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Exam 10: Externalities

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Question 21

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Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following: a private cost of $2.83; a social cost of $3.12; a value to consumers of $3.23. -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

A) provided a subsidy of $0.11 per gallon of gasoline sold.
B) provided a subsidy of $0.29 per gallon of gasoline sold.
C) required to pay a tax of $0.29 per gallon of gasoline sold.
D) required to pay a tax of $0.11 per gallon of gasoline sold.

E) None of the above
F) A) and B)

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Question 22

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Which of the following statements is not correct?

A) Government policies may improve the market's allocation of resources when negative externalities are present by taxing these goods.
B) A positive externality is an example of a market failure.
C) Markets allocate scarce resources with the forces of supply and demand.
D) Externalities cannot be positive.

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

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Question 23

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Even if possible, it would be inefficient to prohibit all polluting activity.

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Two types of private solutions to the problem of externalities are

Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following: a private cost of $2.83; a social cost of $3.12; a value to consumers of $3.23. -Refer to Scenario 10-1. The production of the 400th gallon of gasoline entails an

Which of the following is an example of a positive externality?

Suppose the Environmental Protection Agency issues pollution permits in order to limit the quantity of pollution. Under this policy, is the supply of pollution rights perfectly elastic or is it perfectly inelastic?

Suppose a new market for tradable pollution permits is created. As long as there is a free market for the pollution rights, the final allocation will be __________ , regardless of the initial allocation of permits.

In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

The concept of external benefit is associated with a negative externality, but not with a positive externality.

Briefly explain how research into new technologies gives rise to a positive externality.

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

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. Does the production of fire extinguishers convey a positive externality, a negative externality, or neither?

Figure 10-4 -Refer to Figure 10-4. Which graph represents a market with no externality?

Some policies toward externalities provide incentives so that private decision makers will choose to solve the problem on their own. What name do we use for these types of policies?

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Table 10-2 ​ ​ $\begin{array} { | c | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Private Value } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Private Cost } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Social Value } \\\text { (Dollars) }\end{array} \\\hline 1 & 51 & 45 & 57 \\\hline 2 & 48 & 48 & 54 \\\hline 3 & 45 & 51 & 51 \\\hline 4 & 42 & 54 & 48 \\\hline 5 & 39 & 57 & 45 \\\hline 6 & 36 & 60 & 42 \\\hline\end{array}$ ​ -Refer to Table 10-2. What is the equilibrium quantity of output in this market?

Suppose a subsidy is offered to consumers of education as a means of internalizing the externalities associated with education. If the subsidy accurately reflects the external benefits of education, then the new demand curve for education coincides with which other curve?

Figure 10-5 -Refer to Figure 10-5. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to