Download Economics 111 The Economy and the Environment

Economics 111
The Economy and the Environment
Review Questions
Topic 1
1. The essential feature of the interaction between the economy and the environment is:
A. the economy uses natural capital in a sustainable way
B. a balanced economy has no net impact on the environment
C. economic growth continually depletes natural capital but the benefits outweigh the costs
D. the economy reconfigures natural capital to produce economic services
2. Transboundary environmental impacts arise when
A. international trade causes a separation of production and consumption
B. economic activity crosses the boundary between being environmentally neutral and
environmentally damaging
C. an activity in one country causes an impact in another country
D. pollution affects both air and water quality
3. Rapid trade liberalization can cause significant environmental impacts because
A. the natural system has less time to adapt to changes in economic activity
B. there is a jurisdictional separation between causes and effects
C. environmental policy may not respond quickly enough
D. all of the above
4. Environmental impact tolerance tends to be higher in developing countries because
A. these countries are typically located in warmer climates where pollution breaks down more
quickly
B. cultural and spiritual factors mean that the environment tends to be more highly valued in
these countries
C. these countries are typically poorer than industrialized countries
D. these countries rely heavily on agriculture which has fewer environmental impacts than heavy
industry
5. “Assimilative capacity” refers to
A. the capacity of the economy to assimilate new technologies
B. the rate at which material can be recycled through the natural system without perturbing that
system
C. the rate at which the economy can grow without causing environmental impacts
D. the capacity of the atmosphere to absorb carbon dioxide
6. The natural system is best viewed as
A. a perfectly balanced system in which human interference should be minimized
B. a web of interconnected dynamic processes that exhibit short run cycles that may or may not
be stable over time
C. that part of the overall economic system which provides natural resources
D. an evolving set of biological and physical processes tending towards a steady state
7. Environmental regulations should be equally strict across all countries because
A. most environmental impacts are transboundary
B. developing countries will otherwise make the same mistakes that richer countries have made
in terms of environmental impacts
C. weaker regulations provide an unfair trading advantage
D. none of the above
8. The only primary energy sources are
A. gravitational and nuclear
B. nuclear fission and nuclear fusion
C. solar and nuclear
D. nuclear and electromagnetic
9. The economy cannot grow indefinitely because
A. knowledge capital cannot grow fast enough to substitute for natural capital
B. assimilative capacity is finite
C. natural capital is limited
D. none of the above
10. The environment is linked to international trade and investment because
A. the pattern of trade affects production and consumption patterns within countries
B. environmental policy reduces trade flows
C. trade causes transboundary environmental impacts
D. all of the above
11. Trade can cause a “race to the bottom” in environmental policy because
A. strict environmental policy can erode international competitiveness
B. protectionist trade policies can be disguised as environmental policy
C. environmental policy can be used to create a technological leadership advantage over trading
partners
D. all of the above
12. In economics the essential benchmark by which environmental impacts are judged is:
A. do they cause harm to humans?
B. do they disrupt the balance of the natural system?
C. are they greater than naturally occurring impacts?
D. do they reduce the value of economic output?
13. An externality arises from an economic activity when
A. there is incomplete information about environmental impacts
B. the activity causes damage to the natural system
C. the activity is unnatural
D. the activity has impacts that are not felt by the person who undertakes the activity
14. Continual growth in consumption may be possible despite finite assimilative capacity because
A. knowledge can often be substituted for natural capital
B. technological progress will eliminate the constraints on assimilative capacity
C. trade allows an economy to grow without the use of additional resources
D. all of the above
15. Trade can cause a “race to the bottom” in environmental policy because
A. protectionist trade policies can be disguised as environmental policy
