Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

30) Table 9.8 shows the production cost for two utilities at different levels of sulfur dioxide emissions. Assume that the government issued 8 marketable pollution permits to each firm. If the two firms were to voluntarily trade pollution permits, how many permits would be swapped?

A) 0

B) 1

C) 2

D) 3

31) Suppose two firms operate under a system of marketable pollution permits. If it costs Firm A $25 to reduce pollution by 1,000 units per day, and Firm B can reduce costs by $35 by increasing pollution by 1,000 units per day

A) the firms cannot gain by trading the right to pollute.

B) both firms can benefit if Firm A trades the right to pollute 1,000 units to Firm B for $30.

C) both firms can benefit if Firm A trades the right to pollute 1,000 units to Firm B for $40.

D) both firms can benefit if Firm B trades the right to pollute 1,000 units to Firm A for $30.

32) Suppose Smith's oil refinery and Jones' paper mill both pollute a river and both firms operate under a system of marketable pollution permits. If it costs Smith $45 to reduce pollution by 500 gallons per day, and Jones can reduce costs by $65 by increasing pollution by 500 units per day

A) the firms cannot gain by trading the right to pollute.

B) both firms can benefit if Smith trades the right to increase pollution by 500 gallons to Jones for $30.

C) both firms can benefit if Smith trades the right to increase pollution by 500 gallons to Jones for $50.

D) both firms can benefit if Jones trades the right to increase pollution by 500 gallons to Smith for $30.

33) Suppose two power plants pollute a river and both firms operate under a system of marketable pollution permits. If it costs Firm A $90 to reduce pollution by 800 units per day, and Firm B can reduce costs by $115 by increasing pollution by 800 units per day

A) the firms cannot gain by trading the right to pollute.

B) both firms can benefit if Firm A trades the right to increase pollution by 800 units to Firm B for $70.

C) both firms can benefit if Firm B trades the right to increase pollution by 800 units to Firm A for $120.

D) both firms can benefit if Firm A trades the right to increase pollution by 800 units to Firm B for $100.

34) If two firms pollute, and the increase in costs to Firm A from decreasing pollution is less than the decrease in costs to Firm B from increasing pollution

A) the firms will not trade the right to pollute.

B) the firms can benefit by trading the right to pollute.

C) while both firms can benefit from trading, there is no way for them to determine an agreeable price.

D) both firms will stop polluting.

35) If two firms pollute, and the increase in costs to Firm A from decreasing pollution is equal to the decrease in costs to Firm B from increasing pollution

A) the firms cannot benefit from trading the right to pollute.

B) the firms can benefit by trading the right to pollute.

C) while both firms can benefit from trading, there is no way for them to determine an agreeable price.

D) both firms will stop polluting.

36) We expect firms with ________ to sell marketable pollution permits to firms with ________.

A) low abatement costs; high abatement costs

B) high abatement costs; low abatement costs

C) high price goods; low price goods

D) high production capacity; low production capacity

37) While marketable pollution permits may ________ the total amount of pollution, they may ________ pollution in local areas.

A) increase; decrease

B) decrease; increase

C) decrease; not change

D) not change; increase

38) In the market for pollution permits, the total supply of permits is

A) inelastic.

B) elastic.

C) determined by the Chicago Board of Trade.

D) always equal to the demand for permits.

39) In the market for pollution permits, the demand for permits comes from

A) firms that would prefer to use permits rather than incur abatement costs.

B) the Chicago Board of Trade.

C) firms with low abatement costs.

D) the Environmental Protection Agency.