CHAPTER 3: TEST BANK

SOME ANSWERS AND COMMENTS ON THE TEXT DISCUSSION QUESTIONS 1. Businesses and consumers pollute because there is an economic incentive to do so. Pollution, whether it is due to highly polluting energy sources, failure to use certain technology, or refusal to adapt conservation measures, occurs because it is the cheaper alternative. Consumers who burn their garbage, buy non-recyclables, or discard their newspapers do so because it is cheaper (in time or money) than the other alternatives. . !he beer and paper e"ample shows how resources are over-allocated to the production of goods whose production entails pollution, and how resources are underallocated to the production of goods whose production re#uires the additional e"pense of cleaning up someone else$s pollution. %. Costs are varied and include& the cost of more e"pensive, but less polluting energy sources and other inputs the cost of anti-pollution technology, including scrubbers for smo'estac's, catalytic converters for cars and so on the cost of pollution clean-up the cost of maintaining safe landfills the cost of time in consumer recycling the cost of layoffs in industries which reduce their output in response to rising costs of production through pollution standards or fees the cost to businesses in the form of falling profits as costs of production rise the cost to consumers in the form of higher prices that they pay for products produced by firms with rising costs of production through pollution standards or fees (e should not be willing to sacrifice everything in order to eliminate all pollution because we need to balance the costs and benefits of pollution control. (!his is the economist$s argument. )tudents will have their own arguments as to why we should eliminate all pollution*) +. (hile local government is ,closer to the governed-, the federal government has the resources for and the national interest in pollution control, especially because pollution generated in one area can easily spread to other areas. .. /egative e"ternalities& residential locations near prisons or landfills, loss of wildlife and aesthetic beauty as highways and shopping malls are built in rural areas. Positive

e"ternalities& business firms that provide child care for their wor'ers$ children, business firms that train wor'ers or support their further education, business firms and residences that beautify their property (trees, flowers, etc.). 0. )tandards& !hese seem simple and straight-forward, but uniform standards fail to address the pollution harm to clean versus already polluted water and slow versus fast moving water, and do not account for the variations in marginal costs of pollution control. )pecific standards are better, but are difficult to implement. 1ncentive-based pollution control (ta"es, subsidies, improved convenience of recycling, pollution permits, etc.) allows research and development of least-cost technology and production processes to control pollution, allows the costs as well as the benefits of pollution control to be considered, and often results in the largest polluters having more incentive to reduce pollution than small polluters. 2. 1t is appropriate that consumers pay a higher price for a product whose production entails pollution because consumers are indirectly causing this pollution when they buy the product. (1t is also appropriate that firms receive lower profits when their costs of production go up with a fee because they are directly causing the pollution.) 3. Cost-benefit analysis compares the costs of an activity (such as pollution control) with the benefits of the activity. 4ong run cost-benefit analysis would differ from short run analysis because the long run includes the benefits to future generations of a cleaner, safer environment and natural resource base. 5. (e thin' so. 16. Citi7ens of !hird (orld countries generally do not have the lu"ury of environmental protection. 8nvironmental protection is e"pensive, and !hird (orld residents and countries have little income. (hen forests are cleared to create farms, timber cut down to create e"port earnings, and environmentally-unsound mining used to create 9obs, it is because these are necessary for the nation and its residents. :emember that environmental #uality is a lu"ury good. 11. ; good #uestion for students to answer*

SUGGESTED TEST QUESTIONS

Multiple-Ch i!e Que"ti #"

1. Pollution causes& a. spillover costs. b. inefficient resource allocation. c. an ine#uitable burden of costs placed on society. d. all of the above.

. ;ssuming that the production of paint results in chemical pollution of the land and water and that )p represents the private supply curve and )s represents the social supply curve, the socially optimal level of output in the graph below is&

a. a

b. b

c. c

d. 7ero

%. !he earliest efforts to control pollution in the <.). through legislation came from& a. city governments. b. state governments. c. the federal government. d. none of the above. +. ;ccording to the te"tboo', the decisions about pollution control should be made by& a. city governments. b. county governments. c. state governments. d. the federal (and international) governments. .. (hich of the following is more li'ely to encourage research into new technologies and lower cost methods of meeting environmental #uality= a. performance standard b. design standard c. technology standard d. business standard 0. 8nforcement activities of pollution control include& a. monitoring. b. field surveillance. c. remedies. d. all of the above.

