8

8
Student: ___________________________________________________________________________
1. Illegal roadside dumping resulting from the introduction of waste disposal charges is one example of the
________ of an environmental policy.
A. pollution control cost
B. enforcement cost
C. unintended consequences
D. before/after result
2. Resources devoted to monitoring the behaviour of firms, agencies, and individuals subject to
environmental regulations are called ________.
A. abatement costs
B. enforcement costs
C. private costs
D. environmental costs
3. In the following figure, the social opportunity cost of reducing 40 units of emissions is equal to
________.
A. $100
B. $800
C. $900
D. $1,600
4. Suppose a manufacturing firm that is about to be regulated faces the following actual and potential
production costs: 1) $4,000 before regulation; 2) $4,550 in the future without the regulation; and 3)
$5,200 in the future with the regulation. The true cost of the proposed regulation is ________.
A. $550
B. $1,200
C. $650
D. impossible to determine from the information provided.
$3,240 in the future with the regulation. The before/after cost of the regulation is ________ and the with/
without cost of the regulation is ________.
A. $425; $740
B. $425; $315
C. $740; $315
D. $315; $425
6. A city is evaluating a proposal to build a recycling depot. If a generous citizen is willing to donate land
for the project with a current market value of $800,000, the ________ of the land is ________.
A. social opportunity cost; $0
B. social opportunity cost; unknown
C. private cost to the city; $800,000
D. social opportunity cost; $800,000
7. The social opportunity cost of a new environmental regulation should include the cost of
enforcement.
True False
production costs: 1) $500 before regulation; 2) $630 in the future without the regulation; and 3) $700 in
the future with the regulation. The true cost of the proposed regulation is $200.
True False
9. If a firm goes out of business because an environmental regulation now requires them to incur pollution-
control costs that they were previously getting for free (at society's expense), society will be better off to
have the polluter exit the industry.
True False
10. When evaluating proposals for building a new sewage treatment plant, a cost-benefit analysis does not
have to include the cost of the land if it is to be donated.
True False
11. When environmental regulation of an entire industry results in output adjustments, the social cost of the
regulation can be measured by the changes in consumer and producer surpluses.
True False
12. When supply and demand are linear curves, the incidence of the tax depends on the slopes of the demand
and supply curves.
True False
13. Consider the following illustrative numbers, applying to a manufacturing firm for which a pollution-
control regulation has been proposed:
Determine the before/after costs of the regulation and the with/without costs of the regulation. Which of
these two costs best reflects the true cost of the regulation?
14. A region is considering two sites on which to locate a new wastewater treatment plant.
Site A has been owned by the region for five years and the region initially paid $200,000 for the land.
The current market value of the site is $400,000. Site B is land the region would have to purchase for
$300,000. What is the social opportunity cost of each site? Based on this, which site should they choose?
15. Suppose an industry facing an inverse demand equation equal to P = 120 - 4Q faces a new pollution
control law that shifts its constant marginal cost of production from C1 = 50 to C2 = 68. Compute the
social costs of regulation in this industry.
16. Suppose an industry facing an inverse demand equation equal to P = 250 - 2.5Q faces a new pollution
The following equations represent the inverse supply and demand functions in the market for Good A:
PC = 80 - QD
PP = 14 + QS
where PC and PP are the prices paid by consumers and received by producers respectively. QD and QS are
the quantities demanded and supplied, respectively.
18. Suppose the government imposes a tax of $6 per unit of Good A. What is the incidence of this tax on
consumers and producers?
The following equations represent the inverse supply and demand functions in the market for Good B:
PC = 180 - 2QD
PP = 40 + 2QS
where PC and PP are the prices paid by consumers and received by producers respectively. QD and QS are
the quantities demanded and supplied, respectively.
20. Suppose the government imposes a tax of $8 per unit of Good B. What is the incidence of this tax on
8 Key
1. Illegal roadside dumping resulting from the introduction of waste disposal charges is one example of
the ________ of an environmental policy.
A. pollution control cost
B. enforcement cost
C. unintended consequences
D. before/after result
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 08 #1
Learning Objective: 08-01 Explain how the concept of opportunity cost can apply to environmental regulations.
2. Resources devoted to monitoring the behaviour of firms, agencies, and individuals subject to
environmental regulations are called ________.
A. abatement costs
B. enforcement costs
C. private costs
D. environmental costs
Difficulty: Easy
3. In the following figure, the social opportunity cost of reducing 40 units of emissions is equal to
________.
A. $100
B. $800
C. $900
D. $1,600
Difficulty: Moderate
$5,200 in the future with the regulation. The true cost of the proposed regulation is ________.
