Chapter 9 Market Failure: Imperfect Information, External Benefits, and External Costs

| November 9, 2018

52)
Explain what is meant by “internalizing an externality,” and describe
three methods by which this can be done.

53)
What is the purpose of a pollution tax?

54)
How does a pollution tax work?

55)
Describe the market effects of a carbon tax.

9.7 Traditional Regulation

1)
A uniform-abatement policy is
A)
inefficient because it does not exploit the differences in abatement costs among
firms.
B)
efficient because an equal amount of pollution is assigned to each firm.
C)
inefficient because it incurs relatively low compliance costs.
D)
efficient because it helps firms lower their production costs.

2)
Suppose that there are two firms, each generating three tons of SO2. Suppose also that the government has set a
target abatement level of two tons. Under a policy of uniform abatement with
permits each firm would receive
A)
two non-transferable pollution permits.
B)
two pollution permits which they could sell to each other.
C)
one pollution permit with a value equal to that firm’s cost of abating one ton
of SO2.
D)
one pollution permit with a value equal to the market price for a pollution
permit.

3)
Suppose that there are two firms, each generating three tons of SO2. Suppose also that the government has set a
target abatement level of two tons. Under a policy of uniform abatement with
permits the firm with the lower marginal abatement cost
A)
will abate exactly the same amount of SO2 as the firm with the higher marginal abatement
cost.
B)
will abate less SO2 than the firm with the higher marginal
abatement cost.
C)
will abate more SO2 than the firm with the higher marginal
abatement cost.
D)
will sell its pollution permit to the firm with the higher marginal abatement
cost.

4)
Compared to a pollution tax, a policy of uniform abatement with permits is
A)
less efficient.
B)
more efficient.
C)
exactly as efficient.
D)
either more or less efficient depending on the number of firms affected.

5)
If the government attempts to control pollution with a command-and-control
policy
A)
the government will command each firm to produce no more than a certain level
of pollution.
B)
the government will control the firm’s entire production process.
C)
the government will force the firm to use particular pollution-control
technologies.
D)
all of the above

6)
A command-and-control policy is one in which
A)
the government commands each firm to produce no more than a certain level of
pollution.
B)
the government controls the firm’s advertising policy.
C)
the government forces the firm to use particular pollution-control
technologies.
D)
Both A and C are correct answers.

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