Q: Which equation correctly represents the condition for the efficient level of pollution reduction?

$$ \text{Marginal Cost of Pollution Reduction} = \text{Marginal Benefit of Pollution Reduction} $$

Q: Which formula correctly represents the deadweight loss from a negative externality?

$$ \text{Deadweight Loss} = \frac{1}{2} (Q_{market} - Q_{efficient}) (MSC - MPC) $$

Question 1

Which of the following best describes a negative externality in production?

Accepted Answer

A cost that affects someone who is not directly involved in the production of a good or service.

Question 2

Suppose a factory emits pollution as a by-product of its production. The marginal private cost of production is $50 per unit, but the marginal social cost is $70 per unit. What is the size of the external cost per unit?

Accepted Answer

$20

Question 3

If a market is left unregulated and there is a negative externality in production, what will be the likely outcome?

Accepted Answer

Too much of the good will be produced, resulting in overproduction and deadweight loss.

Question 4

Which equation correctly represents the condition for the efficient level of pollution reduction?

Accepted Answer

$$ 	ext{Marginal Cost of Pollution Reduction} = 	ext{Marginal Benefit of Pollution Reduction} $$

Question 5

According to the Coase Theorem, under what conditions can private bargaining solve the problem of externalities?

Accepted Answer

Property rights are assigned and enforceable, and transaction costs are low.

Question 6

A city is considering subsidizing flu vaccinations because they provide positive externalities. What is the likely effect of this subsidy?

Accepted Answer

The market equilibrium quantity of vaccinations will increase toward the efficient level.

Question 7

Which of the following is an example of a Pigovian tax?

Accepted Answer

A tax on carbon dioxide emissions to internalize the external cost of pollution.

Question 8

Suppose the government imposes a tax equal to the external cost of pollution. What happens to the supply curve for the good that generates pollution?

Accepted Answer

It shifts upward by the amount of the tax.

Question 9

Which of the following best describes the 'tragedy of the commons'?

Accepted Answer

A situation where common resources are overused because individuals ignore the external cost of their consumption.

Question 10

Which of the following goods is both nonrival and nonexcludable?

Accepted Answer

National defense

Question 11

A cap-and-trade system for pollution control is most effective when:

Accepted Answer

Firms with high costs of reducing pollution can buy allowances from firms with low costs, minimizing total abatement costs.

Question 12

Which formula correctly represents the deadweight loss from a negative externality?

Accepted Answer

$$ 	ext{Deadweight Loss} = \frac{1}{2} (Q_{market} - Q_{efficient}) (MSC - MPC) $$

Question 13

Which of the following is a reason why public goods are often underprovided by the market?

Accepted Answer

People can free ride on the benefits without paying.

Question 14

If the marginal social benefit of college education exceeds the marginal private benefit, what does this imply?

Accepted Answer

There is a positive externality in consumption, and the market will underproduce education.

Question 15

Which of the following is an example of a command-and-control policy to address externalities?

Accepted Answer

A requirement that all cars be equipped with catalytic converters.

Question 16

Suppose the government wants to efficiently reduce pollution by 10,000 tons. Firm A can reduce pollution at $10 per ton, while Firm B can only reduce at $100 per ton. Which policy achieves the reduction at the lowest cost?

Accepted Answer

Allow Firm A to reduce more and Firm B to reduce less, possibly through tradable permits.

Question 17

Which of the following statements about property rights and externalities is correct?

Accepted Answer

Clearly defined and enforceable property rights can help internalize externalities.

Question 18

Which of the following best explains why common resources tend to be overused?

Accepted Answer

Individuals ignore the external cost imposed on others when using the resource.

Question 19

Which of the following equations shows how to construct the market demand curve for a public good?

Accepted Answer

$$ 	ext{Market Demand} = \sum_{i=1}^{n} P_i(Q) $$

Question 20

A government is considering a carbon tax of $49 per metric ton, as recommended by economists. What is the main economic rationale for this policy?

Accepted Answer

To internalize the external cost of carbon emissions and move the market toward the efficient outcome.

Externalities, Environmental Policy, and Public Goods: Microeconomics Chapter 5 Study Notes

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