Chapter 14 Practice Quiz Environmental Economics

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Chapter 14Practice Quiz Environmental Economics
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• 1. Suppose the city of New Orleans discovered
  chemical compounds in its drinking water. The
  source is the waste discharges of industrial
  plants upstream. This is an example of
• a. an external cost imposed on the citizens of
• New Orleans by the industrial plants
• upstream.
• b. a market failure where the market price of the
  output of these industrial plants does not fully
  reflect the social cost of producing these goods.
• c. an externality where the marginal social costs
  of producing these industrial goods differ from
  the marginal private costs.
• d. all of the above.

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D. The upstream firm is releasing chemicals
into the water, an external cost to the citizens
of New Orleans. The upstream firm is not
including these costs when pricing its product
hence, the market price is too low. Marginal
social costs would include the marginal private
cost of the industrial product (their costs of
labor, capital, materials, etc.) and the external
cost of the chemicals released into the water.
Choices (a), (b), and (c)each are correct, so
that all of the above is the correct choice.
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• 2. A government policy that charges steel firms a
  fee per ton of steel produced (an effluent
  charge) where the fee is determined by the amount
  of pollutants discharged into the air or water
  will lead to
• a. a decrease in the market equilibrium
• quantity of steel produced.
• b. a decrease in the market equilibrium price of
  steel.
• c. an increase in the market equilibrium price of
  steel.
• d. the results in (a) and (b).
• e. the results in (a) and (c ).

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E. Essentially, the government is employing an
effluent tax to reduce pollution. The tax
increases the cost of production. Supply
decreases, leading to a higher price and smaller
quantity. So choice (e), where (a) quantity
decreases and (c)price increases, is the best
choice.
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• 3. Social costs are
• a. the full resource costs of an economic
  activity.
• b. usually less than private costs.
• c. the costs of an economic activity borne by the
  producer.
• d. all of the above.

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A. Social costs include both private costs (the
costs of the firms inputs, including labor,
capital, land, etc.) and external costs (the
costs to third parties, such as pollution emitted
by the producer). Social costs are at least as
large as private costs. Producers will not
consider external costs, which are a part of
social costs, unless they are forced to do so by
government or court.
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• 4. As a general rule, if pollution costs are
  external, firms will produce
• a. too much of a polluting good.
• b. too little of a polluting good.
• c. an optimal amount of a polluting good.
• d. an amount that cannot be determined without
  additional information.

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A. Private firms will make their production
decision using private costs. If there are
external costs, social costs exceed private
costs. If production decisions included external
costs, supply would be smaller than when private
costs alone are considered. So if external costs
are ignored, the firm will produce too much, as
compared to the social efficient level.
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• 5. Many economists would argue
• a. the optimal amount of pollution is greater
  than zero.
• b. all pollution should be eliminated.
• c. the market mechanism can handle pollution
  without any government intervention.
• d. central planning is the most efficient way to
  eliminate pollution.

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A. The optimal amount of pollution is where
marginal social cost equals marginal social
benefit. This amount typically exceeds zero. The
marginal cost of eliminating all pollution would
likely be very high. For example, we would have
to eliminate all cars. However, firms tend to
ignore external costs such as pollution, in an
unfettered market. While government is likely to
be needed, pollution has actually been worse in
centrally planned economies.
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• 6. Which of the following used marketable
  pollution permits as an incentive for reducing
  pollution?
• a. The 1970 Clean Air Act.
• b. The Comprehensive Environmental Response,
  Compensation, and Liability Act of 1980.
• c. The 1990 Clean Air Act amendments.
• d. The Water Quality and Improvement Act of 1970.

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C. The 1990 Clean Air Act was the first piece of
federal legislation to introduce emissions
trading. It introduced this approach for sulfur
emissions, thought to contribute to acid rain.
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• 7. The disposable diaper industry is perfectly
  competitive. Which of the following is true?
• a. Since the industry is perfectly competitive,
  price and quantity are at the socially efficient
  levels.
• b. Competitive price is higher and competitive
  quantity lower than the socially efficient point.
• c. Competitive price is higher and competitive
  quantity higher than the socially efficient
  point.
• d. Competitive price is lower and competitive
  quantity higher than the socially efficient point.

