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Exam 10: Externalities

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Question 31

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Figure 10-3 -Refer to Figure 10-3. If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would

A) introduce a subsidy of $2 per unit.
B) impose a tax of $4 per unit.
C) introduce a subsidy of $4 per unit.
D) impose a tax of $2 per unit.

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

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Question 32

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​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia to pay Gabriel $15 to not recline his seat. ​

A) True
B) False

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Question 33

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In some circumstances, selling pollution permits may be better than levying a corrective tax.

If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots.

Government can be used to solve externality problems that are too costly for private parties to solve.

Figure 10-2 -Refer to Figure 10-2. Without government intervention, the equilibrium quantity would be

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. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially optimal level of output?

Economists believe that the optimal level of pollution is zero.

Figure 10-6 ​ -Refer to Figure 10-6. If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to

According to recent research, the gas tax in the United States is lower than the optimal level.

Figure 10-2 -Refer to Figure 10-2. The socially optimal quantity would be

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?

Table 10-3 ​ ​ $\begin{array} { | c | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Private Value } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Private Cost } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { External Benefit } \\\text { (Dollars) }\end{array} \\\hline 1 & 22 & 12 & 10 \\\hline 2 & 20 & 15 & 10 \\\hline 3 & 18 & 18 & 10 \\\hline 4 & 16 & 21 & 10 \\\hline 5 & 14 & 24 & 10 \\\hline 6 & 12 & 27 & 10 \\\hline\end{array}$ -Refer to Table 10-3. What amount of subsidy per unit of output would move the market from the equilibrium level of output to the socially optimal level of output?

Figure 10-7 -Refer to Figure 10-7. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is

Figure 10-4 -Refer to Figure 10-4, Graph (b) and Graph (c) . The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit of smokestack scrubber installation is represented by

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

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 equilibrium quantity of gasoline is 440 gallons; that is, Q_MARKET = 440. Then the equilibrium price of a gallon could be

Describe the circumstances under which it would be better for the government to sell pollution permits than to levy a corrective tax.

Does research into new technologies create a positive externality or does it create a negative externality?