B. environmental policy can be used to create a technological leadership advantage over trading
partners
C. strict environmental policy can erode international competitiveness
D. all of the above
16. An externality arises from an economic activity when
A. production and consumption are separated geographically by trade
B. the activity occurs outside the domestic economy
C. there is a cost imposed or a benefit bestowed on a person other than the person who
undertakes the activity
D. the activity causes an environmental impact
Answer Key and Text Page References
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D
C
D
C
B
B
D
A
D
A
A
A
D
A
C
C
1-4
1-8
1-9
1-12
1-6
1-1
1-13
1-6
1-6
1-9
1-10
1-3
1-5
1-6
1-10
1-5
Topic 2
1. The irreversibility and uncertainty associated with many environmental impacts means that
A. no action should be taken unless its environmental impacts are fully understood
B. the costs and benefits of an action cannot be calculated
C. risk is a key factor in decision-making
D. all of the above
2. A key requirement for long run sustainable growth is
A. investment in manufactured capital
B. investment in knowledge
C. reduced consumption
D. substitution of secondary production for primary production
3. “By-catch” refers to
A. the bifurcated capture of carbon dioxide at the emissions source
B. unintended habitat changes associated with forestry
C. the unintended capture of marine species in a fishery
D. the unintended capture of oxygen during geosequestration of carbon dioxide
4. Economic capital comprises four types of capital. They are: natural capital; knowledge capital; social
capital; and
A. financial capital
B. private capital
C. manufactured capital
D. human capital
5. “Primary production” refers to
A. activities like agriculture, fishing and mining
B. the production of essential items like food and shelter
C. the first of the three key stages in the economic growth of a country over time
D. the production of the most highly valued goods in the economy
6. Forestry can cause a loss of biological diversity through
A. the loss of old growth forest
B. the replacement of diverse stands with a single species
C. the silting of streams
D. all of the above
7. A non-uniformly mixed pollutant is
A. one that builds up in the environment over time
B. one whose damaging effect is relatively short-lived
C. one that tends to pool in areas of relatively high concentration
D. one that does not mix with air or water
8. The environmental effects of consumption are
A. often separated from production due to trade
B. always better addressed at the production stage
C. usually less severe than impacts associated with production
D. usually caused by incomplete consumer information
9. “Social capital” refers to
A. capital that is shared across all societies
B. laws and institutions
C. government-owned financial assets like foreign stocks and bonds
D. public infrastructure like roads and railways
10. “Secondary production” refers to
A. the production of less valued goods in the economy
B. recycling of material from primary goods
C. manufacturing processes
D. the second of the three key stages in the economic growth of a country over time
11. Consumption will continue to grow without bound because
A. consumption does not require the use of natural capital
B. knowledge growth will offset reduced natural capital
C. trade allows a separation of consumption and production
D. none of the above
12. Biological oxygen demand is an environmental impact associated with
A. carbon dioxide emissions
B. organic material in wastewater
C. nitrogen-rich fertilizer
D. depletion of atmospheric oxygen
13. A dissipative pollutant is
A. one that builds up in the environment over time
B. one whose damaging effect is relatively minor
C. one that becomes dispersed uniformly over the receptive area
D. none of the above
Answer Key and Text Page References
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C
B
C
C
A
D
C
A
B
C
D
B
D
2-11
2-4
2-6
2-2
2-3
2-6
2-8
2-10
2-3
2-3
2-4
2-6
2-8
Topic 3
1. Nuclear fission converts mass into energy by
A. combusting the nuclei of uranium
B. compressing the nuclei of two lightweight atoms into a heavier one
C. splitting water into hydrogen and oxygen
D. splitting the nuclei of a heavy element into lighter ones
2. Climate change could lead to cooling in western Europe because
A. increased winds will bring Arctic air further south
B. changes in ocean salinity will affect ocean currents
C. methane could be released from melting Arctic permafrost
D. none of the above
3. Ethanol is produced from
A. oil
B. coal
C. biomass
D. natural gas
4. Mercury contamination of snow in the Rocky Mountains could be due to coal-burning power stations in
China.
