EC238 - FINAL EXAM REVIEW
QUESTIONS AND ANSWERS
In economics, the concept of market failure refers to
A. the failure of unregulated markets to offer the lowest possible prices.
In economics, the concept of market failure refers to
A. the failure of unregulated markets to offer the lowest possible prices.
B. a situation where unregulated markets fail to offer efficient and equitable results.
C. a lack of equilibrium.
D. demand curves that have zero slope.
E. All of the above. - Answer-B. a situation where unregulated markets fail to offer
efficient and equitable results.
________ set standards that are unrealistic with today's technology in the hope that
they willmotivate the pollution-control industry to invent ways of meeting the standard
at reasonablecost.
A. Technology-based standards
B. Technology-forcing standards
C. Strict emission standards
D. Performance standards
E. None of the above. - Answer-B. Technology-forcing standards
Standards that take the form of never-exceed levels applied directly to the quantities
ofemissions coming from pollution sources are known as ________.
A. technology-based standards
B. performance standards
C. emission standards
D. ambient standards
E. None of the above. - Answer-C. emission standards
The socially efficient equilibrium emission standard sets the maximum rate of
emissionsequal to the ________.
A. socially efficient level of abatement.
B. socially efficient level of emissions.
C. level of emissions that maximizes total abatement cost.
D. level of emissions that minimizes total abatement cost.
E. None of the above. - Answer-B. socially efficient level of emissions.
When marginal damages for a pollutant vary by region, time of day, or season,
a(n)________ will not be socially efficient but ________ that set the MAC curve
equal to eachMD curve are socially efficient.
A. uniform standard; individual standards
B. ambient standard; uniform standards
C. individual standard; uniform standards
D. technology-based standard; uniform standards
E. None of the above - Answer-A. uniform standard; individual standards
,For the next four questions, consider the following firm. Suppose the marginal
abatement costsof a firm before a given technological improvement equal 𝑀𝐴𝐶# and
𝑀𝐴𝐶! is the marginalabatement cost curve the firm could expect to have after
investing resources in R&D to developbetter treatment or recycling technology
where:𝑀𝐴𝐶# = 6000 − 5𝐸𝑀𝐴𝐶! = 3600 − 3𝐸𝑀𝐷 = 3𝐸The firm faces a standard of
1000 units of emissions.30. What is the total cost of abatement paid by the firm with
its initial marginal abatement costcurve?A. $60,000
B. $100,000
C. $3,500,000
D. $2,100,000
E. None of the above. - Answer-B. $100,000
Explanation: the firm initial emits 6000/5 = 1200 units of pollution and so must abate
200 unitsto meet the standard. At E = 1200, MAC1 = 1000 so 𝑇𝐴𝐶1(1000) = 1000 x
200/2 = 100,000.
What is the total cost of abatement paid by the firm with its lower marginal
abatement costcurve?
A. $60,000
B. $100,000
C. $3,500,000
D. $2,100,000
E. None of the above - Answer-A. $60,000
Explanation: the firm initial emits 6000/5 = 1200 units of pollution and so must abate
200 unitsto meet the standard. At E = 1200, MAC2 = 600 so 𝑇𝐴𝐶2(1000) = 600 x
200/2 = 60,000.
What is the maximum amount of money it would be willing to spend on R&D to
achieve thelower marginal abatement cost curve?
A. $100,000
B. $1,400,000
C. $60,000
D. $40,000
E. None of the above - Answer-D. $40,000
Explanation: from the previous two questions we see that the firm saves $40,000 in
TAC.
If the firm instead faced a tax of $1000 per unit of emissions, what is the maximum
amountof money it would be willing to spend on R&D to achieve the lower marginal
abatement costcurve?
A. $1,100,000
B. $866,667
C. $60,000
D. $66,667
E. None of the above - Answer-D. $66,667
Explanation: With the original MAC curve, the firm will emit 1000 units of pollution
when thetax is $1000 (solve 1000 = 6000 - 5E). We saw previously that TAC1(1000)
= $100,000. It mustalso pay $1,000,000 in tax for TCC1(1000) = $1,100,000. With
the new MAC curve, the firm emits 2600/3≈ 866.667 (solve 1000 = 3000 - 3E) units
of pollution and abates 333.333 units. At E= 866.667, MAC2 = 1000 and 𝑇𝐴𝐶!
