Transcript Tutorial

Chapter 14
Practice Quiz
Tutorial
Environmental Economics
©2000 South-Western College Publishing
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1. Recently 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
of
a. an external cost imposed on the citizens of
New Orleans by the industrial plants
upstream.
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.
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1.
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.
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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 ).
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2.
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.
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3. Social costs are
a. the full resource costs of an economic
activity.
b. usually less than private costs.
c. the costs of an economic activity borne by
the producer.
d. all of the above.
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3.
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.
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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.
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4.
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.
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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
intervention.
d. central planning is the most efficient
way to eliminate pollution.
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5.
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
economies.
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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.
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6.
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.
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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.
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7.
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.
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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
rain).
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.
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8.
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.
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P
EXHIBIT 6
MSC
MPC
ASC
P1
L
K
J
Demand
G
C
A
F
B
Q1
H
APC
E
Q2 Q3 Q4
Q
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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
pollution.
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.
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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.
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Exhibit 7
Impact of Flights on House Value
Number
of Flights
1
Total
Profits
Value of
Marginal
Profits Wilbur’s House
$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
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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.
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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.
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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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END
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