A. Yes
B. No
5. A reduction in carbon dioxide emissions from fossil fuel combustion will not yield an immediate slowing
of climate change because
A. climate change is due to the stock of atmospheric carbon dioxide and acts with a lag
B. an offsetting flow of carbon dioxide will be released from the oceans
C. ongoing deforestation will offset the reduction in emissions
D. all of the above
6. The “energy system” refers to
A. how energy from the sun is transferred through the natural system
B. how the economy acquires and uses energy
C. the generation, transmission and distribution of electricity
D. the conversion of nuclear energy into solar energy
7. “Geosequestration” refers to
A. the release of carbon dioxide from melting Arctic permafrost
B. the capture of carbon dioxide in underground cavities
C. the absorption of heat by the surface of the earth
D. the impact of the earth’s rotation on ocean currents
8. The melting of sea ice is a lesser problem with respect to climate change than the melting of the ice
sheets that cover Greenland and Antarctica because
A. the melting sea ice will cause the oceans to cool
B. sea ice reflects less heat then ice sheets
C. sea ice displaces sea water
D. sea ice covers a smaller area than the ice sheets
9. Hydrogen fuel cells are a clean source of energy.
A. True
B. False
10. Energy intensity of economic activity measures
A. the ratio of domestic product to energy use
B. the ratio of energy use to domestic product
C. the difference between domestic product and energy use
D. none of the above
11. The adverse impacts of climate change are likely to be borne most heavily by
A. rich countries because they have more to lose
B. rich countries because they emit most of the carbon dioxide
C. poor countries because they rely more heavily on agriculture
D. poor countries because they have fewer forests to absorb carbon dioxide
12. The energy released from fossil fuel combustion originates from
A. the kinetic energy of atmospheric oxygen
B. photosynthesis
C. heat trapped beneath the surface of the earth
D. gravitational force
13. Sulfur dioxide emissions are
A. responsible for acidification of lakes and streams
B. a source of global warming
C. primarily due to the combustion of wood
D. a catalyst in the formation of tropospheric ozone
14. Some of the worst case scenarios associated with climate change involve possible self-reinforcing
feedback loops related to
A. increased albedo as ice coverage is reduced
B. increased carbon dioxide uptake by the oceans
C. methane release from melting Arctic permafrost
D. all of the above
Answer Key and Text Page References
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D
B
C
A
A
B
B
C
B
B
C
B
A
C
3-2
3-11
3-3
3-5
3-8
3-1
3-14
3-11
3-4
3-13
3-12
3-3
3-6
3-12
Topic 4
1. “Foreign investment” refers to
A. the augmentation of foreign economic capital with resources from the domestic country
B. the augmentation of domestic economic capital from foreign countries
C. investment in forms of economic capital currently absent from the domestic country
D. the purchase of foreign currency by the domestic government
2. Knowledge spillovers can constitute a barrier to the international transfer of knowledge
because
A. the owners of proprietary knowledge cannot limit the transfer of that knowledge to the
legitimate buyer
B. some of the knowledge is lost as a consequence of the spillover
C. rich countries wish to keep knowledge to themselves
D. access to education and the associated absorption of knowledge is limited in developing
countries
3. The direct link between natural capital utilization and environmental impact that holds at the
global environment level need not hold at the level of individual country environments
because
A. environmental impact tolerance is higher is some countries than in others
B. trade leads to a geographical separation between production and consumption
C. some countries have better production technologies than others
D. natural capital cannot be traded
4. “Economies of scale”
A. means that unit production costs fall as the level of production increases
B. derive from the existence of fixed costs, including expenditures on research and development,
and from the physical characteristics of production processes
C. derive from learning-by-doing
D. all of the above
5. Economies of scale and scope
A. can lead to imperfect competition in production
B. can lead to the domination of global markets by large multinational corporations
C. can acts as barriers to entry
D. all of the above
6. The benefits of trade stem from
A. the direct exchange of economic capital
B. specialization in production
C. the exploitation of economies of scale and scope
D. all of the above
7. Trade allows the exploitation of economies of scale and scope because
A. large global firms are more able to produce at volumes where unit costs are lower
B. trade makes countries wealthier
C. consumers have greater access to goods and services
D. trade rules protect intellectual property rights and thereby encourage investment
8. Figures 4-1 and 4-2 represent the production possibility frontiers for two countries, A and B
respectively. Which of the following statements is true?
A. Country A has a comparative advantage in the production of good 1.
B. Country A has a comparative advantage in the production of good 2.
C. Country B does not have a comparative advantage in the production of good 1.
D. Country A has a comparative advantage in the production both goods.
9. “International investment” refers to
A. the flow of economic capital between countries
B. the flow of goods and services between countries
C. the accumulation of economic capital owned by foreign companies
D. all of the above
10. “Reverse engineering”
A. refers to the process of dismantling imported equipment in order to learn how it works and
how it is built
B. constitutes an incidental transfer of knowledge
C. is an example of a knowledge spillover associated with the transfer of physical equipment
D. all of the above
11. “Exports and imports” refer to
A. the flow of economic capital between countries
B. the outputs and inputs in productive processes
C. the transfer of goods and services between countries
D. flows of foreign currencies across countries
12. Much of the existing heterogeneity across countries ultimately derives from
A. heterogeneity in the intelligence levels across races
B. heterogeneity in natural capital endowments
C. cultural differences across countries
D. different levels of social capital across countries
13. “Economies of scope”
A. means that the unit production cost of one product is lower if another product is produced in
conjunction with it
B. derive from the existence of fixed costs, including expenditures on research and development,
and from the physical characteristics of production processes
C. derive from learning-by-doing
D. all of the above
14. Economies of scale and scope are important for trade because
A. they lead to perfect competition in production
B. they reduce barriers to entry
C. they amplify and maintain cross-country divergences in the historical evolution of economic
capital
D. all of the above
15. The benefits of trade stem from
A. the direct exchange of economic capital
B. the exploitation of economies of scale and scope
C. competitive pressure
D. all of the above
16. When the direct exchange of economic capital is prohibitively costly,
A. trade cannot occur
B. counties can effectively share their economic capital through the exchange of produced goods
C. policies should be put in place to reduce those costs
D. none of the above
17. A “natural monopoly” exists when
A. a single firm has control over natural resources
B. unit production costs are lowest if all production is undertaken by a single firm
C. a small number of large firms control an entire market
D. one country controls the writing of trade rules
18. Creating the right incentives for firms to undertake research and development
A. requires some degree of industry concentration to allow the absorption of associated fixed
costs
B. requires competition to prevent firms from stagnating
C. both A and B
D. none of the above
19. Figures 4-3 and 4-4 represent the production possibility frontiers for two countries, A and B
respectively. Which of the following statements is true?
