Public Finance in Canada 5th Edition by Harvey S Rosen - Test Bank

Public Finance in Canada 5th Edition by Harvey S Rosen – Test Bank

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ExamName___________________________________MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)Marginal damages are hard to measure because1)A)it can be difficult to determine what causes harm.B)they can be generated from multiple sources.C)they are hard to quantify.D)all of these answers are correct.Answer:D2)In the figure below, if the marginal damages line did not originate at 0,2)A)it would mean that marginal damages did not exist.B)SMC would not originate at the same intercept as PMC.C)there is no way to find SMC.D)all of these answers are correct.Answer:B1
3)Externalities can be positive because3)A)there is no concept for marginal benefit.B)welfare can be impacted positively as well as negatively.C)marginal damages do not last over time.D)positive externalities are subsidies.Answer:B4)Refer to the figure below. What is the total amount of tax paid by Bart?4)A)$750B)$0C)$15D)$50Answer:A5)Finding the Pigouvian tax rate is5)A)never efficient.B)hard because marginal damages are difficult to estimate.C)impossible because there are no marginal damages.D)easy because marginal damages are not difficult to estimate.Answer:B6)Pollution rights may be traded if6)A)administrators are uncertain about Pigouvian taxes.B)pollution is harmless.C)there is no market for pollution.D)polluters try to hide pollution.Answer:A7)Externalities can be produced by ________, as well as ________.7)A)market prices; market incomesB)consumers; firmsC)efficient markets; inefficient marketsD)none of these answers is correctAnswer:B2
8)A Pigouvian tax is equal to8)A)the social marginal cost.B)the marginal damage done at the efficient level of output.C)the marginal benefit done at the efficient level of output.D)the price that reduces pollution to zero.Answer:B9)Which of the following is correct?9)A)SMC = PMC – MDB)SMB = SMC + PMBC)SMC = PMC + MDD)PMB = SMB + EMBAnswer:C10)A carbon tax has been implemented in10)A)Canada at the federal level.B)British Columbia at the provincial level.C)both Canada at the federal level and British Columbia at the provincial level.D)no jurisdiction in Canada so far.Answer:B11)A Pigouvian subsidy11)A)reduces production to zero.B)c is generally use to correct a negative externality.C)is the same thing as a Pigouvian tax.D)moves production to the socially optimal level of output.Answer:D12)As a general rule, zero pollution is not socially desirable because12)A)Environment Canada needs to have something to do.B)there would be no production.C)pollution does not do any harm.D)all of these answers are correct.Answer:B13)Private individuals acting on their own may avoid the inefficiencies of externalitiesthrough:13)A)creating a merger of the disputing parties.B)bargaining between disputing parties.C)establishing social conventions.D)all of these answers are correct.Answer:D3
14)Marginal damages14)A)must not be considered in social marginal costs.B)have nothing to do with social marginal costs.C)must sometimes be considered in social marginal costs.D)must always be considered in social marginal costs.Answer:D15)A tax levied on each unit of pollution is15)A)a flat tax.B)an emissions fee.C)an income tax.D)a Pigouvian tax.Answer:B16)A cap-and-trade system16)A)caps the total level of pollution allowed.B)allows polluters to trade permits.C)has a set number of permits.D)all of these answers are correct.Answer:D17)Command-and-control regulations17)A)are less flexible than incentive based regulations.B)come from the private sector.C)have technology or performance standards as a type of control.D)both A and C are correct.Answer:D18)Performance standards work to reduce emissions and are cost effective.18)A)TrueB)FalseC)UncertainAnswer:C19)An externality occurs when the activity of one entity directly affects the welfare ofanother that is transmitted by market prices.19)A)TrueB)FalseC)UncertainAnswer:B20)Externalities can be positive, as well as negative.20)A)TrueB)FalseC)UncertainAnswer:A21)Public goods and externalities often occur together.21)A)TrueB)FalseC)UncertainAnswer:A4
22)A subsidy for pollution not produced can induce producers to pollute at the efficientlevel.22)A)TrueB)FalseC)UncertainAnswer:A23)Pollution rights can be traded and are always efficient.23)A)TrueB)FalseC)UncertainAnswer:C24)Carbon taxes impose an equal burden across households of all income types.24)A)TrueB)FalseC)UncertainAnswer:B25)When an activity produces a positive externality, too much of it is produced relative tothe efficient level.25)A)TrueB)FalseC)UncertainAnswer:B26)Efficiency considerations takes into account welfare and distributional considerations aswell.26)A)TrueB)FalseC)UncertainAnswer:B27)For market efficiency, SMC must be equated to SMB.27)A)TrueB)FalseC)UncertainAnswer:A28)University education is an example of an activity that generates a positive externality.28)A)TrueB)FalseC)UncertainAnswer:A29)An emissions fee ensures that abatement cost is minimized.29)A)TrueB)FalseC)UncertainAnswer:A30)Incentive-based regulations provide polluters no incentive to reduce pollution and arethus not used often.30)A)TrueB)FalseC)UncertainAnswer:B5
