11) To totally internalize an externality, a government can levy a tax related only to the physical
quantity of pollution if
A) the economic damages associated with the pollution are different across different locations.
B) the economic damages are too large to be determined.
C) the economic damages associated with the pollution are the same across different locations.
D) the economic damages are zero.
12) To correct for a negative externality, a government might impose a uniform tax related only
to the physical quantity of pollution if
A) the administrative costs are high.
B) the cost of ascertaining the actual economic costs are relatively small.
C) the economic damages are zero.
D) the economic damages associated with the pollution are different across different locations.
13) An externality refers to the idea that
A) explicit costs differ from implicit costs.
B) decision-makers do not internalize all the costs.
C) we cannot do anything that does not affect other people.
D) private and internal costs differ.
14) Your neighbor has just planted some fragrant flowers. The wonderful scent drifts into your
room and makes you happy.
A) This scent is an internal cost to you.
B) This cannot be an externality since you are enjoying the scent.
C) This is an externality since you get a benefit from your neighbor's flowers.
D) The social cost of this activity is entirely borne by you neighbor.
15) If all firms had to bear all the social costs of their actions, we should observe marginal cost
A) of all firms shifting up.
B) of some firms shifting up, of some others shifting down, and of the rest not shifting at all.
C) of all firms that had generated externalities shifting up while there would be no change for the
rest of the firms.
D) of some firms shifting up and of the rest shifting down.
16) In order to correct the problems associated with external costs,
A) the signals given to the economy must change so that decision-makers will take into account
all the costs of their actions.
B) the government must take over production of industries that are responsible for most of the
C) standards must be established that make it illegal to pollute.
D) the prices of all goods must be raised so people will consume less of the world's resources.
17) Which of the following methods could be used to correct for external costs?
A) Impose a tax or an effluent fee on the offenders.
B) Have the offender clean up the pollution it caused.
C) Require firms in the industry to install pollution control devices.
D) All of the above would be appropriate.
18) Suppose cars are taxed according to the amount of pollution they emit per gallon of gasoline
consumed. We would expect to observe all of the following EXCEPT
A) an increase in quantity demanded of less-polluting automobiles and a reduction in quantity
demanded of more-polluting automobiles.
B) an increase in quantity demanded of more fuel-efficient cars.
C) an increase in production of automobiles that were less polluting.
D) an increase in the miles driven.
19) The most efficient way to get firms to reduce pollution is to
A) set uniform emission standards and require all firms to meet the standards.
B) make the worst polluters shut down and go out of business.
C) make them pay for the social costs of production and let them decide how to respond to the
D) provide firms and consumers with the information about the effects of their actions and
encourage them to behave responsibly.
20) When a polluter has to bear the full social cost of their actions, they will
A) weigh the costs and benefits of each potential action and might decide to not stop polluting by
paying a fine.
B) go out of business since pollution abatement is expensive.
C) will always decide to reduce the amount of pollution by reducing the quantity they produce.
D) increase the price of the product and the quantity produced to pay for the additional costs.
21) To efficiently improve environmental quality, it is usually
A) better to focus on the hardest areas to clean up first since these usually are the biggest
B) more appropriate to concentrate on the physical quantities of pollution rather than on
C) best to set up stringent emission standards that must be followed by everyone.
D) better to focus on economic damages rather than physical quantities of pollution.
22) A uniform tax according to the physical quantities of pollution may not be the appropriate
way to correct for an externality because
A) it places a unfair burden on small producers.
B) a uniform tax can only account for social costs and not external costs.
C) a firm will reduce production.
D) it may not adequately account for economic damages.
23) Which of the following might be a way that an automobile driver's pollution costs could be
A) The driver could purchase abatement equipment for her car.
B) The state could eliminate the gas tax.
C) The state could pay a gas subsidy for everyone who drives.
D) The state could allow her to drive in the HOV lane.
24) When an external cost exists that is NOT taken into account in the production of a product,
A) the level of output is too low, and the supply curve should shift to the right to account for the
B) the level of output is optimal, and there should be no change in the supply curve.
C) the price of the product is too high, and production should be expanded to lower the price.
D) the level of output is too high, and the supply curve should shift to the left to account for the
25) Use the above table. If the level of production was determined by the market, it would be
26) Use the above table. What will the price be before external costs are internalized with a tax?
27) Use the above table. What will the output level be when external costs are internalized with a
28) Use the above table. What will the price be when external costs are internalized with a tax?
29) Use the above table. What will the tax be when external costs are internalized?
30) Use the information in the above table. The external marginal costs are
D) inverse to quantity produced.