, (866.667) = 1000 x 333.333/2= $166,667. Taxes amount to$866,667 for TTC2(1000)
= $1,033,333.
Under ________ the burden is on the ________ to make the right decision about
whattechnology to use.
A. technology-forcing standards; pollution control industry
B. technology-based standards; polluting firms
C. technology-based standards; public regulatory authority
D. emission standards; public regulatory authority
E. None of the above - Answer-C. technology-based standards; public regulatory
authority
For the next two question, consider a polluter with MAC = 18 - 3E facing an
emissions tax of$12 per unit of emissions35. The polluter will emit ________ under
the tax regime.
A. 4 units
B. 2 units
C. 6 units
D. 9 units
E. None of the above - Answer-B. 2 units
Explanation: solve 18-3E = 12
The polluter will incur total compliance costs of ________ under the tax regime.
A. $24
B. $18
C. $48
D. $54
E. None of the above - Answer-C. $48
Explanation: At 2 units of pollution, MAC(2) = 12 and abatement is 4 units. 𝑇𝐴𝐶(2) =
#!×(! =24. The firm's tax bill is 12 × 2 = 24 which gives TTC(2) = 48.
For the next three question, consider a polluter with MAC = 1200 - 3E and marginal
damagecurve of MD = 5E37. The socially efficient tax is equal to ________.
A. $750
B. $350
C. $3000
D. $150
E. None of the above. - Answer-A. $750
Explanation: Solve 1200-3E = 5E to get E = 150. MD(150) = 750 = efficient tax.
Total damages from pollution under the socially efficient tax are equal to
___________.
A. $112,500
B. $56,250
C. $28,125
D. $93,750
E. None of the above. - Answer-B. $56,250
Explanation: At E = 150, MD(150) = 750 so 𝑇𝐷(150) = 150 x 750/2= 56,250.
QUESTIONS AND ANSWERS
In economics, the concept of market failure refers to
A. the failure of unregulated markets to offer the lowest possible prices.
In economics, the concept of market failure refers to
A. the failure of unregulated markets to offer the lowest possible prices.
B. a situation where unregulated markets fail to offer efficient and equitable results.
C. a lack of equilibrium.
D. demand curves that have zero slope.
E. All of the above. - Answer-B. a situation where unregulated markets fail to offer
efficient and equitable results.
________ set standards that are unrealistic with today's technology in the hope that
they willmotivate the pollution-control industry to invent ways of meeting the standard
at reasonablecost.
A. Technology-based standards
B. Technology-forcing standards
C. Strict emission standards
D. Performance standards
E. None of the above. - Answer-B. Technology-forcing standards
Standards that take the form of never-exceed levels applied directly to the quantities
ofemissions coming from pollution sources are known as ________.
A. technology-based standards
B. performance standards
C. emission standards
D. ambient standards
E. None of the above. - Answer-C. emission standards
The socially efficient equilibrium emission standard sets the maximum rate of
emissionsequal to the ________.
A. socially efficient level of abatement.
B. socially efficient level of emissions.
C. level of emissions that maximizes total abatement cost.
D. level of emissions that minimizes total abatement cost.
E. None of the above. - Answer-B. socially efficient level of emissions.
When marginal damages for a pollutant vary by region, time of day, or season,
a(n)________ will not be socially efficient but ________ that set the MAC curve
equal to eachMD curve are socially efficient.
