Question 1

One reason that private solutions to externalities do not always work is that

Accepted Answer

A) government intervention negates the benefits of positive externalities. 
B) some people benefit from externalities. 
C) interested parties incur costs in the bargaining process. 
D) charities are not well organized. 
A) government intervention negates the benefits of positive externalities. 
B) some people benefit from externalities. 
C) interested parties incur costs in the bargaining process. 
D) charities are not well organized.

Question 2

Which of the following represents a way that a government can help the private market to internalize an externality?

Accepted Answer

A) taxing goods that have negative externalities 
B) subsidizing goods that have positive externalities 
C) The government cannot improve upon the outcomes of private markets. 
D) Both a and b are correct. 
A) taxing goods that have negative externalities 
B) subsidizing goods that have positive externalities 
C) The government cannot improve upon the outcomes of private markets. 
D) Both a and b are correct.

Question 3

Transaction costs

Accepted Answer

A) can keep private parties from solving externality problems. 
B) are incurred in the production process due to externalities. 
C) increase when taxes are imposed to correct negative externalities. 
D) are eliminated when the government intervenes in a market with externalities. 
A) can keep private parties from solving externality problems. 
B) are incurred in the production process due to externalities. 
C) increase when taxes are imposed to correct negative externalities. 
D) are eliminated when the government intervenes in a market with externalities.

Question 4

Government intervention is necessary to correct all externalities.

Accepted Answer

A) True 
 B)False

Question 5

Market failure can be caused by

Accepted Answer

A) too much competition. 
B) externalities. 
C) low consumer demand. 
D) scarcity. 
A) too much competition. 
B) externalities. 
C) low consumer demand. 
D) scarcity.

Question 6

Briefly explain how research into new technologies gives rise to a positive externality.

Accepted Answer

Research into new technologies

Question 7

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Accepted Answer

A) Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities. 
B) Externalities result in prices that are too high for many consumers to pay. 
C) Markets fail to produce the maximum total benefit to society when positive or negative externalities are present. 
D) Markets produce too little of a good when positive or negative externalities are present. 
A) Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities. 
B) Externalities result in prices that are too high for many consumers to pay. 
C) Markets fail to produce the maximum total benefit to society when positive or negative externalities are present. 
D) Markets produce too little of a good when positive or negative externalities are present.

Question 8

In the absence of externalities, the "invisible hand" leads a market to maximize

Accepted Answer

A) producer profit from that market. 
B) total benefit to society from that market. 
C) both equality and efficiency in that market. 
D) output of goods or services in that market. 
A) producer profit from that market. 
B) total benefit to society from that market. 
C) both equality and efficiency in that market. 
D) output of goods or services in that market.

Question 9

Figure 10-9      
-Refer to Figure 10-9. Which graph represents a market with a positive externality?

Accepted Answer

A) Panel (a) 
B) Panel (b) 
C) Panel (c) 
D) Both (b) and (c) are correct. 
A) Panel (a) 
B) Panel (b) 
C) Panel (c) 
D) Both (b) and (c) are correct.

Question 10

Figure 10-11  
-Refer to Figure 10-11. The socially optimal quantity of output is

Accepted Answer

A) 240 units, since the value to the buyer of the 240th unit is equal to the cost incurred by the seller of the 240th unit. 
B) 240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller of the 240th unit. 
C) 420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the seller of the 420th unit. 
D) 420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit. 
A) 240 units, since the value to the buyer of the 240th unit is equal to the cost incurred by the seller of the 240th unit. 
B) 240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller of the 240th unit. 
C) 420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the seller of the 420th unit. 
D) 420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit.

Question 11

To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increases the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached?

Accepted Answer

One solution would be to have one person

Question 12

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Accepted Answer

A) True 
 B)False

Question 13

When the government uses a command-and-control policy to solve an externality, it

Accepted Answer

A) is usually the most effective policy option available. 
B) creates policies that directly regulate behavior. 
C) usually involves taxing the consumption of a commodity. 
D) typically refers to the Coase theorem to structure the policy. 
A) is usually the most effective policy option available. 
B) creates policies that directly regulate behavior. 
C) usually involves taxing the consumption of a commodity. 
D) typically refers to the Coase theorem to structure the policy.

