Public Finance in Canada 5Th Canadian Edition By Harvey S Rosen – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

File: Chapter 05 Test Bank

Multiple Choice

[QUESTION]

1. Marginal damages are hard to measure because

A. they can be generated from multiple sources.

B. they are hard to quantify.

C. it can be difficult to determine what causes harm.

D. all of these answers are correct.

Ans: D

Topic: 05-02

Blooms: Understand

Difficulty: Moderate

[QUESTION]

2. In the figure below, if the marginal damages line did not originate at 0,A. it would mean that marginal damages did not exist.

B. there is no way to find SMC.

C. SMC would not originate at the same intercept as PMC.

D. all of these answers are correct.

Ans: C

Topic: 05-02

Blooms: Understand

Difficulty: Moderate

[QUESTION]

3. Externalities can be positive because

A. marginal damages do not last over time.B. welfare can be impacted positively as well as negatively.

C. there is no concept for marginal benefit.

D. positive externalities are subsidies.

Ans: B

Topic: 05-01

Blooms: Understand

Difficulty: Moderate

[QUESTION]

4. Refer to the figure below. What is the total amount of tax paid by Bart?

A. $0

B. $50

C. $15

D. $750

Ans: DTopic: 05-10

Blooms: Understand

Difficulty: Moderate

[QUESTION]

5. Finding the Pigouvian tax rate is

A. hard because marginal damages are difficult to estimate.

B. easy because marginal damages are not difficult to estimate.

C. never efficient.

D. impossible because there are no marginal damages.

Ans: A

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

6. Pollution rights may be traded if

A. polluters try to hide pollution.

B. administrators are uncertain about Pigouvian taxes.

C. there is no market for pollution.

D. pollution is harmless.

Ans: B

Topic: 05-10

Blooms: Understand

Difficulty: Moderate[QUESTION]

7. Externalities can be produced by ____________, as well as ____________.

A. consumers; firms

B. market prices; market incomes

C. efficient markets; inefficient markets

D. none of these answers is correct

Ans: A

Topic: 05-01

Blooms: Remember

Difficulty: Easy

[QUESTION]

8. A Pigouvian tax is equal to

A. the social marginal cost.

B. the price that reduces pollution to zero.

C. the marginal benefit done at the efficient level of output.

D. the marginal damage done at the efficient level of output.

Ans: D

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

9. Which of the following is correct?A. SMC = PMC – MD

B. PMB = SMB + EMB

C. SMC = PMC + MD

D. SMB = SMC + PMB

Ans: C

Topic: 05-02

Blooms: Remember

Difficulty: Easy

[QUESTION]

10. A carbon tax has been implemented in

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.

Ans: B

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

11. A Pigouvian subsidy

A. c is generally use to correct a negative externality.

B. is the same thing as a Pigouvian tax.

C. reduces production to zero.D. moves production to the socially optimal level of output.

Ans: D

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

12. As a general rule, zero pollution is not socially desirable because

A. there would be no production.

B. Environment Canada needs to have something to do.

C. pollution does not do any harm.

D. all of these answers are correct.

Ans: A

Topic: 05-02

Blooms: Remember

Difficulty: Easy

[QUESTION]

13. Private individuals acting on their own may avoid the inefficiencies of externalities through:

A. bargaining between disputing parties.

B. creating a merger of the disputing parties.

C. establishing social conventions.

D. all of these answers are correct.

Ans: D

Topic: 05-06Blooms: Remember

Difficulty: Easy

[QUESTION]

14. Marginal damages

A. must always be considered in social marginal costs.

B. must not be considered in social marginal costs.

C. must sometimes be considered in social marginal costs.

D. have nothing to do with social marginal costs.

Ans: A

Topic: 05-02

Blooms: Remember

Difficulty: Easy

[QUESTION]

15. A tax levied on each unit of pollution is

A. an income tax.

B. an emissions fee.

C. a flat tax.

D. a Pigouvian tax.

Ans: B

Topic: 05-10

Blooms: Remember

Difficulty: Easy[QUESTION]

16. A cap-and-trade system

A. has a set number of permits.

B. allows polluters to trade permits.

C. caps the total level of pollution allowed.

D. all of these answers are correct.

Ans: D

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

17. Command-and-control regulations

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.

Ans: D

Topic: 05-10

Blooms: Remember

Difficulty: Easy

True/False[QUESTION]

18. Performance standards work to reduce emissions and are cost effective.

A. True

B. False

C. Uncertain

Ans: C

Topic: 05-10

Blooms: Understand

Difficulty: Moderate

[QUESTION]

19. An externality occurs when the activity of one entity directly affects the welfare of another that

is transmitted by market prices.

A. True

B. False

C. Uncertain

Ans: B

Topic: 05-01

Blooms: Remember

Difficulty: Easy

[QUESTION]

20. Externalities can be positive, as well as negative.

A. True

B. FalseC. Uncertain

Ans: A

Topic: 05-01

Blooms: Remember

Difficulty: Easy

[QUESTION]

21. Public goods and externalities often occur together.

A. True

B. False

C. Uncertain

Ans: A

Topic: 05-01

Blooms: Remember

Difficulty: Easy

[QUESTION]

22. A subsidy for pollution not produced can induce producers to pollute at the efficient level.

A. True

B. False

C. Uncertain

Ans: A

Topic: 05-10

Blooms: Remember

Difficulty: Easy[QUESTION]

23. Pollution rights can be traded and are always efficient.

A. True

B. False

C. Uncertain

Ans: C

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

24. Carbon taxes impose an equal burden across households of all income types.

A. True

B. False

C. Uncertain

Ans: B

Topic: 05-18

Blooms: Remember

Difficulty: Easy

[QUESTION]

25. When an activity produces a positive externality, too much of it is produced relative to the

efficient level.

A. True

B. FalseC. Uncertain

Ans: B

Topic: 05-05

Blooms: Remember

Difficulty: Easy

[QUESTION]

26. Efficiency considerations takes into account welfare and distributional considerations as well.

A. True

B. False

C. Uncertain

Ans: B

Topic: 05-18

Blooms: Remember

Difficulty: Easy

[QUESTION]

27. For market efficiency, SMC must be equated to SMB.

A. True

B. False

C. Uncertain

Ans: A

Topic: 05-05

Blooms: Remember

Difficulty: Easy[QUESTION]

28. University education is an example of an activity that generates a positive externality.

A. True

B. False

C. Uncertain

Ans: A

Topic: 05-01

Blooms: Understand

Difficulty: Moderate

[QUESTION]

29. An emissions fee ensures that abatement cost is minimized.

A. True

B. False

C. Uncertain

Ans: A

Topic: 05-10

Blooms: Remember

Difficulty: Easy

[QUESTION]

30. Incentive-based regulations provide polluters no incentive to reduce pollution and are thus not

used often.

A. True

B. FalseC. Uncertain

Ans: B

Topic: 05-10

Blooms: Remember

Difficulty: Easy

Short Answer

[QUESTION]

31. Suppose the factory Afro-Puffs Inc. produces wigs. As a by-product of this wig production, they

also produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hair

in place). The De-Lite car factory, down the road, experiences a negative externality from this

production 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 the

production 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?

Ans: (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.

Topic: 05-10

Blooms: Apply

Difficulty: Difficult

[QUESTION]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 is given 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

an efficient quantity of waste?

(c) What would be the quantity dumped if the firm did not care about the fishery?

Ans: (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 its marginal

benefit is greater than 0. Therefore, set MB equal to zero and solve for Q. Q = 34/3.

Topic: 05-02

Blooms: Apply

Difficulty: Difficult

[QUESTION]

33. The private marginal benefit for commodity X is given by 15 – X, where X is the number of units

consumed. The private marginal cost of producing X is constant at zero. Each unit of X imposes an

external cost of 10 on society. In the absence of any government intervention, how much X is

produced? What is the gain to society involved in moving from the inefficient to the efficient level of

production?

Ans: 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.

Topic: 05-02

Blooms: Apply

Difficulty: Difficult

[QUESTION]

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

river from 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 = HT not socially desired?

Ans: (a)

(b)(c) Not socially optimal.

Topic: 05-02

Blooms: Analyze

Difficulty: Difficult

[QUESTION]

35. Refer to the figures below to answer this question: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

should the 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 systems

when the inflation and change in marginal costs are considered?

Ans: a) When the social marginal benefit curve is inelastic then the government should employ a

cap-and-trade system because it is more efficient than the emission fee system. Emission fee system

allows too little pollution compared to fairly close pollution reduction of the cap-and-trade system.

b) When the social marginal benefit curve is elastic then the government should employ an emission

fee system because it is more efficient. Cap-and-trade system allows too much pollution 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 no legislative

or regulatory action in response to inflation. Moreover, emission fee systems are not appropriatewhen the marginal cost of pollution reduction is not constant. With emission fee systems, pollution

reduction decreases as marginal costs increase. However, with cap-and-trade systems, pollution

reduction is constant as marginal costs increase. Finally if the government is uncertain about the

marginal cost of pollution reduction, then the effective reduction system depends on the elasticity

of marginal social benefits.

Topic: 05-10

Blooms: Analyze

Difficulty: Difficult

[QUESTION]

36. Why are command-and-control regulations less flexible than incentive based systems?

Ans: The nature of command-and-control prevents the market from achieving a cost-effective

outcome. A technology standard provides no incentive for firms to look for cheaper ways to reduce

emissions. A performance standard does not allow the burden of reducing emissions cannot be

shifted to firms that can achieve reductions more cheaply. Incentive-based approaches are more

flexible as they allow the market to achieve cost-effective outcomes.

Topic: 05-10

Blooms: Understand

Difficulty: Moderate

[QUESTION]

37. Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?

Ans: Although answers may vary, there should be some mention of the responsiveness to cost

changes and uncertainty. Therefore when marginal social benefits are inelastic and costs are higher

than expected, cap-and-trade achieves too much reduction and an emissions fee achieves too little

reduction.

Topic: 05-10

Blooms: Understand

Difficulty: Moderate[QUESTION]

38. List and discuss at least two problems that might arise when using the Coase theorem.

Ans: Bargaining costs are generally not zero. Identifying damages is difficult. There are usually many

parties involved and that complicates the bargaining process and adds costs. There is generally some

amount of asymmetric information.

Topic: 05-06

Blooms: Understand

Difficulty: Moderate