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D. Disposable diapers have an external cost, to
the extent that they are not biodegradable and
sit in landfills. Producers in a competitive
market consider only private costs, ignoring
disposal issues. Similarly, consumers just want
to prevent leaks that affect them, but ignore
leaks that affect landfills. So producers and
consumers use private costs and benefits. Social
costs are higher, so that social supply is
smaller. The competitive price, based on private
costs and benefits, is lower than the social
cost. Competitive quantity is larger, given the
larger supply, than the socially efficient
quantity.
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• 8. An example of the command-and-control approach
  to environmental policy is
• a. placing a tax on high-sulfur coal to reduce
  its use and the corresponding sulfur emissions
  (which contribute to acid rain).
• b. requiring electric utilities to install
  scrubbers to reduce sulfur dioxide emissions
  (which contribute to acid rain).
• c. allowing coal producers to buy and sell
  permits to allow sulfur emissions.
• d. allowing individuals to sue coal producers if
  sulfur emissions exceed government-set standard.

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B. Command-and-control is a regulation whereby
the government establishes a pollution target and
dictates the method to achieve the target. An
example is requiring scrubbers to reduce sulfur
emissions. Sulfur emission permits and effluent
taxes are example of incentive-based approaches.
With taxes, for example, the firm can choose
low-sulfur coal to avoid the tax.
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Exhibit 6 Profit-Maximizing Firm
MPC
MSC
ASC
APC
Demand
H
G
P1
L
C
A
Price per unit
K
J
E
F
-
B
.
-
Q2
Q3
Q4
Q1
Quantity of output
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• 9. The profit-maximizing firm in Exhibit 6
  creates water and air pollution as a consequence
  of producing its output of beef cattle. If
  pollution costs are borne by third parties, the
  firm will maximize economic profit by choosing to
• a. voluntarily incur costs to reduce its
• pollution.
• b. produce at output rate Q3.
• c. produce at output rate Q2.
• d. produce at output rate Q4.

D. The firm will produce at Q4 where demand (MR)
intersects Private MC.
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• 10. Use Exhibit 6 to complete the following To
  maximize social welfare, the firm should produce
  at output rate
• a. Q1.
• b. Q2.
• c. Q3.
• d. Q4.

B. The firm will produce at Q2, where demand
(MR) intersects Social MC.
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Exhibit 7 Impact of Flights on House Value
Number of Flights
TotalProfits
MarginalProfits
Value ofWilburs House
10,000 18,000 24,000 28,000 30,000
10,000 8,000 6,000 4,000 2,000
100,000 95,000 90,000 85,000 80,000
1 2 3 4 5
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• 11. As shown in Exhibit 7, if Orville has the
  property right to fly over Wilburs house, but
  Wilbur is allowed to negotiate with Orville on
  the number of flights, what will be the number of
  flights?
• a. 2.
• b. 3.
• c. 4.
• d. 5.

B. At 3 flights, marginal profits for Orville is
6,000 and the value of Wilburs property goes
down by 5,000.
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• 12. As shown in Exhibit 7, Wilbur has the
  property right to have no planes flying over his
  house, but Orville is allowed to negotiate with
  Wilbur, what will be the number of flights?
• a. 2.
• b. 3.
• c. 4.
• d. 5.

B. At 3 flights, marginal profits for Orville is
6,000 and the value of Wilburs property goes
down by 5,000.
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• 13. As shown in Exhibit 7, at the socially
  efficient number of flights, what will be the
  market value of Orvilles house?
• a. 100,000.
• b. 95,000.
• c. 90,000.
• d. 85,000.

C. At 3 flights, this is the last number of
flights that the marginal profits are greater
than the marginal costs (ie. the amount that
Orvilles house declines in value)