Exam 10: Externalities

Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000^th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. -Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were

Table 10-6 The following table shows the total costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103. -Refer to Table 10-6. If the government charged a fee of $85 per unit of pollution, how many units of pollution would the firms eliminate altogether?

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

The Environmental Protection Agency (EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy?

Which of the following is a difference between corrective taxes and tradable pollution permits?

Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to

What is the difference between command-and-control policies and market-based policies toward externalities?

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. Which of the following statements is correct?

Education yields positive externalities. For example,

When externalities cause markets to be inefficient,

Figure 10-7 -Refer to Figure 10-7. Which quantity represents the social optimum for this market?

Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $6-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

According to recent research, the gas tax in the United States is lower than the optimal level.

Corrective taxes are typically advocated to correct for the effects of

Private markets fail to account for externalities because

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

Figure 10-4 -Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be

Since almost all forms of transportation produce some type of pollution,

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 maximize the total benefit of fire extinguishers to society as a whole, should the number of fire extinguishers produced be less than, equal to, or greater than 500? Explain.

Table 10-4 -Refer to Table 10-4. The market equilibrium quantity of output is