A. uniform standard; individual standards
B. ambient standard; uniform standards
C. individual standard; uniform standards
D. technology-based standard; uniform standards
E. None of the above - Answer-A. uniform standard; individual standards
,For the next four questions, consider the following firm. Suppose the marginal
abatement costsof a firm before a given technological improvement equal 𝑀𝐴𝐶# and
𝑀𝐴𝐶! is the marginalabatement cost curve the firm could expect to have after
investing resources in R&D to developbetter treatment or recycling technology
where:𝑀𝐴𝐶# = 6000 − 5𝐸𝑀𝐴𝐶! = 3600 − 3𝐸𝑀𝐷 = 3𝐸The firm faces a standard of
1000 units of emissions.30. What is the total cost of abatement paid by the firm with
its initial marginal abatement costcurve?A. $60,000
B. $100,000
C. $3,500,000
D. $2,100,000
E. None of the above. - Answer-B. $100,000
Explanation: the firm initial emits 6000/5 = 1200 units of pollution and so must abate
200 unitsto meet the standard. At E = 1200, MAC1 = 1000 so 𝑇𝐴𝐶1(1000) = 1000 x
200/2 = 100,000.
What is the total cost of abatement paid by the firm with its lower marginal
abatement costcurve?
A. $60,000
B. $100,000
C. $3,500,000
D. $2,100,000
E. None of the above - Answer-A. $60,000
Explanation: the firm initial emits 6000/5 = 1200 units of pollution and so must abate
200 unitsto meet the standard. At E = 1200, MAC2 = 600 so 𝑇𝐴𝐶2(1000) = 600 x
200/2 = 60,000.
What is the maximum amount of money it would be willing to spend on R&D to
achieve thelower marginal abatement cost curve?
A. $100,000
B. $1,400,000
C. $60,000
D. $40,000
E. None of the above - Answer-D. $40,000
Explanation: from the previous two questions we see that the firm saves $40,000 in
TAC.
If the firm instead faced a tax of $1000 per unit of emissions, what is the maximum
amountof money it would be willing to spend on R&D to achieve the lower marginal
abatement costcurve?
A. $1,100,000
B. $866,667
C. $60,000
D. $66,667
E. None of the above - Answer-D. $66,667
Explanation: With the original MAC curve, the firm will emit 1000 units of pollution
when thetax is $1000 (solve 1000 = 6000 - 5E). We saw previously that TAC1(1000)
= $100,000. It mustalso pay $1,000,000 in tax for TCC1(1000) = $1,100,000. With
the new MAC curve, the firm emits 2600/3≈ 866.667 (solve 1000 = 3000 - 3E) units
of pollution and abates 333.333 units. At E= 866.667, MAC2 = 1000 and 𝑇𝐴𝐶!
, (866.667) = 1000 x 333.333/2= $166,667. Taxes amount to$866,667 for TTC2(1000)
= $1,033,333.
Under ________ the burden is on the ________ to make the right decision about
whattechnology to use.
A. technology-forcing standards; pollution control industry
B. technology-based standards; polluting firms
C. technology-based standards; public regulatory authority
D. emission standards; public regulatory authority
E. None of the above - Answer-C. technology-based standards; public regulatory
authority
For the next two question, consider a polluter with MAC = 18 - 3E facing an
emissions tax of$12 per unit of emissions35. The polluter will emit ________ under
the tax regime.
A. 4 units
B. 2 units
C. 6 units
D. 9 units
E. None of the above - Answer-B. 2 units
Explanation: solve 18-3E = 12
The polluter will incur total compliance costs of ________ under the tax regime.
A. $24
B. $18
C. $48
D. $54
E. None of the above - Answer-C. $48
Explanation: At 2 units of pollution, MAC(2) = 12 and abatement is 4 units. 𝑇𝐴𝐶(2) =
#!×(! =24. The firm's tax bill is 12 × 2 = 24 which gives TTC(2) = 48.
For the next three question, consider a polluter with MAC = 1200 - 3E and marginal
damagecurve of MD = 5E37. The socially efficient tax is equal to ________.
A. $750
B. $350
C. $3000
D. $150
E. None of the above. - Answer-A. $750
Explanation: Solve 1200-3E = 5E to get E = 150. MD(150) = 750 = efficient tax.
Total damages from pollution under the socially efficient tax are equal to
___________.
A. $112,500
B. $56,250
C. $28,125
D. $93,750
E. None of the above. - Answer-B. $56,250
Explanation: At E = 150, MD(150) = 750 so 𝑇𝐷(150) = 150 x 750/2= 56,250.
