Sample Exam 3 Questions

Econ 350

1.         Which of the following is a criterion for evaluating environmental policies?
a)         efficiency

b)         fairness

c)         incentives to improvements

d)         enforceability

e)         all of the above

2.         Under a system of negligent liability, a firm disposing hazardous materials into a river would:

a)         be liable for any damages regardless of the circumstances.

b)         be liable for any damages only if the firm did not take reasonable steps to avoid damage.

c)         not be liable for any damages.

d)         none of the above.

3.         Which of the following situations would provide a system of liability rules the best chance for generating an efficient level of emissions?

a)         many people are involved, causal links are clear, and damages are difficult to measure.

b)         few people are involved, causal links are clear, and damages are difficult to measure.

c)         few people are involved, causal links are muddy, and damages are easy to measure.

d)         many people are involved, causal links are muddy, and damages are easy to measure.

e)         few people are involved, causal links are clear, and damages are easy to measure.

4.         Private bargaining can lead people to the efficient outcome if:

a)         transactions costs are low and property rights are well defined.

b)         transactions costs are high and property rights are ill defined

c)         transactions costs are high and property rights are well defined.

d)         transactions costs are low and property rights are ill defined.

5.         Moral suasion refers to:

a)         the study of ethics and religion.

b)         programs that appeal to a person's sense of civic duty to "do the right thing."

c)         the inability of people to maintain their sense of morality.

d)         Bob Dole and Bill Clinton's new blue suede shoes.

6.         Suppose that society's marginal abatement cost function is given by MAC = 50 - 2E and society's marginal damage function is given by MD = 3E.  What is the optimal level of pollution emissions?

a)         50

b)         30

c)         20

d)         10

e)         5

7.         According to the situation in Question 6 above, what would be the optimal per unit pollution tax?

a)         $50

b)         $40

c)         $30

d)         $20

e)         $10

8.         Emission taxes are generally regarded as efficient since:

a)         they raise the maximum amount of revenue possible for the IRS.

b)         they encourage all pollution sources to completely eliminate their emissions.

c)         they require environmental regulators to know the individual source marginal abatement cost functions.

d)         they encourage all pollution sources to adjust their emissions so that the equimarginal principle is satisfied.

9.         All of the following are true except one.  Which one is not true?
a)         Emission taxes tend to provide greater incentives to innovate than standards.
b)         The monitoring requirements of an emissions tax policy are more stringent than those for the typical  standards program.
c)         Abatement subsidies encourage emissions per firm to go down, but also may encourage the number of   firms in the industry to go up.
d)         Emission taxes tend to be less efficient compared to standards.

 10.       Technology-based effluent standards (TBESs) are likely to give more pollution control for the money spent than alternative approaches such as tradable discharge permits or emission taxes.

a)         True

b)         False

 Analytical Problem:

11.       Assume that society is composed of two polluters with the marginal abatement cost functions described below: 

                        MAC₁ = 30 - E₁

                        MAC₂ = 50 - 4E₂

            E₁ and E₂ are the level of emissions of polluter 1 and 2, respectively.  Show all work!

a)         What is the unregulated level of pollution emissions for each polluter?

b)         Find the total level of emissions that would be generated if a per-unit pollution tax of $10 were imposed.

c)         Find the market price of a marketable pollution permit if pollution was limited to 20 units through the issuance of marketable pollution permits. How many permits will each polluter purchase?   (Hint: Use the equimarginal principle along with the fact that E₁ + E₂ = 20.)

d)         Suppose that the marginal benefit from reducing emissions is a constant $26 dollars per unit of emissions.  Assuming that the permits system is implemented as described in part (c) above, do you think E = 20 is the optimal emissions level?  Explain why or why not.