31) The government imposes a tax on an industry that produces goods creating a negative
externality. Yet the industry produces more than the optimum quantity of output. This means
A) the tax is more than the external cost associated with the product.
B) the tax is less than the external cost associated with the product.
C) the company should advertise the product more.
D) the company should increase the production of the product.
32) The marginal cost to society of reducing pollution increases with the increased use of
pollution abatement because
A) of the diminishing marginal utility of abatement.
B) of the reduced demand for abatement.
C) of the diminishing returns from abatement.
D) of the high cost of abatement.
33) All of the following are choices for the polluter when faced with additional costs to abate the
A) ignore the government regulations.
B) install pollution abatement equipment.
C) reduce the pollution-causing activity.
D) pay the price to pollute.
34) The government is considering levying a tax on the pollution generated from two electric
power plants (Plant A and Plant B). Plant A is located in a city with a high density of
population, and Plant B is located in the rural area with a low density of population. The
A) levy the same tax per unit of pollution on both plants.
B) levy a higher tax per unit of pollution on Plant A because of its higher economic damage.
C) levy a higher tax per unit of pollution on Plant B because of its lower economic damage.
D) tax only Plant A but not Plant B because Plant B generates less revenue.
35) To correct for the social impact of pollution, the government should levy a per-unit tax
A) that is the same for all polluters regardless of their locations or sizes.
B) according to the economic damage of the pollution.
C) according to the business activity of the polluter.
D) only to those polluters that can afford to pay for the tax.
36) Suppose that the nation wide average cost of air pollution generated by a car is $1,000.
Would a tax of $1,000 on every car induce people to take external costs into consideration and
bring about the optimal price and output for autos? Explain.
37) Using a graph, show the effects of a negative externality. Where is the socially optimum
point of output? How can it be achieved?
38) Is a uniform per-unit tax on firms that cause an externality an optimal policy for correcting
the externality? Explain.
1) Assuming that pollution cannot be removed from the environment at zero cost, the optimal
level of pollution
A) will be zero.
B) will be negative.
C) will be positive.
D) cannot be determined.
2) As we approach total pollution abatement
A) the marginal benefit to society declines.
B) the marginal benefit to society increases.
C) the marginal benefit to society increases, but at a decreasing rate.
D) the marginal cost to society declines.
3) As we approach total pollution abatement
A) the marginal cost to society falls.
B) the marginal cost to society rises.
C) the marginal cost to society equals the marginal benefit to society.
D) the marginal cost to society falls but then rises.
4) It is assumed that the marginal benefit of air cleanliness falls with the degree of cleanliness
A) the marginal cost of air cleanliness increases.
B) air cleanliness is a public good and not a private good.
C) the marginal utility of air cleanliness falls with the degree of cleanliness.
D) the generation of pollution should be considered an externality.
5) The marginal cost of pollution abatement is represented by
A) an upward sloping curve.
B) a downward sloping curve.
C) a horizontal curve.
D) a vertical curve.
6) The marginal benefit of pollution abatement is represented by
A) an upward sloping curve.
B) a downward sloping curve.
C) a horizontal curve.
D) a vertical curve.
7) Attaining higher and higher levels of air cleanliness causes
A) additional costs to rise to increasingly high levels.
B) larger and larger increases in per capita incomes.
C) additional costs to fall to lower and lower levels.
D) larger and larger marginal benefits to society.
8) According to economic analysis, the optimal level of pollution is
A) always zero.
B) at the point at which the marginal benefits of pollution control exceed the marginal cost.
C) at the point at which the marginal benefits of pollution control are less than the marginal cost.
D) at the point at which the marginal benefits from pollution control are equal to the marginal
9) In the process of reducing pollutants in our environment, we are
A) achieving a cleaner environment at no real cost.
B) causing higher levels of unemployment.
C) reallocating resources in an inefficient manner.
D) trading off less of other goods and services for a cleaner environment.
10) In general, we would expect the marginal cost of pollution abatement to be
11) The marginal benefit from pollution abatement
A) increases as pollution abatement increases because people learn to want an even cleaner
environment as the environment gets cleaner.
B) decreases as pollution abatement increases because of the law of diminishing marginal
C) is constant as pollution abatement increases because pollution abatement is valued for its own
sake and not for the utility it provides.
D) decreases as pollution abatement increases because of the law of diminishing marginal utility.
12) The total benefits to society from pollution abatement
A) increase at an increasing rate with the increase of pollution abatement.
B) increase at a decreasing rate with the increase of pollution abatement.
C) decrease at an increasing rate with the increase of pollution abatement.
D) decrease at a decreasing rate with the increase of pollution abatement.