A. $550
B. $1,200
C. $650
D. impossible to determine from the information provided.
Difficulty: Easy
Learning Objective: 08-02 Define the with-without principle and how it applies to benefit-cost analysis.
$3,240 in the future with the regulation. The before/after cost of the regulation is ________ and the
with/without cost of the regulation is ________.
A. $425; $740
B. $425; $315
C. $740; $315
D. $315; $425
Difficulty: Easy
6. A city is evaluating a proposal to build a recycling depot. If a generous citizen is willing to
donate land for the project with a current market value of $800,000, the ________ of the land is
________.
A. social opportunity cost; $0
B. social opportunity cost; unknown
C. private cost to the city; $800,000
D. social opportunity cost; $800,000
Learning Objective: 08-03 Distinguish between the private and socail costs of a project and provide an example.
7. The social opportunity cost of a new environmental regulation should include the cost of
enforcement.
TRUE
Difficulty: Easy
production costs: 1) $500 before regulation; 2) $630 in the future without the regulation; and 3) $700
in the future with the regulation. The true cost of the proposed regulation is $200.
FALSE
$200 represents the before/after costs of the regulation while the true cost is better reflected by the
with/without costs of the regulation which in this example would be $70.

Difficulty: Easy
9. If a firm goes out of business because an environmental regulation now requires them to incur
pollution-control costs that they were previously getting for free (at society's expense), society will be
better off to have the polluter exit the industry.
TRUE
10. When evaluating proposals for building a new sewage treatment plant, a cost-benefit analysis does not
have to include the cost of the land if it is to be donated.
FALSE
The analysis should include the opportunity cost related to the value the land would have in its next
best use.

11. When environmental regulation of an entire industry results in output adjustments, the social cost of
the regulation can be measured by the changes in consumer and producer surpluses.
TRUE
Difficulty: Easy
Learning Objective: 08-04 Explain how to measure the social costs of a regulation when industry output adjusts.
12. When supply and demand are linear curves, the incidence of the tax depends on the slopes of the
demand and supply curves.
TRUE
Difficulty: Easy
Learning Objective: 08-05 Define what is meant by the incidence of a policy and provide an illustration graphically of how the share paid by consumers versus
producers is determined.
13. Consider the following illustrative numbers, applying to a manufacturing firm for which a pollution-
control regulation has been proposed:
Determine the before/after costs of the regulation and the with/without costs of the regulation. Which
of these two costs best reflects the true cost of the regulation?
The before/after costs are equal to the costs in the future with the regulation minus the costs before
the regulation: 9,700 - 8,900 = $800. The with/without costs are equal to the costs in the future with
the regulation minus the costs in the future without the regulation: 9,700 - 9,200 = $500. The with/
without costs are a better reflection of the true cost of the regulation because the before/after costs do
not consider the future increases in cost that would happen in the absence of the regulation coming
into effect.
Difficulty: Easy
14. A region is considering two sites on which to locate a new wastewater treatment plant.
Site A has been owned by the region for five years and the region initially paid $200,000 for the land.
The current market value of the site is $400,000. Site B is land the region would have to purchase
for $300,000. What is the social opportunity cost of each site? Based on this, which site should they
choose?
Assuming that both sites give the same benefits in terms of use as a water treatment plant (and all
other uses), site A has a social opportunity cost of $400,000 (what it would sell for today) while site B
has a social opportunity cost of $300,000 (the purchase price today). Based on the opportunity costs of
the two sites, site B should be selected.
15. Suppose an industry facing an inverse demand equation equal to P = 120 - 4Q faces a new pollution
The social cost will be equal to the changes in consumer and producer surplus resulting from the
regulation. Before regulation, the market price will be $50 and output will be equal to 17.5 units.
There is no producer surplus because the marginal cost is constant, but the consumer surplus is equal
to the area of a triangle with height 70 and width 17.5 which is $612.50. After regulation, the market
price will be $68 and the output will be 13 units. Again producer surplus is zero, but the consumer
surplus is the area of triangle with height 52 and width 13 which is $338. The loss in consumer surplus
resulting from the regulation is equal to $274.50 which is equal to the social cost of the pollution
control law.
regulation. Before regulation, the market price will be $25 and output will be equal to 90 units. There
is no producer surplus because the marginal cost is constant, but the consumer surplus is equal to the
area of a triangle with height 225 and width 90 which is $10,125. After regulation, the market price
will be $50 and the output will be 80 units. Again producer surplus is zero, but the consumer surplus
is the area of triangle with height 200 and width 80 which is $8,000. The loss in consumer surplus
resulting from the regulation is equal to $2,125 which is equal to the social cost of the pollution
control law.
regulation. Before regulation, the market price will be $80 and output will be equal to 640 units. There
is no producer surplus because the marginal cost is constant, but the consumer surplus is equal to
the area of a triangle with height 320 and width 640 which is $102,400. After regulation, the market
price will be $100 and the output will be 600 units. Again producer surplus is zero, but the consumer
surplus is the area of triangle with height 300 and width 600 which is $90,000. The loss in consumer
surplus resulting from the regulation is equal to $12,400 which is equal to the social cost of the
pollution control law.
