Test Questions & Answers Ch13 Incentive-Based Strategies

Chapter 13

Incentive-Based Strategies: Market Trading Systems

Multiple Choice Questions
 

 1. Offset trading is a trading system designed to achieve more efficient pollution control. It can be described as: 
A. a program that issues tradable permits in order to limit aggregate emissions.
B. a program that regulates the base rate at which pollutants are emitted.
C. a program that sets a standard for emission that no firm can exceed.
D. a program that allows new firms to pay existing firms to reduce their emissions below a standard.

Difficulty: Easy

2. Emission rate trading is a trading system designed to achieve more efficient pollution control. It can be described as: 
A. a program that issues tradable permits in order to limit aggregate emissions.
B. a program that regulates the base rate at which pollutants are emitted.
C. a program that sets a standard for emission that no firm can exceed.
D. a program that allows new firms to pay existing firms to reduce their emissions below a standard.

Difficulty: Easy

3. Cap-and-trade is a trading system designed to achieve more efficient pollution control. It can be described as: 
A. a program that issues tradable permits in order to limit aggregate emissions.
B. a program that regulates the base rate at which pollutants are emitted.
C. a program that sets a standard for emission that no firm can exceed.
D. a program that allows new firms to pay existing firms to reduce their emissions below a standard.

Difficulty: Easy

4. A polluter will ________ its emissions and sell its excess permits on the market if the market price of permits is ________ its MAC at its chosen emission level. 
A. reduce; less than
B. reduce; greater than
C. increase; less than
D. increase; greater than

 
Difficulty: Easy

 

5. In a cap-and-trade program, permits flow from polluters with relatively ________ abatement cost curves to polluters with relatively ___________ abatement cost curves. 
A. low; high
B. high; low
C. steep; flat
D. flat; steep

 
Difficulty: Easy 

6. The ________ established an innovative permit-trading scheme for the control of airborne SO₂ emissions in ________. 
A. 1990 Clean Air Act Amendments; Canada
B. 1990 Clean Air Act Amendments; the United States
C. Canadian Environmental Protection Act; Canada
D. Cross-State Air Pollution Rule; the United States

 
Difficulty: Moderate

 

7. A polluter will ______ a permit if the price is ________ its MAC of controlling emissions. 
A. sell; less than
B. buy; greater than
C. buy; less than
D. all of the above

Difficulty: Moderate

8. The supply curve for permits in a cap-and-trade program is ____________.

A. downward sloping
B. upward sloping
C. a vertical line
D. a horizontal line

Difficulty: Moderate

9. Transferable emission permit programs work best if A. there is asymmetric information between buyers and sellers.
B. many different markets available for buying and selling permits.
C. the permit market is competitive among buyers and sellers.
D. none of the above.

Difficulty: Easy

10. The first problem encountered when trying to institute a cap-and-trade program is
A. assigning a regulatory agency to oversee the program.
B. establishing a market for permits.
C. setting the price for permits.
D. the initial distribution of the permits.

Difficulty: Easy

11. One of the ways that initial pollution rights can be allocated in a cap-and-trade program is by equal distribution among all existing sources of a particular effluent. Which of the following is a reason that equal distribution of initial pollution rights among polluters is flawed?
A. Existing firms within an industry vary in size.
B. Firms in different industries may vary in value of output.
C. This method does not reward those who have invested in emissions reductions already.
D. All of the above.

Difficulty: Easy

12. Cap-and-trade programs require an established set of rules for trading. It is recommended that the regulating agency set the rules and not interfere with the market, because market interference
A. increases transactions costs.
B. causes uncertainty.
C. interferes with the efficient flow of permits.
D. all of the above.

Difficulty: Easy

13. The most direct way to accomplish a reduction in the number of permits for a cap-and-trade is
A. initial distribution of permits is dated according to the year in which it may be used, after which a declining set of permits would be issued.
B. regulating agencies could buy permits and retire them.
C. new laws could be adopted periodically to adjust the distribution and number of permits.
D. regulators could request that firms leave the industry.

Difficulty: Easy

14. One solution to a cap-and-trade program with firms that vary in the level of damages that their emissions cause is
A. a program restricts trading between zones that are grouped according to damages.
B. a program that establishes trading ratios between zones that are grouped according to damages.
C. a program that doesn’t allow trading.
D. both A and B.

Difficulty: Easy

15. Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What are the firm’s abatement costs?

A. (a+b)
B. (a+b+c)
C. (a+b+c+d)
D. (e)

Difficulty: Easy

16. Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm’s permit purchase costs?

A. (e+d+b)
B. (c+d+e)
C. (e+d)
D. (e)

Difficulty: Easy

17. Refer to the Figure above. Assume that the firm is facing MAC₁ and that it has adjusted its permit holdings to e₁. What is the firm’s incentive to engage in R&D to reduce abatement costs to MAC₂?

