D) moves production to the socially optimal level of output. Ans: d
14. As a general rule, zero pollution is not socially desirable because A) there would be no production.
B) the Environmental Protection Agency (EPA) needs to have something to do. C) no pollution would lead to global warming. D) all of the above. Ans: a
15. Externalities require government intervention when A) violence will result between disputing parties. B) there are only a few sellers in the market. C) property rights are not clearly established. D) the government imposes sales taxes. E) all of the above. Ans: c
16. Which method helps in obtaining the socially optimal level of output? A) Pigouvian taxesB) regulation
C) property rights and bargainingD) all of the aboveAns: d 17. Marginal damages
A) must always be considered in social marginal costs.B) must not be considered in social marginal costs.
C) must sometimes be considered in social marginal costs.D) have nothing to do with social marginal costs. Ans: a
18. A tax levied on each unit of pollution is
A) a income taxB) a emissions feeC) a flat taxD) an international taxAns: b 19. A cap-and-trade policy A) has a set number of permits
B) allows polluters to trade permitsC) caps the total level of pollution allowedD) all of the above
E) none of the above Ans: d
20. Command-and-control regulations
A) are less flexible than incentive based regulationsB) come from the private sector C) have technology standards a type of controlD) a & cE) a & b Ans: d
Essay
21. Suppose the factory Afro-Puffs Inc. produces wigs. As a by-product of this wig production, they also produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hair in place). The De-Lite car factory, down the road, experiences a negative externality from this production process. Suppose that the supply curve (private marginal costs) for the wig factory is X=(2/5)P- 2, and it faces a market demand of Xd=15 - P/2. The marginal damages caused by the production of wigs can be written as X=P – 1/2. (a.) Find the equilibrium price and quantity in the market for wigs.
(b.) Find the socially optimal level of wigs and the corresponding price. (c.) How much should the wig factory be taxed per wig?