Question

Q1: Global warming is considered to be an important example of market failure because:

(a) Oil firms act as an oligopoly, coordinating their output and pricing decisions.

(b)The private cost of global warming exceeds the social cost of producing goods.

(c) Consumers desire for publicly owned resources to be transferred to private ownership.

(d) The social cost of global warming exceeds the private cost of producing goods.

Q2: Tradable Pollution Permits (TPP) are used to:

(a) Reduce SO2 emissions by requiring firms to pay a pollution tax.

(b) Encourage firms to reduce SO2 emissions by allowing the sale of excess permits.

(c) Decrease consumption as the producer passes the full cost of the permit onto the consumer.

(d) Impose a tax on SO2 emissions that is paid by the firm and is a source of tax revenues for the federal government.

Q3: Under the European Union's tradable carbon emissions rights scheme, utilities are given a set level of permits to emit carbon dioxide. If a utility wants to pollute more than its allowance it could buy more permits in the market. Under what situation will a utility that wants to pollute more than its allowance not purchase additional permits?

a) if there is an excess demand for permits in the market

b) if it is cheaper to switch from heavy polluting energies to cleaner fuels than to purchase pollution permit

c) if it is cheaper to burn heavy polluting energies than to switch to cleaner fuels

d) if the market price of a permit is so low that it has virtually no resale value

Answer 1

Q1) option D)

A negative externality is defined as a situation when social margibma cost of production exceeds the private marginal cost , & thus private market only considers PMC, hence overproduction happens in negative externality

Q2) option B)

In case of tradable permit system , a fixed number of permits are issued & firms can trade these permits, at a market clearing price of permits.

Q3) option B)

When a firm will not buy a permit, then it implies that price of permit is higher than marginal cost of abatement.

Thus it is relatively cheaper to switch to abate the pollution unit , rather than make payment for buying a permit