A. Country A has a comparative advantage in the production of good 1
B. Country A has a comparative advantage in the production of good 2
C. Country B does not have a comparative advantage in the production of good 2
D. Country A has a comparative advantage in the production both goods
Answer Key and Text Page References
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B
A
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A
4-2
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4A-1
4-1
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4-5
4-6
4-6
4-6
4-7
4A-1
Topic 5
1. The scale effect of trade arises because
A. trade leads to an increased demand for environmental quality
B. trade leads to a change in the composition of production
C. trade leads to a geographical separation of production and consumption
D. trade leads to in increase in the level of production
2. The technique effect of trade can lead to improved environmental quality because
A. it reinforces the scale effect of trade
B. it can offset the scale effect of trade
C. it leads to a decline in the level of production
D. it causes an increase in the demand for environmental quality
3. Trade-induced market pressure on firms to adopt cleaner technologies is limited by
A. consumption externalities even among green consumers
B. imperfect consumer information
C. the geographical separation of production and consumption
D. all of the above
4. The composition effect of trade means that
A. countries with a comparative advantage in natural-capital intensive production experience a
relative increase in environmental quality
B. countries with a comparative advantage in natural-capital intensive production experience a
relative decline in environmental quality
C. all countries experience a relative decline in environmental quality
D. all countries experience a relative increase in environmental quality
5. All other things equal, the scale effect on environmental quality is
A. positive
B. negative
C. negative for some countries and positive for others
D. neutral
6. The technique effect of trade derives from
A. a trade-induced increase in demand for environmental quality
B. the importation of new technologies
C. the exploitation of scale economies in production
D. trade-induced changes in the composition of production
7. If policy is not forward looking then the technique effect of trade may be diluted because
A. some environmental damage may be irreversible
B. the trade-induced increase in the scale of production is immediate
C. short-term electoral horizons are often incompatible with long term planning
D. all of the above
8. The composition effect of trade is due to
A. a trade-induced increase in the level of production
B. a trade-induced increase in the level of consumption
C. the adoption of cleaner production techniques
D. trade-induced shifts in production patterns within countries
Answer Key and Text Page References
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D
B
D
B
B
A
A
D
5-1
5-3
5-4
5-6
5-1
5-2
5-5
5-5
Topic 6
1. Structural adjustment in response to trade liberalization can mean that some industries and
firms contract even though the sectors of which they are part expand, and that some firms and
industries expand even though the sectors of which they are part contract.
A. True
B. False
2. “Welfare-enhancing” trade liberalization means that
A. all members of the society benefit
B. the winners compensate the losers and are still benefit off
C. the winners could in principle compensate the losers and still be better off
D. none of the above
3. Economic theory states that
A. society as a whole is better off when some of its members gain and others lose if and only if
those who gain were initially worse off than those who lose
B. society as a whole is better if the winners could in principle compensate the losers and still be
better off
C. society as a whole is better off after a potential Pareto improvement
D. none of the above
4. There is a strict trade-off between equality of economic outcomes and the creation of wealth
because
A. people need incentives to undertake effort and risk
B. the inequality of outcomes reflects inequality of opportunities
C. the environment could not support a society in which everyone was as wealthy as the very
rich
D. none of the above
5. A key principle for managing structural adjustment is
A. industrial concentration should be prevented
B. declining industries should be supported by government tax breaks
C. mitigation should be incentive-based
D. trade liberalization should be phased in quickly so as to create a stable investment climate
6. A key principle for managing structural adjustment is
A. some degree of domestic industrial concentration should be allowed
B. declining industries should be supported by government tax breaks
C. trade liberalization should be phased in over time but without any particular timetable
D. all of the above
7. Intra-sectoral adjustment refers to
A. adjustment across the industries and firms within a sector as a consequence of specialization
B. adjustment across the industries and firms within a sector as a consequence of the
exploitation of economies of scale and scope
C. the expansion or decline of different sectors of the economy as a consequence of
specialization
D. the expansion or decline of different sectors of the economy as a consequence of the
exploitation of economies of scale and scope
8. Beneficiaries from trade liberalization include
A. shareholders in industries that contract
B. workers in industries that contract
C. consumers
D. all of the above
9. The groups worst affected by trade liberalization are
A. diversified shareholders in industries that fall into relative decline
B. workers whose skills are highly specific to industries that fall into relative decline
C. consumers of goods produced by industries that fall into relative decline
D. consumers of goods produced by industries that undergo relative expansion
10. Some inequality of economic outcomes is essential for the creation of wealth because
A. some people are more deserving than others
B. people need incentives to undertake effort and risk
C. inequality of outcomes reflects inequality of opportunities
D. the environment could not support a society in which everyone is as wealthy as the wealthiest
people today
Answer Key and Text Page References
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A
C
D
D
C
A
B
C
B
B
6-2
6-3
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6-5
6-2
6-3
6-4
6-4
Topic 7
1. The primary determinant of individual welfare in the rural economy is
A. the productivity of network effects
B. fertility choices
C. migration choices
D. the per capita agricultural land base
2. The productivity of manufacturing and services in the urban economy is determined largely by
A. network effects
B. the agricultural land base
C. fertility choices
D. none of the above
3. A network effect arises