Question 14

When negative externalities are present in a market

Accepted Answer

A) private costs will be greater than social costs. 
B) social costs will be greater than private costs. 
C) only government regulation will solve the problem. 
D) the market will not be able to reach any equilibrium. 
A) private costs will be greater than social costs. 
B) social costs will be greater than private costs. 
C) only government regulation will solve the problem. 
D) the market will not be able to reach any equilibrium.

Question 15

Table 10-4  
-Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to the socially optimal equilibrium?

Accepted Answer

A) a tax of $4 per unit of output 
B) a subsidy of $4 per unit of output 
C) a tax of $6 per unit of output 
D) a subsidy of $6 per unit of output 
A) a tax of $4 per unit of output 
B) a subsidy of $4 per unit of output 
C) a tax of $6 per unit of output 
D) a subsidy of $6 per unit of output

Question 16

Industrial policy aims to

Accepted Answer

A) reduce pollution by requiring factories to reduce their pollution by a certain number of tons per year. 
B) reduce pollution by levying a tax on factories of a certain number of dollars for every ton of pollution that the factory emits. 
C) encourage business firms to subsidize continuing education for their employees. 
D) promote technology-enhancing industries. 
A) reduce pollution by requiring factories to reduce their pollution by a certain number of tons per year. 
B) reduce pollution by levying a tax on factories of a certain number of dollars for every ton of pollution that the factory emits. 
C) encourage business firms to subsidize continuing education for their employees. 
D) promote technology-enhancing industries.

Question 17

Negative externalities occur when one person's actions

Accepted Answer

A) cause another person to lose money in a stock market transaction. 
B) cause his or her employer to lose business. 
C) reveal his or her preference for foreign-produced goods. 
D) adversely affect the well-being of a bystander who is not a party to the action. 
A) cause another person to lose money in a stock market transaction. 
B) cause his or her employer to lose business. 
C) reveal his or her preference for foreign-produced goods. 
D) adversely affect the well-being of a bystander who is not a party to the action.

Question 18

Figure 10-9      
-Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in

Accepted Answer

A) Panel (a). 
B) Panel (b). 
C) Panel (c). 
D) Both (b) and (c) are correct. 
A) Panel (a). 
B) Panel (b). 
C) Panel (c). 
D) Both (b) and (c) are correct.

Question 19

Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

Accepted Answer

A) They are equal. 
B) The equilibrium quantity is greater than the socially optimal quantity. 
C) The equilibrium quantity is less than the socially optimal quantity. 
D) There is not enough information to answer the question. 
A) They are equal. 
B) The equilibrium quantity is greater than the socially optimal quantity. 
C) The equilibrium quantity is less than the socially optimal quantity. 
D) There is not enough information to answer the question.

Question 20

A positive externality arises when a person engages in an activity that has

Accepted Answer

A) an adverse effect on a bystander who is not compensated by the person who causes the effect. 
B) an adverse effect on a bystander who is compensated by the person who causes the effect. 
C) a beneficial effect on a bystander who pays the person who causes the effect. 
D) a beneficial effect on a bystander who does not pay the person who causes the effect. 
A) an adverse effect on a bystander who is not compensated by the person who causes the effect. 
B) an adverse effect on a bystander who is compensated by the person who causes the effect. 
C) a beneficial effect on a bystander who pays the person who causes the effect. 
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Exam 10: Externalities

One reason that private solutions to externalities do not always work is that

Which of the following represents a way that a government can help the private market to internalize an externality?

Transaction costs

Government intervention is necessary to correct all externalities.

Market failure can be caused by

Briefly explain how research into new technologies gives rise to a positive externality.

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

In the absence of externalities, the "invisible hand" leads a market to maximize

Figure 10-9 -Refer to Figure 10-9. Which graph represents a market with a positive externality?

Figure 10-11 -Refer to Figure 10-11. The socially optimal quantity of output is

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

When the government uses a command-and-control policy to solve an externality, it

When negative externalities are present in a market

Table 10-4 -Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to the socially optimal equilibrium?

Industrial policy aims to

Negative externalities occur when one person's actions

Figure 10-9 -Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in

Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

A positive externality arises when a person engages in an activity that has

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

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