Pollution is a negative externality because it imposes costs on people who are not part of the market transaction.
Correct Answer
True
True. Neighbors who breathe a factory's smoke neither buy nor sell its product, yet they bear part of the cost of producing it, which is what makes the effect a negative externality.
Category: Externalities
Question 2
A firm's private costs include the harm its pollution does to the health of nearby residents.
Correct Answer
False
False. Private costs are the costs the firm itself pays, such as labor and materials. Harm to residents is an external cost, and adding it to private costs gives the social cost.
Category: Externalities
Question 3
Market failure occurs when a private market does not produce the efficient quantity, as when firms ignore some of the costs of production.
Correct Answer
True
True. When firms leave external costs out of their decisions, the market produces more than the efficient amount, so the market on its own fails to reach the best outcome for society.
Category: Pollution and Market Failure
Question 4
Command-and-control rules usually apply the same standard to every firm, whether its cost of cutting pollution is low or high.
Correct Answer
True
True. This inflexibility means the rules do not let firms that can cut pollution cheaply do more of the cutting, so reaching a given level of cleanup costs more than necessary.
Category: Command-and-Control Rules
Question 5
Under command-and-control rules, existing firms usually face stricter limits than new firms entering the industry.
Correct Answer
False
False. Existing firms often use the political process to win exemptions for themselves, so the stricter rules tend to fall on new firms instead.
Category: Command-and-Control Rules
Question 6
In a marketable permit system, a new firm entering an industry can gain the right to pollute by buying permits from existing firms.
Correct Answer
True
True. Because permits can be traded, a new entrant can buy permits that an existing firm no longer needs, without raising the total amount of pollution allowed.
Category: Market-Oriented Tools
Question 7
Facing a pollution charge, a cost-minimizing firm will cut a unit of emissions even when cutting it costs more than the charge on that unit.
Correct Answer
False
False. A firm cuts emissions only when cutting a unit costs less than the charge. When cutting costs more, it is cheaper to pay the charge and keep emitting.
Category: Market-Oriented Tools
Question 8
Higher property values are one benefit of a cleaner environment.
Correct Answer
True
True. Homes and land near clean air and water are more desirable, so reducing pollution tends to raise their value, along with benefits to health, industry and recreation.
Category: Benefits and Costs
Question 9
Economists generally find that the marginal benefit of pollution reduction rises as the environment becomes cleaner.
Correct Answer
False
False. The marginal benefit generally falls, because the first reductions remove the most harmful pollution and each further reduction adds a smaller benefit.
Category: Benefits and Costs
Question 10
If the marginal cost of further pollution reduction is greater than its marginal benefit, society is devoting too many resources to pollution control.
Correct Answer
True
True. Beyond the point where marginal cost exceeds marginal benefit, each extra unit of cleanup costs more than it is worth, so those resources would do more good elsewhere.
Category: Benefits and Costs
Question 11
Economists estimate the value of a statistical life in part from the extra wages workers require to take riskier jobs.
Correct Answer
True
True. If workers demand higher pay to accept a small added risk of death, that pay premium reveals how much people value reducing the risk, which can be scaled up to a value per statistical life.
Category: Benefits and Costs
Question 12
Command-and-control environmental laws and their amendments have helped make U.S. air and water cleaner in recent decades.
Correct Answer
True
True. Laws such as the Clean Air Act and the Clean Water Act are credited with much of the improvement. Economists' main criticism is that such laws reach their goals at a higher cost than necessary.
Category: Command-and-Control Rules
Question 13
Moving along the production possibility frontier toward more environmental protection has an opportunity cost of less economic output.
Correct Answer
True
True. On the frontier, resources are fully used, so shifting more of them to environmental protection means giving up some production of other goods and services.
Category: Global Issues and Tradeoffs
Question 14
Marketable permits tend to work best when a limited number of firms, such as a few hundred power plants, have a strong interest in trading them.
Correct Answer
True
True. Trading works well when there are enough large, interested participants to form a market. For millions of small sources such as car engines, a pollution charge is usually more practical.
Category: Market-Oriented Tools
Question 15
Because global warming is an international externality, one large country cutting its own emissions can solve the problem by itself.
Correct Answer
False
False. Greenhouse gases from every country mix in the atmosphere, so emissions elsewhere would continue to warm the planet. Solving the problem requires cooperation among many nations.
Category: Global Issues and Tradeoffs
Question 16
Economic analysis can show which single point on the production possibility frontier between output and environmental protection is best for every society.
Correct Answer
False
False. Economics can show that points inside the frontier are wasteful, but choosing among points on the frontier depends on a society's values and circumstances.
Category: Global Issues and Tradeoffs
Question 17
When firms trade pollution permits with one another, the total amount of pollution allowed in the market rises.
Correct Answer
False
False. Trading moves permits from one firm to another, but the total number of permits, and so the total pollution allowed, stays the same as the government set it.
Category: Market-Oriented Tools
Question 18
A pollution charge tells each firm exactly which pollution-control technology it must install.
Correct Answer
False
False. A pollution charge only puts a price on each unit emitted and leaves each firm free to find its own cheapest way to cut emissions. Requiring specific equipment is a feature of command-and-control rules.
Category: Market-Oriented Tools
Question 19
Low-income countries have historically produced most of the world's greenhouse gas emissions.
Correct Answer
False
False. High-income countries have been the main source of greenhouse gas emissions over history, which is one reason low-income countries argue they should not bear most of the cost of cutting them.
Category: Global Issues and Tradeoffs
Question 20
EPA studies of the Clean Air Act have found that its costs far outweighed its benefits.
Correct Answer
False
False. EPA studies found that the benefits of the Clean Air Act, mainly better health and longer lives, were much larger than its costs, although that does not prove every individual rule is worthwhile.
Category: Benefits and Costs