test 7 externalities
1) Consider the following two statements:
Statement 1: When the production of a certain good causes very large pollution, it is possible that in the social optimum this good should not be produced.
Statement 2: When the demand for a good whose production pollutes the environment is perfectly price elastic, the socially efficient production level will always involve zero pollution.
Option A
Both statements are correct.
Option B
Both statements are wrong.
Option C
Statement 1 is wrong and statement 2 is correct.
Option D
Statement 2 is wrong and statement 1 is correct.
Statement 1 is CORRECT: it is possible that if there are external costs linked to the production of a good, if we want to include that external cost in the price, the price will be lower than the consumer's willingness to pay. In that case there is no more production and consumption of the good.
Statement 2 is wrong: draw a graph (D is horizontal, S has its normal shape). If the cost of pollution is included, the S shifts to the left. It is possible that in the new optimum, still a certain amount of this good is consumed. D
2) The demand for a good X is given by Q = 200 - 2P and the supply is given by Q = 2P. The production of good X is characterized by a positive external effect estimated at € 40 per unit produced. The socially efficient production quantity of good X is:
Option A
120;
Option B
100;
Option C
140;
Option D 60
Calculate the inverse supply function: p = 1 / 2q. Internalize the benefit of the positive external effect =of40.
p = 1/2 q - 40.
Enter this in the q = 200 -2p to know the desired amount.
q = 200 - 2 x (1 / 2q - 40) = 200 - q + 80 -> 2q = 280 -> q = 140
so answer c.C
3) Which statement is correct? In the case of negative externalities, the quantity and price at the market equilibrium do not maximize social welfare, because compared to the social welfare optimum:
Option A
the price is too low and the quantity is too high;
Option B
the price is too high and the quantity is too low;
Option C
the price and quantity are too low;
Option D
the price and quantity are too high;
Answer a is correct. In the event of negative externalities, part of the cost is not included in the price , the free market price is therefore too low and too much of the product is produced and consumed.A
4) Consider the following two statements:
Statement 1: With positive externalities, production is too large compared to the social welfare optimum, in a free market without government intervention.
Statement 2: As a result of the antibiotic-resistant bacteria in beef, consumer confidence in beef has decreased, and demand for beef sauce is also collapsing. The influence of this on the price of beef sauce is greater, the more price elastic the supply of beef sauce.
Option A
Only statement 1 is correct.
Option B
Only statement 2 is correct.
Option C
Both statements are correct.
Option D
None of the statements is correct.
Statement 1 is WRONG: With positive external effects, the production is socially too small (instead of too large) if it is traded properly on a free market
Statement 2 is WRONG: The influence of this on the price of beef sauce is greater, the more inelastic the supply of beef sauce.D
5) Which statement is correct?
Option A
The advantage of market-based government interventions compared to non-market-based government interventions is that the former do not cause any welfare losses.
Option B
In the equilibrium with consumer subsidy, compared to the equilibrium without consumer subsidy, the quantity is greater if the supply is perfectly price inelastic.
Option C
From an economic point of view, tradable emission permits are a good solution to reduce CO2 emissions.
Option D
If there are negative externalities when consuming a good, free market forces will generally cause too little of the good to be consumed as compared to what is optimum from the social welfare point of view.
Answer a is wrong. Both market-based and non-market-based government interventions cause a loss of welfare in the market.
Answer b is wrong. In the equilibrium with consumer subsidy, compared to the equilibrium without consumer subsidy, the traded quantity remains the same if the supply is perfectly price-inelastic .
Answer c is correct.
Answer d is wrong. When there are negative external effects in the consumption of a good, the free market forces will generally ensure that too much (instead of too little) of the good will be consumed compared to the prosperity optimum. C
6) Consider the following two statements:
Statement 1: When the production of a certain product entails very large pollution, it is possible that at the social welfare optimum this good should not be produced.
Statement 2: If government subsidizes the market for isolation material for homes, then additional units will be produced and consumed, for which WTP > MC.
Option A
Both statements are correct.
Option B
Both statements are wrong.
Option C
Statement 1 is wrong and statement 2 is correct.
Option D
Statement 2 is wrong and statement 1 is correct.
Statement 1 is CORRECT. If the cost of the negative external effect are high, after the internalization of this externalitycost the total price of production can be higher than WTP of the consumer. In that case, no production and consumption is socially appropriate.
Statement 2 is WRONG. we get a new market equilibrium for which it holds that the last traded that WTP < MC.
So answer d D
7) The figure below shows that it makes economically no difference whether a fat tax is levied on the producer or the consumer. When a fat tax is imposed on the consumer, the market equilibrium changes from D to C and the producer price becomes:
Option A
PB;
Option B
PC;
Option C
PE;
Option D
PF;
The fat tax is levied on the consumer and market equilibrium shifts from D to C. With a consumer tax, producer price becomes the new equilibrium price. In this case, in point C we can find the new market equilibrium price PC. So answer b. B
8) In case of positive (consumption) externalities, the free market allocation results in:
Option A
a too low price and a too low quantity.
Option B
private value > social value
Option C
welfare gain
Option D
marginal societal cost > willingness to pay
The easiest way is to simply graph the situation of positive (consumption) externalities. The problem here is that the social value is higher than the private value because external benefits are not internalized. As a result, the p is too low and too little is produced and consumed. we are thus in free market equilibrium with marginal units for which WTP> MSC. In the free market equilibrium there is a welfare loss compared to the socially optimal situation So answer a is correct.
9) Which statement is wrong?
Option A
With positive externalities, production is too small if it is determined by free market forces.
Option B
In a market of perfect competition with externalities, efficient production levels are achieved without government intervention.
Option C
Production quotas can be a way of addressing negative externalities.
Option D
The problem of externalities illustrates that free market forces are not perfect.
answer a is correct. In the case of positive external effects, the production is socially too small if the goods are traded on a free market.
answer b is wrong. In a market of perfect competition with external effects, the efficient production level is not achieved without government intervention (this because part of the costs / benefits are not taken into account).
answer c is correct. Production quotas can be a way (non-market conform) to deal with negative externalities.
answer d is correct. The problem of externalities illustrates that free market forces are not perfect.
B
10) Suppose that the demand for a good, whose production generates negative externalities, is perfectly price inelastic. Which statement is correct? Compared to the free market equilibrium, in the socially optimal situation:
Option A
the price is higher and the quantity unchanged.
Option B
the price is unchanged and the quantity higher.
Option C
the price is unchanged and the quantity unchanged.
Option D
the price is lower and the quantity unchanged.
Draw the market, with demand function vertical and supply function normal trend. Draw the impact of the negative externality. This leads to a new market equilibrium in which quantity remains the same, but price is higher. So answer a.