CEA Environmental and Resource Economics 1

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 negative externality occurs when a market transaction imposes costs on third parties, such as pollution from a factory harming nearby residents who bear health costs.

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

The Coase Theorem holds that if property rights are clearly assigned and bargaining is costless, parties will negotiate to the socially efficient outcome regardless of initial rights allocation.

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

A Pigouvian tax corrects for negative externalities by raising the private cost of production to equal the full social cost, leading producers to internalize the harm they cause.

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

The Tragedy of the Commons describes how individually rational users of a shared resource overexploit it, leading to collective ruin—classic examples include overfishing and groundwater depletion.

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

A cap-and-trade system establishes a binding ceiling on total emissions and lets firms with low abatement costs sell excess permits to firms with high abatement costs, achieving reductions at least cost.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Environmental and Resource Economics 1