A. when the productivity of a technology rises with the number of people using that technology
B. whenever a new technology is introduced into an economy
C. when a technology exhibits economies of scale
D. when employers hire friends and family members
4. Manufacturing and service sectors typically locate in cities because
A. land is more expensive in rural areas
B. rural workers are poorly educated
C. the productivity of business networks relies to a large degree on people being within close
proximity of each other
D. all of the above
5. Economies of scale and scope in the provision of public amenities and infrastructure are more
easily exploited in cities than in rural areas because
A. construction costs are lower in cities
B. network effects bring people together in cities
C. governments are usually located in cities
D. land is more expensive in rural areas
6. Cities are often the engines of their own growth because
A. there is less environmental damage associated with growth in cities
B. cities tend to spread out as they become more crowded
C. government subsidies tend to favour cities over rural areas
D. economies of scale and scope enable the provision of more public infrastructure in cities
which in turn enhances the productivity of industry and draws more people to those cities
7. There are limits to the productive growth of cities because
A. economies of scale and scope in the provision of infrastructure eventually become exhausted
B. there are eventual diminishing returns to network size
C. the environmental resources of the city region are finite
D. all of the above
8. Equilibrium in an economic system arises when
A. individual actions lead to an outcome in which no individual has an incentive to change their
action
B. individual actions lead to an outcome which is Pareto efficient
C. social welfare is maximized
D. all of the above
9. Migration between urban and rural areas continues until
A. environmental quality in the urban area begins to decline
B. the level of welfare for an individual of given private wealth is more-or-less equated in the
two regions
C. the productivity of the agricultural land base begins to rise
D. economies of scale and scope in the provision of infrastructure is exhausted
10. The equilibrium between rural and urban areas can be disrupted by
A. trade liberalization
B. war
C. absolute population growth
D. all of the above
11. Trade liberalization has induced a rural-to-urban migration in many developing countries
because
A. production patterns in those countries have shifted towards agriculture
B. trade usually takes place in cities
C. trade has boosted the productivity of the urban industrial network
D. all of the above
12. Equilibrium is re-established after trade-induced rural-to-urban migration through
A. reduced relative environmental quality in the urban region due to the increased scale of
economic activity
B. enhanced per-capita productivity in the rural region
C. diminishing returns to labor in the urban industries
D. all of the above
13. Environmental quality in urban areas is necessarily lower after trade liberalization because
A. there is trade-induced migration from rural to urban areas
B. there is an increase in the scale of production in urban areas
C. equilibrium must be re-established between rural and urban areas
D. none of the above
14. Trade-induced rural-to-urban migration may not cause a decline in the absolute level of
environmental quality in urban regions because
A. economies of scale and scope enable the provision of more public infrastructure in urban
areas
B. the technique effect of trade may offset the scale effect of urban growth
C. cities tend to spread out as they become more crowded
D. there are eventual diminishing returns to network size in urban areas
15. The basic principle of environmental policy design is
A. to implement a resource allocation target as a corrected equilibrium through the application of
policy instruments to change private incentives
B. to minimize environmental damage by prohibiting activities that cause pollution
C. to ensure that environmental regulations do not undermine international competitiveness
D. to change preferences so that individuals choose less damaging consumption behaviour
16. Good policy design requires the identification of the private choices that determine
equilibrium outcomes because
A. equilibrium outcomes are typically Pareto efficient
B. policy should not interfere with private choices
C. this guides the targeting of policy instruments
D. none of the above
17. The key private choices relating to urbanization and the environment include
A. production and consumption choices
B. fertility choices
C. migration choices
D. all of the above
18. Externalities can arise from private fertility choices because
A. children make consumption decisions as adults that often have external costs
B. children become young workers and so provide productive trading opportunities for those too
old to produce for themselves
C. there exist various child-related subsidies and publicly funded child health and education
programs
D. all of the above
19. The net environmental externality associated with migration to urban areas could be positive
or negative because
A. the consumption activities of a new settler in the urban area could be good or bad for the
environment
B. there is an increased unpriced environmental impact in the new location but a reduced
unpriced environmental impact in the old location
C. environmental damage is typically convex
D. all of the above
20. Economies of scale in the provision of public infrastructure and amenities can lead to
A. an externality associated with migration choices
B. higher average costs of provision in rural areas when people migrate to urban areas
C. lower average costs of provision in urban areas when people migrate to urban areas
D. all of the above
21. Key principles that should guide policy with respect to urbanization include:
A. policy should not attempt to internalize externalities except when policy instruments are
unable to target the source of the problem
B. policy should attempt to prevent migration from rural to urban areas
C. policy instruments should target the source of the problem whenever possible
D. all of the above
Answer Key and Text Page References
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D
A
A
C
B
D
D
A
B
D
C
D
D
B
A
C
D
D
B
D
C
7-2
7-3
7-3
7-3
7-3
7-3
7-4
7-4
7-4
7-5
7-5
7-5
7-6
7-6
7-8
7-8
7-9
7-10
7-11
7-11
7-12
Topic 8
1. “Industry concentration”
A. means that there are a small number of large firms in the industry
B. can lead to imperfect competition in the industry
C. can lead to economic rent for the firms in the industry
D. all of the above
2. “Economic rent” refers to
A. a return on investment higher than is needed to make that investment worthwhile
B. a payment made to access a patented technology
C. the difference between profit and cost
D. none of the above
