Purdue University North Central

Economics 251

Review Questions - Chapter 28 (13) - Environmental Protection

(1) The term external costs or externalities refers to:

(a) costs borne outside of the United States.

(b) the impact on markets of goods imported from foreign countries.

(c) costs of a market activity borne by a third party, other than the producer or consumer.

(d) illegal economic activity.

(2) Social costs minus private costs equal:

(a) economic profit.

(b) an external cost or externality.

(c) the full resource cost borne by society to produce the good or service.

(d) the costs borne by consumers of the good or service produced.

(3) The purpose of an emission charge is to:

(a) require all polluters to reduce pollution by the same amount.

(b) internalize (to the polluter) the external costs of his/her production activity.

(c) ensure that the external costs of pollution are borne by society at large.

(d) discourage the polluter from installing pollution control equipment.

(4) The command and control strategy for pollution reduction refers to:

(a) requiring specific standards on the methods and amounts of pollution reduction.

(b) the use of tradeable permits.

(c) the use of emission charges.

(d) utilizing deposit refund systems to utilize economic incentives to reduce pollution reduction.

(5) The optimal rate of pollution:

(a) is zero.

(b) can be handled by the market mechanism, which internalizes all external costs of pollution.

(c) ensured by government intervention with a command and control strategy.

(d) equates marginal social cost of pollution control with the marginal social benefit of pollution control.

Refer to the Table 1 below to answer Questions (6) and (7).

Table 1

Reduction in Marginal Costs Marginal Costs

Emissions (in tons) Steel Plant Paper Plant

1 $200 $80

2 $250 $120

3 $300 $140

(6) Referring to Table 1, suppose the government commands each firm to reduce its emissions by 1 ton each. What is the total cost?

(a) $280.

(b) $370.

(c) $440.

(d) $200.

(7) Referring to Table 1 again. Suppose the government commands each firm to reduce its emissions by 1 ton each, but allows these two firms to trade pollution permits. What would be the price of a permit to emit the second ton of pollutants?

(a) Less than $80.

(b) Between $80 and $200.

(c) Between $120 and $200.

(d) More than $200.

Refer to Table 2 in answering Question (8) below.

Table 2

Costs of Reducing Water Pollution (Parts Per Million of a Pollutant=PPM)

Water Purity (PPM) 45 35 25 10 0

Social Benefit ($’s) 100 170 220 250 260

Social Cost ($’s) 20 25 35 65 100

Marginal Social Benefit ($’s/PPM) ___ ___ ___ ___

Marginal Social Cost ($’s/PPM) ___ ___ ___ ___

(8) Referring to Table 2, what is the socially optimal rate of pollution?

(a) 0 PPM.

(b) 10 PPM.

(c) 25 PPM.

(d) 35 PPM.

Consider Figure 1 in answering Questions (9) and (10) below.

Figure 1

(9) In Figure 1, if pollution costs are external to the firm, the rate of output will be:

(a) less than 100 units.

(b) 100 units.

(c) 160 units.

(d) greater than 160 units.

(10) In Figure 1, if the external cost or externality is internalized, the rate of output will be:

(a) less than 100 units.

(b) 100 units.

(c) 160 units.

(d) greater than 160 units.