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Exam 3: Externalities and Government Policy 

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Question 21

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The current competitive market price of fish is $3 per pound.A chemical producer emits effluent into a lake used by a commercial fishing firm.Each ton of chemical output causes a 20-pound reduction in the annual catch of the fishing firm.Assuming that transactions costs are zero and the chemical firm has the legal right to dump effluent into the lake,

A) the fishing firm would be willing to pay up to $60 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
B) the fishing firm would be willing to pay up to $3 per ton of chemicals per year to induce the chemical firm to reduce chemical output.
C) the chemical firm would never consider the damage caused by its effluent.
D) government intervention is required to achieve efficiency.

E) B) and D)
F) A) and D)

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Question 22

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If a negative externality exists for sales of gasoline in a competitive market, more than the efficient amount of gasoline will be sold per year.

A) True
B) False

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Question 23

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If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,

If the marginal external cost of pollution increases with the annual output of polluting goods, then the total external cost will increase at a constant rate with annual output.

A toll road used to subsidize public transportation in an effort to reduce pollution is an example of a corrective tax.

When a positive externality exists, benefits to third parties other than the buyers and sellers of a good will result from market exchange of the good.

The marginal external benefit of the sale of smoke detectors in a city declines with annual output.The total external benefit of smoke detectors will therefore eventually become zero.

Command-and-control regulation to reduce emissions is likely to be a less costly way of reducing a given amount of emissions than tradeable emissions permits.

If the marginal costs of reducing emissions varies among regions, then regulations requiring all regions in a nation to reduce emissions by the same amount will achieve:

The competitive market equilibrium price of sanitation services in a small town with no government-supplied sanitation services is $2 per trash pickup.There is a $1 marginal external benefit associated with each trash pickup.The elasticity of supply of trash pickups is infinite in the long run, implying a horizontal supply curve.To achieve the efficient output of sanitation services, a corrective

The efficient amount of pollution abatement is likely to be 100 percent.

Assuming a product can be manufactured competitively without any externalities at an efficient quantity of 500 units and an efficient price of $150.00 per unit, what efficient quantity-price net subsidy combination would be consistent with a corrective subsidy for a positive externality?

When negative externalities exist, perfectly competitive markets produce less than the efficient output.

When a negative externality exists, the marginal social cost of annual output sold in a competitive market will exceed the marginal social benefit of that output in equilibrium.

Emissions standards allow businesses to emit waste at zero cost until the limits set by the standards are reached.

A positive externality results from the purchase of smoke detectors.If smoke detectors are sold in a competitive market,

Regulations require that emissions of carbon monoxide be limited to 1,000 tons per 100 square miles for all regions of the nation.If the marginal external cost of the emissions varies among regions in the nation, then the regulations will:

According to the Coase theorem, externalities can be internalized when transactions costs are zero through:

Electric power is produced by an unregulated monopoly in a certain region.The monopolistic elec?tric power company's production of electricity results in $10 per kilowatt hour of pollution damage to parties other than the buyers of electricity in the region.To achieve efficiency,

The marginal external cost associated with paper production is constant at $10 per ton per year.The competitive market equilibrium for paper production is currently 10 million tons per year.A corrective tax on paper production will: