Econ 101 Section 3 – Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 7 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. Suppose the local government decides to tax emission of sulfur dioxide. The optimal Pigouvian tax equals:
a. the marginal cost of production when the quantity of pollution is zero
b. the marginal cost of production at the socially optimal quantity of pollution.
c. the marginal social cost of pollution at the socially optimal quantity of pollution.
d. the marginal social cost of pollution when the quantity of pollution is zero.
2. In some countries, motorists pay an extra fee to travel on congested highways at peak times. This extra fee serves to
a. internalize the externality.
b. subsidize a technology spillover.
c. eliminate the externality.
d. subsidize a positive externality.
3. A system of tradable emissions permits ensures that
a. those who can reduce pollution most cheaply will do so.
b. there will be no pollution.
c. pollution will be at the level where marginal social benefit equals zero.
d. pollution will be at the level where marginal social cost equals zero.
4. In an unregulated market economy, the quantity of pollution will be
a. the level at which the marginal social benefit of pollution is zero.
b. such that the marginal social benefit exceeds the marginal social cost.
c. the socially optimal level.
d. the level at which the marginal social cost of pollution is zero.
5. When an emissions tax is imposed on production of a good, then the price will be __ than it would be in the absence of the tax, and the equilibrium quantity will be __.
a. lower, lower
b. higher, higher
c. higher, lower
d. lower, higher
6. An emissions fee equal to the optimal Pigouvian tax on coal has the effect of __ the externality associated with the burning of coal while ensuring that the marginal benefit of pollution __ the marginal cost of pollution.
a. internalizing, equals
b. lessening, is greater than
c. worsening, equals
d. internalizing, is less than
7. If an emissions tax is imposed but it is less than the optimal Pigouvian tax, then
a. total surplus will be maximized.
b. the marginal social benefit of pollution is greater than the marginal social cost of pollution.
c. the amount of pollution will be less than the socially optimal amount.
d. the marginal social cost of pollution is greater than the marginal social benefit of pollution.
Question 8 [14 pts] The accompanying table shows the total
social benefit from steel production and the total cost to steel
producers of producing steel. Producing a ton of steel imposes a
marginal external cost of $60 per ton.
a. Calculate the marginal social benefit per ton of steel and the marginal (private) cost per ton of steel, and enter these values in the table. Then calculate the marginal social cost per ton of steel and enter the values in the table.
b. What is the market equilibrium quantity of steel production? 4 tons
c. What is the socially optimal quantity of steel production? 2 tons
d. If you wanted to impose a Pigouvian tax to remedy the problem created by the negative externality, how high would the Pigouvian tax need to be per ton of steel? $60/ton
Question 9 [12 pts] The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the town wants to reduce to 200 units. The accompanying table shows the current pollution level produced by each company and each company’s marginal cost of reducing its pollution. The marginal cost is constant.
| Initial Pollution Level | MC of reducing pollution | |
| Company | (units) | (per unit) |
| College Cleaners | 230 | $5 |
| Big Green Cleaners | 120 | $2 |
a. Suppose that Collegetown were to pass an environmental standards law that limits each company to 100 units of pollution. What would be the total cost to the two companies of each reducing its pollution emissions to 100 units? (By total cost, I mean the net cost to College Cleaners plus the net cost to Big Green Cleaners).
130 x $5 + 20 x $2 = $650 + $40 = $690
Suppose instead that Collegetown issues 100 pollution vouchers to each company, each entitling the company to one unit of pollution, and that these vouchers can be traded (bought/sold).
b. How much is each pollution voucher worth to College Cleaners? $5
c. To Big Green Cleaners? $2
d. Who will sell vouchers and who will buy them? Big Green sells, College buys
e. How many vouchers will be traded? 100 vouchers
f. What is the total cost (as defined above) to the two companies of the pollution controls under this voucher system?
120 x $2 + 30 x $5 = $240 + $150 = $390