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Exam 15: Externalities, Environmental Policy and Public Goods

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Question 21

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Consider a situation in which a utility company emits high levels of sulphur dioxide and the company is not liable for the damages its pollution causes.According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution.

A) necessary; equitable
B) necessary; efficient
C) not necessary; equitable
D) not necessary; efficient

E) C) and D)
F) B) and D)

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Question 22

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Which of the following must be present to reach a private solution to an externality problem?

A) A majority of the parties affected by the externality must agree to a solution.
B) The transactions costs to negotiate a solution must be relatively low.
C) The total number of people, creators of the problem and those affected, must be relatively large to justify negotiating a solution.
D) The government must approve the solution for it to be a legal solution.

E) All of the above
F) A) and B)

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Question 23

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Figure 15.9 Companies producing toilet paper bleach the paper to make it white.The bleach is discharged into rivers and lakes and causes substantial environmental damage.Figure 15.9 illustrates the situation in the toilet paper market. -Refer to Figure 15.9.The efficient output is

Figure 15.2 Figure 15.2 shows a market with a negative externality. -Refer to Figure 15.2.The size of marginal external costs can be determined by

When production generates a negative externality, the true cost of production is the

Figure 15.13 Figure 15.13 shows the market for aviation security.Aviation security generates a positive externality because people who are not airline passengers benefit from aviation security. -Refer to Figure 15.13 to answer the following questions. a. In the absence of any government intervention, what is the equilibrium level of security that airlines will supply? Denote this level, Q*.Briefly explain why this quantity is not the economically efficient level of aviation security. b.In the diagram, illustrate the presence of positive externalities in the aviation security market.Label any new curve that you draw. c.On your diagram identify the economically efficient level of aviation security.Denote this level Q_e. d.Explain how a government subsidy for the airlines can bring about the economically efficient aviation security level.Be sure to identify the size of the subsidy.

A 'social cost' of production is

Figure 15.12 University education benefits society by producing a more employable workforce, reducing crime and creating a better informed citizenry.Thus, the social benefits of university education exceed the private benefits for any level of university education.This is illustrated in Figure 15.12. -Refer to Figure 15.12.One way to obtain the economically efficient amount of university education is for governments to subsidise university education.What is the size of the per-student Pigovian subsidy that the government must provide to internalise the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example, through low-interest student loans.)

What is meant by the term 'internalising an externality'? How does a Pigovian tax or subsidy internalise an externality?

Which of the following is not a method to avoid overuse of a common resource?

Classifying a good as rival means

Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle involvement in traffic accidents.In this sense, these mandatory helmet laws are reducing ________ of risky behaviour.

Figure 15.3 -Refer to Figure 15.3.What is the private profit maximising output level?

Figure 15.3 -Refer to Figure 15.3.The deadweight loss due to the externality is represented by the area

Figure 15.3 -Refer to Figure 15.3.What is the efficient output level?

What are transactions costs? Why do transactions costs create difficulties in finding a private solution to the problem of pollution?

Figure 15.6 Figure 15.6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 15.6.What is the economically efficient output level?

If there is pollution in producing a product, then the market equilibrium price

Which of the following displays these two characteristics: rivalry and non-excludability?

The marginal social benefit curve is a synonym for