Page 783 - Krugmans Economics for AP Text Book_Neat

Module 75 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Some opponents of tradable emissions permits object to them 2. For each of the following cases, explain whether an external
on the grounds that polluters that sell their permits benefit cost or an external benefit is created and identify an
monetarily from their involvement in polluting the appropriate policy response.
environment. Assess this argument. a. Trees planted in urban areas improve air quality and
lower summer temperatures. Section 14 Market Failure and the Role of Government
b. Water-saving toilets reduce the need to pump water from
rivers and aquifers. The cost of a gallon of water to
homeowners is virtually zero.
c. Old computer monitors contain toxic materials that
pollute the environment when improperly disposed of.

Tackle the Test: Multiple-Choice Questions

1. Which of the following policy tools is inefficient even when 4. One example of a source of external benefits is
correctly administered? a. technology spillover.
a. environmental standards b. traffic congestion.
b. emissions taxes c. pollution.
c. tradable emissions permits d. subsidies for polluters.
d. Pigouvian taxes e. taxes on environmental conservation.
e. cap and trade programs
5. Marginal social benefit equals marginal private benefit plus
2. An efficient Pigouvian subsidy for a good is set equal to the a. marginal external benefit.
good’s b. marginal private cost.
a. external cost. c. total external benefit.
b. marginal social benefit. d. total external cost.
c. marginal external cost. e. marginal social cost.
d. marginal external benefit.
e. price at which MSC = MSB.
3. Which of the following is true in the case of a positive
externality?
a. MSC > MSB
b. MPB > MSC
c. MSB > MPB
d. MPB > MSB
e. MSC > MPC

module 75 Exter nalities and Public Policy 741