2026 Advanced Study and Assessment Review for Principles of Economics 2e Chapters 1–8

Certain schools of economic thought suggest that a _____________ would reduce pollution in a __________________, when compared to command-and-control regulation. A. marketable permit, less cost-effective way B. pollution tax, flexible, more cost-effective way C. marketable permit, less flexible manner D. pollution tax, less cost effective, but flexible way Correct answer: B Rationale: Pollution taxes allow firms flexibility to reduce pollution in the least costly way, making them more cost-effective than rigid command-and-control rules. Marketable permits can also be flexible, but the wording in B best reflects standard economic theory. The other options mischaracterize flexibility or cost efficiency. With respect to the benefits of clean air and water, which of the following would most likely be classified as being relatively easy to value in economic terms? A. gains in farming, fishing and tourism B. gains from lower levels of corrosion C. gains in environmental enjoyment D. all of the above are correct answers Correct answer: A Rationale: Gains in farming, fishing, and tourism can be measured through market prices and income data. Corrosion reduction and environmental enjoyment are harder to quantify because they lack clear market values. As environmental protection increases, 2026 A. the biggest marginal benefits are achieved first, smaller marginal benefits follow. B. inexpensive and easy methods of reducing pollution begin to dwindle. C. the more costly and innovative methods can be readily avoided. D. in addition to a and b above, the quality of environmental protection increases. Correct answer: D Rationale: Early pollution reductions yield high benefits and use low-cost methods, but further improvements become more expensive while environmental quality continues to rise. Option D correctly combines these ideas. Option C contradicts economic reality. The challenge of preserving biodiversity, A. any nation itself can reduce emissions to solve global warming. B. any nation acting alone can protect biodiversity around the world. C. includes the full spectrum of animal and plant genetic material. D. a nation can protect biodiversity within its own borders and c. Correct answer: D Rationale: Biodiversity includes genetic diversity of plants and animals, and nations can protect biodiversity within their borders but not globally on their own. Options A and B overstate the power of individual nations. The flexibility of marketable permits program developed for the oil refining industry is credited with achieving the reduction in lead pollution for __________ less cost than command-and-control regulation would have required. A. at least 50% B. 50% C. 20% D. at least 20% Correct answer: D Rationale: Studies show marketable permits reduced costs by at least 20% compared to command-and-control approaches. The other figures are either too specific or not supported by the evidence. 2026 Low and middle-income societies correctly point out that high-income countries have historically A. been the primary contributors to greenhouse warming. B. been the primary contributors to reduced biodiversity. C. failed to put environmental protection ahead of corporate profits. D. legitimately lacked moral standing in addition to all the above. Correct answer: D Rationale: High-income countries have historically contributed most to emissions, biodiversity loss, and environmentally harmful industrial practices. Option D correctly combines all these points. A beekeeper decides to locate her business on a plot of land that is between an apple orchard and an elementary school. A negative externality that can result is A. the cost of the bee hives to the beekeeper. B. the possibility of the bees stinging the students at the school. C. the bees helping to pollinate the orchard, leading to more fruit. D. the honey the bees produce. Correct answer: B Rationale: Bee stings affecting students impose a cost on others not involved in the transaction, making it a negative externality. The other options are either private costs or benefits. A beekeeper decides to locate her business on a plot of land that is between an apple orchard and an elementary school. A positive externality that can result is A. the cost of the bee hives to the beekeeper. B. the possibility of the bees stinging the students at the school. C. the bees helping to pollinate the orchard, leading to more fruit. D. the honey the bees produce. Correct answer: C Rationale: Pollination benefits the orchard without direct compensation, making it a positive externality. Honey production and hive costs are private outcomes. 2026 Environmentalist groups tend to prefer ________________ to ___________________. A. command-and-control regulations, marketable permits B. marketable permits, pollution charges C. pollution taxes, marketable permits D. marketable permits, monetary refunds Correct answer: B Rationale: Environmental groups often prefer marketable permits because they cap total pollution levels, whereas pollution charges allow pollution as long as firms pay. Other options do not reflect common policy preferences. The supply and demand conditions facing a firm that makes widgets and generates a negative externality by dumping a highly toxic sludge in a nearby river is given in the table below. The equilibrium price and quantity when only private costs are taken into account are A. Price = $55, Quantity = 30 B. Price = $40, Quantity = 55 C. Price = $30, Quantity = 20 D. Price = $30, Quantity = 80 Correct answer: D Rationale: When only private costs are considered, firms ignore external damage, resulting in overproduction. Option D reflects the highest quantity and lowest price consistent with ignoring social costs. Kip and Yale run separate mining companies in the same forest. Both pollute the river flowing through the forest with debris from their work. If a system of tradable permits is introduced, the total cost of cutting current debris in half is A. $40 B. $45 C. $50 D. $55 Correct answer: C Rationale: Tradable permits allocate pollution reduction to the firm with lower marginal abatement costs first, minimizing total cost. The correct calculation yields $50, while other options reflect inefficient allocations. 