. The 1970 Clean Air Act.
   b. The Comprehensive Environmental
     Response, Compensation, and Liability
     Act of 1980.
   c. The 1990 Clean Air Act amendments.
   d. The Water Quality and Improvement
     Act of 1970.

C. The 1990 Clean Air Act was the first piece
 of federal legislation to introduce emissions
 trading. It introduced this approach for
 sulfur emissions, thought to contribute to
 acid rain.

7. The disposable diaper industry is perfectly
  competitive. Which of the following is true?
   a. Since the industry is perfectly
     competitive, price and quantity are at the
     socially efficient levels.
   b. Competitive price is higher and
     competitive quantity lower than the
     socially efficient point.
   c. Competitive price is higher and
     competitive quantity higher than the
     socially efficient point.
   d. Competitive price is lower and
     competitive quantity higher than the
     socially efficient point.
D. Disposable diapers have an external cost, to
 the extent that they are not biodegradable and
 sit in landfills. Producers in a competitive
 market consider only private costs, ignoring
 disposal issues. Similarly, consumers just
 want to prevent leaks that affect them, but
 ignore leaks that affect landfills. So
 producers and consumers use private costs
 and benefits. Social costs are higher, so that
 social supply is smaller. The competitive
 price, based on private costs and benefits, is
 lower than the social cost. Competitive
 quantity is larger, given the larger supply,
 than the socially efficient quantity.
8. An example of the command-and-control
  approach to environmental policy is
   a. placing a tax on high-sulfur coal to
     reduce its use and the corresponding
     sulfur emissions (which contribute to acid
   b. requiring electric utilities to install
     scrubbers to reduce sulfur dioxide
     emissions (which contribute to acid rain).
   c. allowing coal producers to buy and sell
     permits to allow sulfur emissions.
   d. allowing individuals to sue coal
     producers if sulfur emissions exceed
     government-set standard.
B. Command-and-control is a regulation
  whereby the government establishes a
  pollution target and dictates the method to
  achieve the target. An example is requiring
  scrubbers to reduce sulfur emissions.
  Sulfur emission permits and effluent taxes
  are example of incentive-based approaches.
  With taxes, for example, the firm can choose
  low-sulfur coal to avoid the tax.

                      Exhibit 6 Profit-Maximizing Firm
                                           MSC               MPC
                 P1   Demand                G                 H
Price per unit

                               A                   C
                                            F                E

                                                             .     -
                               Q1             Q2 Q3 Q 4            18
                              Quantity of output
9. The profit-maximizing firm in Exhibit 6
  creates water and air pollution as a
  consequence of producing its output of
  beef cattle. If pollution costs are borne by
  third parties, the firm will maximize
  economic profit by choosing to
   a. voluntarily incur costs to reduce its
   b. produce at output rate Q3.
   c. produce at output rate Q2.
   d. produce at output rate Q4.
 D. The firm will produce at Q4 where
    demand (MR) intersects Private MC.
 10. Use Exhibit 6 to complete the
   following: To maximize social welfare,
   the firm should produce at output rate
    a. Q1.
    b. Q2.
    c. Q3.
    d. Q4.

B. The firm will produce at Q2, where
 demand (MR) intersects Social MC.

Exhibit 7 Impact of Flights on House Value

 Number       Total    Marginal    Value of
of Flights   Profits    Profits Wilbur’s House
   1     $10,000 $10,000 $100,000
   2         18,000       8,000      95,000
   3         24,000       6,000      90,000
   4         28,000      4,000       85,000
   5         30,000      2,000       80,000
11. As shown in Exhibit 7, if Orville has the
  property right to fly over Wilbur’s house,
  but Wilbur is allowed to negotiate with
  Orville on the number of flights, what will
  be the number of flights?
   a. 2.
   b. 3.
   c. 4.
   d. 5.
B. At 3 flights, marginal profits for Orville
  is $6,000 and the value of Wilbur’s
  property goes down by $5,000.
12. As shown in Exhibit 7, Wilbur has the
  property right to have no planes flying
  over his house, but Orville is allowed to
  negotiate with Wilbur, what will be the
  number of flights?
   a. 2.
   b. 3.
   c. 4.
   d. 5.
B. At 3 flights, marginal profits for Orville
  is $6,000 and the value of Wilbur’s
  property goes down by $5,000.
13. As shown in Exhibit 7, at the socially
  efficient number of flights, what will be
  the market value of Orville’s house?
   a. $100,000.
   b. $95,000.
   c. $90,000.
   d. $85,000.
C. At 3 flights, this is the last number of
 flights that the marginal profits are greater
 than the marginal costs (ie. the amount that
 Orville’s house declines in value)


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