CEA Environmental and Resource Economics

Question 1

What is a 'negative externality' in environmental economics?

Accepted Answer

A cost imposed on a third party not involved in the economic transaction

Answer

A tax that reduces production below the socially optimal level

Answer

A market failure caused by asymmetric information

Answer

A subsidy that distorts resource allocation toward polluters

Question 2

The Coase Theorem states that externalities can be resolved efficiently through private negotiation when which condition holds?

Accepted Answer

Property rights are well-defined and transaction costs are negligible

Answer

Government sets the correct Pigouvian tax rate

Answer

The number of affected parties is large enough to form a coalition

Answer

Markets are perfectly competitive with no public goods

Question 3

A Pigouvian tax is designed to address market failures by doing which of the following?

Accepted Answer

Setting a tax equal to the marginal external cost to internalize the externality

Answer

Taxing all output of a polluting industry at a flat rate

Answer

Subsidizing clean alternatives to crowd out dirty production

Answer

Capping total emissions and distributing permits by revenue

Question 4

What is the 'Tragedy of the Commons' as described by Garrett Hardin?

Accepted Answer

Shared resources are overexploited because individual users ignore the cost imposed on others

Answer

Public goods are underprovided because of free-rider behavior

Answer

Common property regimes always lead to market failure

Answer

Governments overregulate common pool resources, reducing efficiency

Question 5

In environmental economics, what does a 'cap-and-trade' system accomplish?

Accepted Answer

Sets a total emissions limit and allows firms to buy and sell emission permits

Answer

Caps the price firms can charge for polluting and trades the surplus to government

Answer

Sets uniform emission standards and taxes firms that exceed the cap

Answer

Allows trading of carbon credits without any aggregate emissions ceiling

Question 6

What distinguishes a 'public good' from a 'common pool resource' in environmental economics?

Accepted Answer

Public goods are non-excludable and non-rival; common pool resources are non-excludable but rival

Answer

Public goods are rival and excludable; common pool resources are neither

Answer

Common pool resources have higher free-rider problems than public goods

Answer

Public goods are always provided by government; common pool resources are privately managed