Question : 31) Private solutions to the problem of externalities most likely : 1387496

31) Private solutions to the problem of externalities are most likely when

A) government actively encourages these solutions.

B) transaction costs are low and the number of bargaining parties is small.

C) transaction costs are low and the number of bargaining parties is large.

D) transaction costs are low and the monetary damages to third parties is high.

32) Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If the victims of the pollution could not legally enforce the right of their property not to be damaged, the amount of pollution reduction

A) would be significantly less than if the owners of the smelter were legally liable for damages.

B) would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost.

C) would be the same as if it would be if the owners of the smelter were legally liable.

D) would be too small; the government would have to intervene to bring about an efficient outcome.

33) Compare two situations. (A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel. (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that

A) bargaining between the firm and the victims of the air pollution caused by the firm will result in little reduction of pollution in either situation (A) or (B) because the firm has greater economic and political power than the victims.

B) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a greater reduction in pollution in situation (A) than situation (B).

C) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a smaller reduction in pollution in situation (A) than situation (B).

D) bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation (A) and situation (B).

Figure 5-8

Consider a chemical plant that discharges toxic fumes over a nearby community. To reduce the emissions of toxic fumes the firm can install pollution abatement devices. Figure 5-8 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.

34) Refer to Figure 5-8.  What is the economically efficient level of pollution reduction?

A) 12.5 million tons

B) 9 million tons

C) 8 million tons

D) 0 tons

35) Refer to Figure 5-8.  Suppose the emissions reduction target is currently established at 8 million tons. What is the area that represents the cost of eliminating an additional 1 million tons?

A) A

B) B + C

C) A + B

D) A + B + C

36) Refer to Figure 5-8.  Suppose the emissions reduction target is currently established at 8 million tons. Should society undertake to reduce an additional 1 million tons so that the total reduction is 9 million tons?

A) No, because there is a net cost represented by the area B + C.

B) Yes, because the marginal benefit exceeds the marginal costs.

C) Yes, because toxic fumes are dangerous and must be eliminated at any cost.

D) No, because the firms will pass the additional cost on to consumers.

37) Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain then, according to the Coase theorem,

A) an efficient solution can be reached only if property rights are assigned to the victims of the pollution.

B) an efficient solution can be reached only if property rights are assigned to the polluters.

C) an efficient solution can be reached regardless of the initial assignment of property rights.

D) government intervention is critical to reach an efficient solution.

38) Congressman Murphy made the following proposal: “We should establish policies that completely eliminate air pollution. This is the only way to ensure that none of our citizens suffers the negative effects of air pollution.” If Congressman Murphy’s proposal was adopted and all forms of air pollution were eliminated, which of the following would be true?

A) The total cost of pollution reductions would equal the total benefit to society.

B) Economic efficiency would be maximized.

C) The total benefit to society from reductions in air pollution would be maximized.

D) The marginal cost from pollution reductions would exceed the marginal benefit.

39) In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.

40) If there is pollution in producing a product, then the market equilibrium price is too high and equilibrium quantity is too low.