A. (a+b)
B. (a+c)
C. (a+b+c)
D. (a+b+c+d)

Difficulty: Moderate

18. The EPA program that established an allowable base rate for the amount of lead in the gasoline that oil refineries produced and allowed for the trading of excess allowances is an example of ____________.

A. offset trading
B. emission rate trading
C. carbon offset markets
D. renewable portfolio requirements

 
Difficulty: Easy

19. Transferable emission permit schemes provide _______ incentive to invest in R&D to find cheaper methods of reducing emissions as emission taxes that achieve the same level of abatement. 
A. a different
B. the same
C. a greater
D. a lower

Difficulty: Moderate

20. The EPA's CAP program for _________ was the first large-scale example of a system of transferable emission permits tried in the United States. 
A. leaded gasoline
B. SO₂
C. NO_x
D. CO₂

Difficulty: Easy

21. The EPA's CAP program for SO₂ gave producers an incentive to look for cheaper ways of lowering emissions because 
A. an emissions rate was mandated for firms and the penalties were high.
B. increasing scarcity of permits drove their price up.
C. offset trading offered large trade gains.
D. emissions taxes were enforced with vigor.

Difficulty: Easy

 

22. The EPA's CAP market allowed firms to use whatever means they found the cheapest to reduce SO₂ emissions
A. but required specific technology that had to be used.
B. rather than dictating the technology to be used.
C. and placed pollution control objectives in the hands of the polluters.
D. and sets the price for which discharge permits will be exchanged.

Difficulty: Easy

 23. One of the ways that initial pollution rights can be allocated in a cap-and-trade program is that each firm receives permits amounting to 50% of their current emissions. Which of the following is a reason that this distribution of initial pollution rights among polluters is flawed?
A. This system rewards firms that have delayed decreasing their emissions.
B. Firms have an incentive to increase emissions prior to the implementation of the program.
C. This method does not reward those who have invested in emissions reductions already.
D. All of the above.

Difficulty: Easy

24. Policy approaches that encourage pollution control through trade are more ________ than those polices that rely on technology standards.
A. decentralized
B. centralized
C. market based
D. both A and C.

Difficulty: Easy

25. In cap-and-trade programs where the damages are non-uniform, there is a direct trade-off between the hydrological and meteorological reasons for restricting trade and
A. the economic efficiencies that result from competition.
B. the political resistance to taxation.
C. the enforcement authority of the EPA.
D. the incentives for R&D.

Difficulty: Moderate

26. Transferable discharge systems and emission charge systems seek to remove technical pollution control decision-making from central administrators and place it into the hands of _____________.
A. the voters
B. the EPA
C. the polluters themselves
D. those most harmed by pollution

Difficulty: Easy

27. In a cap-and-trade program, as polluters buy and sell permits, they move to a situation where
A. all firms’ marginal abatement costs are equal to the price of the permits.
B. the demand for permits will exceed the supply.
C. total abatement costs are equal to the total amount spent on permits.
D. the total amount spent on permits is less than the total amount spent on abatement.

Difficulty: Easy

28. In a competitive market for transferable discharge permits, the demand curve is equal to
A. the aggregate supply curve for all firms supplying permits.
B. the aggregate marginal abatement cost functions of all the firms participating in the market.
C. the aggregate production curve for all firms participating in the market.
D. the aggregate emissions curve for all firms participating in the market.

Difficulty: Moderate

29. When we compare the monitoring and enforcement requirements between emissions charges programs and transferable discharge permits, it is clear that
A. transferable discharge programs require more monitoring and enforcement efforts.
B. emissions charge programs require more monitoring and enforcement efforts.
C. there is little difference between the programs with regard to monitoring and enforcement.
D. neither program requires centralized monitoring and enforcement.

Difficulty: Easy

30. The concept of a safety value in CAP programs means
A. there is an upper limit price that, if reached, would trigger the release of more permits.
B. there is a lower limit price that, if reached, would trigger the retirement of permits.
C. the EPA is allowed to purchase permits in order to maintain a higher price.
D. both A. and B.

Difficulty: Easy

31. Increasing the number of zones in a permit trading program will

A. potentially improve equity among heavy and light polluters

B. probably yield fewer number of traders within each zone

C. address any hotspot problem

D. all of above

32. Total emissions from polluters decreases in a CAP program if

A. the total number of permits decreases

B. the marginal abatement cost of each polluter increases

C. the price of permits decreases each year

D. the CAP program expands to include additional types of pollutants

33. A polluter in a CAP program will purchase a permit rather than decrease emissions when

A. the permit price is zero

B. MAC < permit price

C. MAC > permit price

D. none of above

34. With transferable discharge systems and emissions charge systems, the objectives of controlling pollution for society are

A. set by individual polluters

B. set by a central administration

C. determined by the market

D. determined by voting

35. CAP programs seem to work best with

A. non-point source pollution

B. point-source pollution

C. global pollution, such as CO₂

D. local pollution, such as municipal solid waste