2. ; ta" on production that causes air pollution is called& a. a pollution permit. b. a specific standard. c. an effluent fee. d. an emissions fee. 3. (hy is over-allocating resources to a particular mar'et a problem= a. Society would value the other products produced by these scarce resources more than it values the product produced in the market where the over-allocation occurs. b. )ociety values other products less than it values the product produced in the mar'et where the over-allocation occurs. c. )ociety should balance the over-allocation of resources in some mar'ets with under-allocation of resources in others. d. 1t is not really a problem. 5. !echnology forcing& a. allows firms to choose the type of technology to be used in pollution control. b. requires firms to use specific types of technology to be used in pollution control. c. forces firms to purchase the technology to be used in pollution control. d. forces firms to produce the technology to be used in pollution control. 16. 4iberals are more li'ely to& a. accept the government role in pollution control. b. leave pollution control to mar'et forces. c. favor pollution control by cities rather than by the federal government. d. favor pollution fees over standards. ;nswer the ne"t two #uestions on the basis of the following graph. > is the demand curve and ) is the supply curve based on all costs including spillover costs.
P$i!e

D
Qu%#tit&

Q'

Q(

11. 1f ?1 is the e#uilibrium output& a. resources are over-allocated to this mar'et. b. resources are under-allocated to this market. c. there is no misallocation of resources to this mar'et. d. this was not discussed in the boo'.

1 . 1f ? is the e#uilibrium output& a. resources are over-allocated to this market. b. resources are under-allocated to this mar'et. c. there is no misallocation of resources to this mar'et. d. this was not discussed in the boo'. 1%. !he creation of a mar'et for pollution permits will& a. completely eliminate air and water pollution. b. cause firms to seek out low-cost pollution-reducing technologies. c. continually increase air and water pollution. d. all of the above. 1+. 1f an emissions fee e#ual to the spillover cost of pollution by a firm is levied against the firm& a. it will eliminate the over-allocation of resources done by the firm. b. it will increase the price of the firm$s product. c. it will decrease the firm$s output. d. all of the above. 1.. 8conomists and environmentalists differ in that& a. environmentalists want to eliminate all pollution, but economists believe some pollution is acceptable if society values the production of the goods causing the pollution highly enough. b. environmentalists care about the environment, but economists do not. c. environmentalists do not care about the economy, but economists do. d. none of the above. 10. !wo reasons that the environmental movement developed in modern, industriali7ed countries are that& a. there was no pollution prior to the 1566s, and less developed countries simply cannot afford environmental regulation. b. pollution control is a luxury good, and the type of pollutants we have in modern times are more toxic than pollutants used to be. c. increased population has stressed the environment, and people in the <.). have greatly decreased their consumption per person as a result. d. !his was not discussed in the te"t. 12. <tilities were granted the right to buy and sell pollution permits by the& a. )uperfund 4aw of 1536. b. @ar'et for /egative 8"ternalities 4aw of 1550. c. lean !ir !ct of "##$. d. ;cid :ain ;ct of 1532.

13. ;mong problems with the administration of the )uperfund 4aw is that& a. only a small percentage of the toxic waste sites designated for cleanup have actually been cleaned up. b. standards for cleanup are too low, so sites really are not cleaned up enough to use again. c. improper disposal of to"ic waste increased instead of decreasing. d. it ban'rupted many businesses. 15. ; ma9or problem faced by community recycling programs is& a. people absolutely refuse to recycle. b. finding a market for recyclable materials. c. incentives simply do not wor'. d. most such programs ma'e recycling very convenient. 6. Charging A%.66 a bag to put a household$s bag of garbage in the municipal dump is an e"ample of& a. highway robbery. b. a disincentive to recycle. c. an incentive to recycle. d. an inefficient recycling program.