3. Economies of scale and scope can lead to industry concentration because
A. larger firms tend to be less innovative than small firms
B. small firms cannot achieve the low production costs achieved by larger firms and are
therefore unable to survive in the industry
C. large firms have greater lobbying power over policy makers
D. smaller firms can operate on a smaller scale than large firms
4. Globalization-induced concentration
A. leads to lower prices due to imperfect competition
B. leads to higher production costs by creating barriers to entry
C. leads to lower production costs through the exploitation of economies of scale
D. leads to greater environmental damage because large firms are more polluting than small
firms
5. Imperfect competition on global markets means that a unilateral tightening of environmental
standards by one country
A. raises environmental quality in that country but can lead to a loss of economic rent
B. has an ambiguous effect on environmental quality in that country because production levels
rise thereby causing an offsetting scale effect
C. raises welfare in that country because environmental quality rises
D. can actually reduce environmental in that country due to a loss of economic rent
6. An erosion of international competitiveness leads to a loss of economic rent because
A. existing domestic producers lose market share
B. domestic producers have an incentive to relocate to jurisdictions that have lower costs
C. it discourages foreign investment inflow and enhances the attractiveness for domestic firms
of investing abroad
D. all of the above
7. The relocation of domestic firms to jurisdictions that have lower costs
A. is the most important impact of reduced international competitiveness
B. is limited in reality by the adjustment costs associated with relocation
C. has nothing to do with tight environmental standards
D. improves domestic welfare because it removes polluting production from the domestic
country
8. The generally negative relationship between environmental standards and international
competitiveness could be weakened by
A. the productivity costs of poor environmental quality
B. the promotion of technological change
C. environmental protectionism
D. all of the above
9. Lax environmental standards can potentially reduce productivity because
A. it can be difficult to attract highly skilled labour to regions with low environmental quality
B. factors of production may be affected negatively by poor environmental quality
C. environmental damage can lead to conflict and political instability
D. all of the above
10. The incentives created by unregulated market forces are unlikely to induce the right level of
technological change because
A. the environmental benefits of technological change are unpriced in an unregulated market
B. capital market imperfections lead to excessive innovation
C. appropriation problems lead to excessive innovation
D. all of the above
11 The “Porter hypothesis” argues that
A. economies of scale lead to industry concentration and imperfect competition
B. strict environmental standards can enhance competitiveness through the promotion of
“technological leadership”
C. strict environmental standards erode international competitiveness
D. lax environmental standards reduce the productivity of natural capital
12. The key to fostering appropriate innovative effort to reduce reliance on natural capital is
A. to set strict environmental standards to overcome problems associated with imperfect capital
markets and insecure intellectual property rights
B. to reduce government interference in markets
C. to correctly price environmental damage
D. to eliminate patents that restrict access to new technologies
13. The imposition of strict environmental standards for imported goods
A. can give a competitive edge to domestic producers who compete with those imports
B. constitutes a disguised form of protection because it cannot be justified on environmental
grounds
C. is justifiable only if the production of those imported goods causes transboundary pollution
D. none of the above
14. Some people have suggested that exports from countries which do not reduce their
greenhouse gas emissions should be subject to tariffs. This suggestion
A. has no merit because it constitutes environmental protectionism
B. has no merit because domestic environmental standards should not be subject to interference
by other countries
C. is inconsistent with existing rules under the World Trade Organization
D. all of the above
15. Psychic costs associated with environmental damage in another country
A. are not a true economic cost and cannot justify the use of import restrictions
B. are not a true economic cost but are nonetheless recognized under existing World Trade
Organization rules
C. are a genuine economic cost but are difficult to measure objectively
D. are a genuine economic cost but are generally not substantial enough to justify import
restrictions
16. Product certification and eco-labeling schemes have the potential to be used as protectionist
measures
A. because they usually provide misleading information
B. because “green consumers” usually prefer domestically-made products
C. if the standards for certification or qualification for eco-labeling are uniform across the world
D. if the standards for certification or qualification for eco-labeling are not uniform across the
world
17. A “race to the bottom” in setting environmental standards
A. has no effect on welfare because all countries end up in the same place
B. can leave all countries worse off than if they cooperated on the adoption of stricter standards
C. can leave all countries worse off than if they cooperated on the adoption of weaker standards
D. reduces environmental quality but gives all countries a competitive edge over their trading
partners
18. Trade liberalization agreements should include side agreements
A. that require uniform environmental standards across participating countries
B. that require developing countries to raise their environmental standards
C. that prohibit the use of trade restrictions based on environmental grounds
D. none of the above
19. Trade liberalization agreements alone may not necessarily lead to greater welfare because
A. they expose domestic industries to foreign competition
B. they can lead to higher overall levels of consumption
C. trade is bad for the environment
D. they do not eliminate the incentive for individual countries to attempt to capture a larger share
of global rents by distorting non-trade policies
Answer Key and Text Page References
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2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
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D
A
B
C
A
D
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D
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B
C
A
C
C
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D
D
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Topic 9
