Question 1. The optimal level of pollution is zero, even if it is costly to abat

Question

Question 1. The optimal level of pollution is zero, even if it is costly to abate pollution.

A. True

B. False

Question 2. What is the required condition for Coase bargaining?

A. Small number of affected parties

B. Low costs of bargaining

C. Both A and B are required

Question 3. What is the expected impact of raising a pollution tax?

A. Less pollution abatement

B. The tax increase should have no effect on the market outcome

C. Less pollution

Question 4. Suppose the federal government increases the gasoline tax. What is the expected impact on the retail gasoline market?

A. Higher quantity and lower price

B. Lower quantity and higher price

C. Higher quantity and higher price

D. Lower quantity and lower price

Question 5. The European nations operate a market for greenhouse gas pollution permits, and the supply of permits is allocated to those firms that generate greenhouse gases (e.g., electric power plants). Suppose the market authorities also want to encourage greenhouse gas abatement through other methods, so they issue permits to firms that find other ways to reduce greenhouse gases in the environment (e.g., private forests). What is the expected impact of this increase in the supply of permits on the market equilibrium?

A. Price for pollution permits falls

B. Price for pollution permits rises

C. Price for pollution permits does not change

Explanation / Answer

(1) The statement is True. The optimal level of pollution is zero, even if it is costly to abate pollution.

(2) The correct answer is option (C). The required condition for Coase bargaining are small number of affected parties and low costs of bargaining.

(3) The correct answer is option (A). The expected impact of raising a pollution tax is less pollution abatement.

(4) The correct answer is option (A). The federal government increases the gasoline tax. The expected impact on the retail gasoline market is higher quantity and lower price.

(5) The correct answer is option (B). The expected impact of this increase in the supply of permits on the market equilibrium is that the price of the pollution permits rises

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