T$ue-%#)-*%l"e Que"ti #"

B B ! B ! ! ! B

1. Cenerally spea'ing, the economist$s view is that all pollution should be eliminated. . 8"ternalities always involve costs that are shifted from the private mar'et onto society. %. 8nvironmental #uality is a lu"ury good. +. Dver-allocation of resources occurs in mar'ets that are harmed by pollution caused in another mar'et. .. !he social costs of production that causes pollution include both the private costs of production and the spillover costs of pollution. 0. ; design standard specifies not only the re#uired level of performance (in controlling pollution), but also the means to reach that performance. 2. Certification enables a business firm to produce a product, 'nowing that it meets pollution standards in controlling pollution. 3. <niform standards are more effective than specific standards in controlling pollution.

! ! ! B !

5. :ising marginal costs of pollution control means that it costs more to remove an additional unit of pollution when pollution levels are already low. 16. 8ffluent and emissions fees are more li'ely to result in least-cost pollution control than the use of standards. 11. People are more li'ely to recycle if recycling is convenient for them. 1 . 1f the supply of recyclable materials increases, the price of these materials will increase. 1%. ; problem with the early administration of the )uperfund 4aw was that sites were not considered cleaned up unless they were sufficiently clean to be used for any purpose. 1+. 4ow #uantities of production may not cause pollution because the earth can cleanse itself of small amounts of waste. 1.. Pollution permits usually result in firms that are not heavy polluters to begin with doing all the cleanup. 10. Benefit-cost analysis is useless in evaluating environmental policy. 12. Present <.). laws do not allow trade in pollution permits. 13. !en cent deposits on aluminum soda cans are an e"ample of an incentive to recycle. 15. Performance standards promote research into low-cost pollution control technologies. 6. Per unit ta"es can be used as an incentive toward conservation.

! B B B ! ! !

Sh $t-A#"+e$ Que"ti #"

1. Consider the graph of a mar'et for corn in a small country, assuming that production of corn results in chemical fertili7er and pesticide run-off that pollutes near-by streams. )p represents the private mar'et supply curve, while )s is the social supply curve. )s reflects the full social costs of production.

a. )pecifically, what costs are reflected in the social supply curve= b. (hat is represented by the vertical distance between the two supply curves= (hat amount is this= c. (hy is it possible that production of less than ,666 bushels of corn results in no spillover costs= d. (hat is the e#uilibrium #uantity of corn produced in the private mar'et= EEEEEEEEEEE (hat is the socially optimal #uantity of corn= EEEEEEEEEEEE (hy do we say that the private mar'et results in an over-allocation of resources to corn production= (hy is this a problem= e. )uppose an effluent fee of A1,666 is imposed on the corn producers for every thousand bushels of corn produced. (hat will be the effect of the fee on the mar'et price of corn= EEEEEEEEEEEE 1s it appropriate that consumers pay a higher price for a product whose production creates pollution= EEEEEEEEEEEE (hy= . 1n the first graph below, draw the shift that would occur if an electrical plant decides it is too e"pensive to cool off water before dumping it into a stream, and goes ahead to cause this water (thermal) pollution. /e"t draw the shift that will occur in the downstream fishing industry if it must undergo the e"pense of cooling the water before it can be used to raise fish.

Considering both of these graphs&

a. (hat is the effect of the decision on the price of electricity= EEEEEEEEEEEE b. (hat is the effect on the price of fish= EEEEEEEEEEEE c. 1n which industry is there now an over-allocation of resources= EEEEEEEEEEEE d. 1n which industry is there now an under-allocation of resources= EEEEEEEEEEEE

%. Consider the following graphs of demand and supply in a polluting chemical industry, under two different scenarios. 1n the first case, an effluent fee of A1.66 per pound of chemicals is placed on the industry, and in the second case, an even larger effluent fee of A .66 per pound is placed on the industry.

a. b. c. d.

(hy does the supply curve shift up (bac') in each case with the imposition of the effluent fee= (hat is the value of the vertical distance between the two supply curves in the first graph EEEEEEEEEEEE, and in the second graph EEEEEEEEEEEE= (hat is the effect of the fee on the price of chemicals EEEEEEEEEEEE and on the #uantity of chemicals EEEEEEEEEEEE= 1n which graph is the #uantity of chemicals (and therefore the amount of pollution) reduced the most= EEEEEEEEEEEEEEEEEEEEEEEE

+. (hy is it important to analy7e costs as well as benefits of pollution control= (hat are some of these costs=