1. The external cost associated with transboundary pollution typically leads to an outcome in which
A. environmental standards are set too high from a global perspective
B. environmental standards are set too low from a global perspective
C. there is too much trade
D. none of the above
2. The distortion of environmental policy for trade-related reasons can be magnified by transboundary
pollution because
A. the trade-related distortion can give rise to a higher level of pollution in each country and a higher
associated flow of transboundary pollution
B. the transboundary nature of the pollution means that the environmental cost to any individual country
from relaxing its standards for rent-seeking goals is higher than it would be if the entire effects of its
pollution were felt within its borders
C. trade flows are generally higher when environmental policy is distorted
D. all of the above
3. The interaction of transboundary pollution and trade-related distortions in environmental policy is
particularly problematic in the case of climate change because
A. energy costs are a key determinant of international competitiveness
B. energy use is a key contributor to greenhouse gas emissions
C. cooperative solutions can be difficult to achieve among countries with widely different levels of wealth
D. all of the above
4. Cooperation can be difficult to achieve among countries with widely different levels of wealth because
A. poor countries are too demanding in the negotiations
B. rich countries have most of the votes in the United Nations
C. achieving global efficiency is likely to require wealth transfers
D. poor countries typically do not care about the environment
5. Greenhouse gas emissions are higher in developed countries than in developing countries because
A. developing countries use better technologies
B. people in developed countries are less concerned about climate change
C. the scale of production is higher in developed countries
D. developing countries are less dependent on trade than developed countries
6. The best cooperative solution to the climate change problem is
A. for developed countries to force developing countries to reduce emissions
B. to base relative abatement requirements on relative abatement costs
C. to base relative abatement requirements on relative climate change damage costs
D. for the relative burden of pollution abatement to be placed more heavily on developed countries since
they are primarily responsible for the existing stock of carbon in the atmosphere
7. Side payments from developed countries to developing countries are likely to be a necessary part of an
efficient cooperative solution to the climate change problem because
A. efficiency calls for relatively more abatement in developing countries
B. developed countries are primarily responsible for the existing stock of carbon in the atmosphere
C. developing countries have been subject a long history of injustices at the hands of developed countries
D. developing countries are deserving of charity because of their relative poverty
8. A “first-best” cooperative agreement on transboundary pollution problems is likely to involve
technology transfers because
A. knowledge is a public factor
B. sharing is the hallmark of a just society
C. technology is commonly transferred from developed countries to developing countries via industrial
espionage
D. none of the above
9. The key obstacle to technology transfers in practice is
A. the poor quality of education in developing countries
B. industrial espionage and copyright violations
C. the need to create incentives for knowledge creation through patents
D. the existence of cultural barriers between countries
Answer Key and Text Page References
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2.
3.
4.
5.
6.
7.
8.
9.
B
A
D
C
C
B
A
A
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9-4
9-5
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Topic 10
1. In the “regulated market paradigm”,
A. the allocation of resources is determined principally by a central planning authority
B. a regulator specifies what individual firms can and cannot do, enforced by the threat of
penalties for non-compliance
C. resource flows are determined principally by decentralized market forces shaped by
regulation
D. government does not interfere with the allocation of resources by markets
2. In the “regulated market paradigm”, the policy design problem involves
A. implementing a resource allocation target as a corrected market equilibrium
B. applying policy instruments to change the incentives of the economic agents
C. ascertaining behavioural responses to policy instruments to inform the setting of instrument
values
D. all of the above
3. An allocation is efficient if
A. it is not possible to switch to an alternative allocation in which at least one person is better
and no individual is worse off
B. everyone is equally well off
C. the distribution of wealth is equal across all people
D. none of the above
4. Economic efficiency relates only to those people currently alive.
A. True
B. False
5. Economic efficiency is a compelling criterion for policy design because it allows the
identification of a unique optimal resource allocation.
A. True
B. False
6. Sustainable development is the only resource allocation target which incorporates economic
efficiency and a distributional element.
A. True
B. False
7. The choice of regulatory regime in the policy design problem
A. is properly characterized as a binary choice between command and control regulation and
economic instruments
B. should be viewed as choosing a mix of policy types that may change over time
C. must be made before the resource allocation target is set
D. should focus exclusively on economic instruments because of their superior efficiency
properties relative to other policies
8. The choice over the particular tax to apply to gasoline – for example, 5 cents per litre or 10
cents per litre – is a choice over
A. regulatory regime
B. regulatory paradigm
C. instrument value
D. none of the above
9. The two main types of command and control regulation are
A. performance standards and design standards
B. emission standards and emission fees
C. emission fees and tradeable emission permits
D. emission standards and intensity standards
10. Emission standards are typically the best type of performance standard because
A. they give firms less flexibility
B. they are not subject to the possibility of perverse effects with respect to emission levels
C. they are the easiest to monitor
D. all of the above
11. An important shortcoming of emissions-per-unit-output standards is
A. they do not target the source of the damage
B. they generally do not allow the achievement of an emissions target at least-cost
C. they can potentially lead to higher levels of emissions than without regulation
D. all of the above
12. The use of catalytic converters on cars is an example of
A. an output standard