ESSAY. Write your answer in the space provided or on a separate sheet of paper.31)Suppose the factory Afro-Puffs Inc. produces wigs. As a by-product of this wig production, theyalso produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hairin place). The De-Lite car factory, down the road, experiences a negative externality from thisproduction 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 theproduction 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?Answer:(a) Set PMC equal to demand and solve for P and X. X = 50/9, P = 170/9.(b) Find SMC by adding PMC to MD. Set SMC equal to demand and solve for P and X. X =49/11, P = 232/11.(c) At X = 49/11, subtract PMC from SMC. Tax = 109/22.32)A steel factory has the right to discharge waste into a river. The waste reduces the number of fish,causing damage for fisheries. Let Q denotes the quantity of waste dumped. The marginal damage,denoted MD, is given by the equation MD = 2 + 5Q. The marginal benefit (MB) of dumping waste isgiven by the equation MB = 34 – 3Q.(a) Calculate the efficient quantity of waste.(b) What is the efficient fee, in dollars per unit of waste, which would cause the firm to dump only anefficient quantity of waste?(c) What would be the quantity dumped if the firm did not care about the fishery?Answer:(a) Set MD = MB and solve for Q*. Q* = 4.(b) Insert 4 units into either MD or MB. Fee = 22.(c) If the firm did not care about the fisheries, then they will discharge was as long as itsmarginal benefit is greater than 0. Therefore, set MB equal to zero and solve for Q. Q = 34/3.33)The private marginal benefit for commodity X is given by 15 – X, where X is the number of unitsconsumed. The private marginal cost of producing X is constant at zero. Each unit of X imposes anexternal cost of 10 on society. In the absence of any government intervention, how much X isproduced? What is the gain to society involved in moving from the inefficient to the efficient levelof production?Answer:Without intervention, optimal will be where PMB = 0. X = 15. The efficient level is X = 5.The area beneath the PMB is gained. Gain = 25.34)Consider the case of two farmers, Tony and Hakim, depicted in the following figure. Both use DDT(a chemical pesticide) for their crops. The use of DDT causes an externality for swimmers down riverfrom the farms.(a) Show the amount of pesticides used if each uses the privately optimal level of pesticides.(b) Show the amount of pesticides used if they are socially concerned.(c) Why is a reduction back to XH= HTnot socially desired?6
Answer:(a)(b)7
Answer:(c) Not socially optimal.35)Refer to the figures below to answer this question:8
Cap-and-trade versus emissions fee when marginal social benefits are inelastic and costs are uncertain:Cap-and-trade versus emissions fee when marginal social benefits are elastic and costs are uncertain:a) In case of an inelastic marginal social benefit curve, what type of pollution reduction system shouldthe government employ? Why?b) If the social benefit curve is elastic, does your answer change?c) What are the advantages and disadvantages of cap-and-trade systems over emission fee systemswhen the inflation and change in marginal costs are considered?Answer:a) When the social marginal benefit curve is inelastic then the government should employ acap-and-trade system because it is more efficient than the emission fee system. Emission feesystem allows too little pollution compared to fairly close pollution reduction of thecap-and-trade system.b) When the social marginal benefit curve is elastic then the government should employ anemission fee system because it is more efficient. Cap-and-trade system allows too muchpollution reduction compared to fairly close pollution reduction of emission fee system.c) Cap-and-Trade systems are superior in high inflation environments since it requires no9
Answer:legislative or regulatory action in response to inflation. Moreover, emission fee systems are notappropriate when the marginal cost of pollution reduction is not constant. With emission feesystems, pollution reduction decreases as marginal costs increase. However, withcap-and-trade systems, pollution reduction is constant as marginal costs increase. Finally if thegovernment is uncertain about the marginal cost of pollution reduction, then the effectivereduction system depends on the elasticity of marginal social benefits.36)Why are command-and-control regulations less flexible than incentive based systems?Answer:The nature of command-and-control prevents the market from achieving a cost-effectiveoutcome. A technology standard provides no incentive for firms to look for cheaper ways toreduce emissions. A performance standard does not allow the burden of reducing emissionscannot be shifted to firms that can achieve reductions more cheaply. Incentive-basedapproaches are more flexible as they allow the market to achieve cost-effective outcomes.37)Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?Answer:Although answers may vary, there should be some mention of the responsiveness to costchanges and uncertainty. Therefore when marginal social benefits are inelastic and costs arehigher than expected, cap-and-trade achieves too much reduction and an emissions feeachieves too little reduction.38)List and discuss at least two problems that might arise when using the Coase theorem.Answer:Bargaining costs are generally not zero. Identifying damages is difficult. There are usuallymany parties involved and that complicates the bargaining process and adds costs. There isgenerally some amount of asymmetric information.10