The following equations represent the inverse supply and demand functions in the market for Good A:
PC = 80 - QD
PP = 14 + QS
where PC and PP are the prices paid by consumers and received by producers respectively. QD and QS
are the quantities demanded and supplied, respectively.
Field - Chapter 08
In order to answer this question, we need to determine the changes in consumer and producer surplus
that result from the imposition of the tax. Without the tax, the competitive equilibrium output can be
found by equating demand and supply:
80 - Q = 14 + Q
Q = 66/1.5 = 44
Producers and consumers both pay the same price P = $58. The consumer surplus is equal to the area
of a triangle with height 22 and width 44 which is $484. The producer surplus is equal to the area of
a triangle with height 44 and width 44 which is equal to $968. With the tax, the consumer price will
equal the producer price plus $6. We find the tax equilibrium output by setting PC = PP + 6:
80 - Q = 14 + Q + 6
Q = 60/1.5 = 40
Now consumers pay PC = $60 and producers pay PP = $54 (notice the difference between the two
price levels is equal to the per unit tax). The consumer surplus is now equal to the area of a triangle
with height 20 and width 40 which equals $400. Producer surplus is now equal to the area of a triangle
with height 40 and width 40 which is $800. The tax affects consumers by increasing the price they
pay from $58 to $60 resulting in a loss of consumer surplus of $84. The tax affects producers by
decreasing the price they receive from $58 to $54 resulting in a loss of producer surplus of $168.
80 - Q = 14 + Q
Q = 66/1.5 = 44
of a triangle with height 22 and width 44 which is $484. The producer surplus is equal to the area of
a triangle with height 44 and width 44 which is equal to $968. With the tax, the consumer price will
80 - Q = 14 + Q + 12
Q = 54/1.5 = 36
with height 18 and width 36 which equals $324. Producer surplus is now equal to the area of a triangle
with height 36 and width 36 which is $648. The tax affects consumers by increasing the price they
pay from $58 to $62 resulting in a loss of consumer surplus of $160. The tax affects producers by
decreasing the price they receive from $58 to $50 resulting in a loss of producer surplus of $320.
The following equations represent the inverse supply and demand functions in the market for Good B:
PC = 180 - 2QD
PP = 40 + 2QS
where PC and PP are the prices paid by consumers and received by producers respectively. QD and QS
are the quantities demanded and supplied, respectively.
Field - Chapter 08
20. Suppose the government imposes a tax of $8 per unit of Good B. What is the incidence of this tax on
180 - 2Q = 40 + 2Q
Q = 140/4 = 35
of a triangle with height 70 and width 35 which is $1,225. The producer surplus is equal to the area of
a triangle with height 70 and width 35 which is equal to $1,225. With the tax, the consumer price will
180 - 2Q = 40 + 2Q + 8
Q = 132/4 = 33
with height 66 and width 33 which equals $1,089. Producer surplus is now equal to the area of a
triangle with height 66 and width 33 which is $1,089. The tax affects consumers by increasing the
price they pay from $110 to $114 resulting in a loss of consumer surplus of $136. The tax affects
producers by decreasing the price they receive from $110 to $106 resulting in a loss of producer
surplus of $136.
8 Summary
Category # of Questions
Accessibility: Keyboard Navigation 11
Difficulty: Easy 9
Difficulty: Moderate 11
Field - Chapter 08 22
Learning Objective: 08-01 Explain how the concept of opportunity cost can apply to environmental regulations. 4
Learning Objective: 08-02 Define the with-without principle and how it applies to benefit-cost analysis. 4
Learning Objective: 08-03 Distinguish between the private and socail costs of a project and provide an example. 4
Learning Objective: 08-04 Explain how to measure the social costs of a regulation when industry output adjusts. 4
Learning Objective: 08- 4
05 Define what is meant by the incidence of a policy and provide an illustration graphically of how the share paid by consumers ve
rsus producers is determined.

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