B. an emissions standard
C. a design standard
D. a “second-best” performance standard
13. Design standards are better than “end-of-pipe” regulations because
A. they prevent pollution at the source
B. they are generally less costly to implement
C. the adoption of cleaner technologies holds the key to sustainable development
D. none of the above
14. Adoption of a cleaner technology should be undertaken
A. whenever it is available
B. only if it reduces the cost of pollution abatement
C. whenever its use is easier to monitor than emission standards
D. none of the above
15. An important problem with command and control regulation is that
A. setting cost-effective non-uniform standards requires more information than the regulator
usually has access to
B. fines must be set too high to ensure compliance
C. there is too much incentive for firms to adopt new technologies just to avoid the regulations
D. they tend to be too strict
16. A policy with cost-effective emission standards typically needs to assign different standards
for different pollution sources because
A. some sources are easier to monitor than others
B. abatement costs differ across sources
C. some sources are better suited to intensity standards
D. all of the above
17. The key feature of economic instruments for environmental policy is that they
A. help protect the environment without imposing a cost on the economy
B. attach an explicit price to pollution
C. are more acceptable to the business community than command and control regulation
D. do not interfere with market forces in the allocation of resources
18. Economic instruments include
A. emission fees and emission standards
B. design standards and environmental securities
C. emission fees and tradeable emission permits
D. none of the above
19. An emission fee can achieve the equality of marginal abatement costs across different sources
A. because sources coordinate on how best to respond to the emission fee
B. because the regulator can infer marginal abatement costs from how firms respond to the fee
C. only if different sources faces different prices depending on their marginal abatement costs
D. only if all sources face the same fee
20. An abatement subsidy can potentially have a perverse effect on aggregate emissions because
A. it can encourage excessive entry into the polluting industry
B. it reduces the incentive for each firm to reduce emissions
C. it reduces the incentive to adopt a cleaner technology
D. all of the above
21. In an emissions trading scheme,
A. the price of emissions is set by the regulator
B. the price of emissions is determined by the supply and demand for permits
C. trading is only allowed if it reduces the overall level of emissions
D. there is no incentive to adopt a cleaner technology because firms can buy emission permits
instead
22. A key advantage of a tradeable emission permit scheme over an emissions fee is that under a
tradeable emission permit scheme
A. the quantity of emissions is controlled directly by the regulator
B. the regulator can infer information about abatement costs by observing trading activity and
can therefore set the price of permits to achieve the pollution target
C. emissions are more easily monitored
D. all of the above
23. The goal of a deposit-refund system should be
A. to raise government revenue
B. to create the right incentives with respect to the disposal of consumer waste products
C. to divert all recyclable waste from landfills
D. to educate consumers about the environmental impacts of their consumption behaviour
24. An environmental security scheme
A. is like a deposit-refund scheme but where the deposit is only partially refunded
B. is a monitoring program under which potential polluters are prevented from taking
environmental risks
C. creates an incentive for potential polluters to engage in precautionary action
D. none of the above
25. Information disclosure schemes are an effective alternative to economic instruments because
A. they change consumer preferences and thereby reduce damaging consumption behaviour at
its source
B. they do not internalize external costs
C. they do not impose additional costs on consumers
D. none of the above
26. Economic instruments can be a more equitable approach to environmental regulation than
uniform standards because when pollution is priced,
A. environmental damage has a smaller impact on poor households
B. those who cause more environmental damage are required to pay more
C. even wealthy households cannot afford to pollute as much
D. all of the above
27. The best way to foster compliance with environmental regulations when monitoring is costly
is to set a low monitoring probability and a high penalty.
A. True
B. False
28. The key to a well-designed monitoring and enforcement policy with self-reporting is
A. to set a low penalty for self-reported non-compliance and a high penalty for mis-reporting
B. to set a high penalty for both self-reported non-compliance and mis-reporting
C. to set a high actual penalty but a low expected penalty for self-reported non-compliance
D. none of the above
29. The cost-effectiveness property of economic instruments
A. does not hold in a trade context because firms can relocate their polluting production to
another country
B. does not hold in a trade context because imports are not subject to pollution pricing
C. is less important in a trade context because trade-based specialization keeps production costs
low anyway
D. is more important in a trade context because of competitiveness considerations
30. It is generally not a good idea to use economic instruments in a sector where there are
concerns over international competitiveness because economic instruments – like taxes –
raise production costs while command-and-control policies – like emission standards – do
not.
A. True
B. False
31. The “double dividend” associated with taxes on pollution refers to the fact that these taxes
A. reduce pollution and reduce consumption
B. reduce pollution and allow distortionary taxes on labour and savings to be cut
C. reduce pollution today and create incentives for the innovation of cleaner technologies for the
future
D. reduce pollution and reduce production costs by encouraging innovation
Answer Key and Text Page References
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2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
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17.
18.
19.
20.
21.
22.
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26.
27.
28.
29.
30.
31.
C
D
A
B
B
B
B
C
A
B
D
C
D
D
A
B
B
C
D
A
B
A
B
C
D
B
B
A
D
B
B
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GOOD 2
50
20
Figure 4-1: Production Possibility Frontie r for Country A
GOOD 1
GOOD 2
30
60
Figure 4-2: Production Possibility Frontie r for Country B
GOOD 1
GOOD 2
70
100
Figure 4-3: Production Possibility Frontier f or Country A
GOOD 1
GOOD 2
80
30
Figure 4-4: Production Possibility Frontie r for Country B
GOOD 1