2026 An economist is more likely to identify __________________ as a more efficient and flexible way for society to __________________________. A. marketable permits, allow a limited, declining amount of pollution to occur B. better defined property rights, to address issues of allowable levels of pollution C. market-oriented environmental tools, enforce strict limits on emissions D. better defined property rights, to shrink pollution levels over time Correct answer: A Rationale: Marketable permits cap pollution while allowing firms flexibility in how reductions occur. The other options either lack flexibility or misstate economic mechanisms. Two rubber companies, Boing and Twang, are considering pollution filters. In the absence of any government intervention or agreement between the firms, A. both firms will install filters B. Boing will install a filter, Twang will not C. Twang will install a filter, Boing will not D. neither firm will install a filter Correct answer: D Rationale: Each firm receives only part of the benefit while bearing the full cost, so neither has sufficient incentive to act alone. This is a classic free-rider problem. Some of the leading ecotourism destinations include: A. Costa Rica and Panama in Central America B. Malaysia and the Galapagos Islands C. the Serengeti in Tanzania, the Amazon rain forests D. the Caribbean, New Zealand and all of the above Correct answer: D Rationale: All listed locations are well-known ecotourism destinations, making “all of the above” the most complete and accurate answer. Which policy tool directly sets a maximum allowable level of pollution? 2026 A. pollution tax B. marketable permits C. subsidies for clean technology D. public awareness campaigns Correct answer: B Rationale: Marketable permits establish a fixed cap on total emissions, ensuring pollution does not exceed a set level. Pollution taxes influence behavior through prices but do not guarantee a specific pollution limit. Subsidies and awareness campaigns do not directly control emissions. Which of the following best explains why pollution is considered a market failure? A. firms lack incentives to innovate B. pollution increases production costs C. social costs exceed private costs D. consumers demand cheaper goods Correct answer: C Rationale: Pollution imposes external costs on society that are not reflected in market prices, causing overproduction. The other options do not directly describe the core definition of market failure. A pollution tax is considered efficient because it A. eliminates pollution entirely B. applies the same reduction to all firms C. encourages firms with lower abatement costs to reduce more D. guarantees equal profits among firms Correct answer: C Rationale: Firms that can reduce pollution cheaply will do so to avoid the tax, minimizing total abatement cost. Pollution taxes do not eliminate pollution or enforce equal reductions or profits. Which situation best illustrates the tragedy of the commons? A. a private park charging entry fees B. a government-regulated fishing zone 2026 C. overfishing in an unregulated ocean D. pollution permits traded between firms Correct answer: C Rationale: Open-access resources like unregulated oceans tend to be overused because individuals act in self-interest without regard for long-term sustainability. Regulation, pricing, or ownership prevents this outcome. When marginal benefits of pollution reduction exceed marginal costs, society should A. reduce pollution further B. maintain current pollution levels C. increase pollution D. remove all environmental regulations Correct answer: A Rationale: As long as benefits exceed costs, additional pollution reduction increases net social welfare. Stopping early would leave potential gains unrealized. Which of the following is most likely a nonmarket benefit of environmental protection? A. increased property values B. higher crop yields C. improved human health D. enjoyment of scenic landscapes Correct answer: D Rationale: Scenic enjoyment lacks direct market prices, making it a nonmarket benefit. The other options can often be valued through observable economic data. Compared to command-and-control regulation, market-based policies generally A. increase compliance costs B. require identical technology across firms C. reduce incentives for innovation D. allow firms flexibility in meeting targets 2026 Correct answer: D Rationale: Market-based policies let firms choose how to reduce pollution, lowering costs and encouraging innovation. Command-and-control regulations are typically rigid. Which of the following best explains why global climate change is difficult to address? A. emissions are easy to monitor B. benefits of reduction are localized C. costs are shared globally while actions are national D. technology to reduce emissions does not exist Correct answer: C Rationale: Climate change is a global externality where individual countries bear costs but benefits are worldwide, discouraging unilateral action. Monitoring and technology are not the primary obstacles. A firm reduces emissions because it can sell unused pollution permits. This illustrates A. moral suasion B. command-and-control regulation C. incentive-based regulation D. public goods provision Correct answer: C Rationale: The ability to profit from reducing pollution creates financial incentives, a hallmark of incentive-based regulation. The other options do not involve market rewards. Which policy would most directly encourage firms to adopt cleaner technologies over time? A. fixed emissions standards B. lump-sum fines C. pollution taxes D. voluntary guidelines Correct answer: C 2026 Rationale: Pollution taxes continuously reward lower emissions, motivating ongoing innovation. Fixed standards and voluntary measures provide weaker long-term incentives.