Question 1

Figure 10-9      
-Refer to Figure 10-9, Panel (b). The market equilibrium price is

Accepted Answer

A) P2. 
B) P3a. 
C) P3b. 
D) P3a - P3b. 
A) P2. 
B) P3a. 
C) P3b. 
D) P3a - P3b.

Question 2

Which of the following statements is not correct?

Accepted Answer

A) Government policies may improve the market's allocation of resources when negative externalities are present. 
B) Government policies may improve the market's allocation of resources when positive externalities are present. 
C) A positive externality is an example of a market failure. 
D) Without government intervention, the market will tend to undersupply products that produce negative externalities. 
A) Government policies may improve the market's allocation of resources when negative externalities are present. 
B) Government policies may improve the market's allocation of resources when positive externalities are present. 
C) A positive externality is an example of a market failure. 
D) Without government intervention, the market will tend to undersupply products that produce negative externalities.

Question 3

The Coase theorem suggests that private solutions to an externality problem

Accepted Answer

A) are effective under all conditions. 
B) will usually allocate resources efficiently if private parties can bargain without cost. 
C) are only efficient when there are negative externalities. 
D) may not be possible because of the distribution of property rights. 
A) are effective under all conditions. 
B) will usually allocate resources efficiently if private parties can bargain without cost. 
C) are only efficient when there are negative externalities. 
D) may not be possible because of the distribution of property rights.

Question 4

Which of the following is a problem that keeps people from privately solving externality problems?

Accepted Answer

A) Each party involved holds out for a better deal. 
B) The externality is large. 
C) Only problems with a sufficiently large number of parties can be solved. 
D) There is a lack of government intervention. 
A) Each party involved holds out for a better deal. 
B) The externality is large. 
C) Only problems with a sufficiently large number of parties can be solved. 
D) There is a lack of government intervention.

Question 5

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

Accepted Answer

A) the value of electricity to consumers equals the private cost of producing electricity. 
B) the value of electricity to consumers equals the social cost of producing electricity. 
C) the cost of the externality is maximized. 
D) the transaction costs of private bargaining are minimized. 
A) the value of electricity to consumers equals the private cost of producing electricity. 
B) the value of electricity to consumers equals the social cost of producing electricity. 
C) the cost of the externality is maximized. 
D) the transaction costs of private bargaining are minimized.

Question 6

When the government reduces my income tax by $0.30 for every $1.00 that I contribute to a charity, the government is effectively

Accepted Answer

A) alleviating the negative externalities that are associated with charitable giving. 
B) imposing a negative externality on those who do not pay income taxes. 
C) encouraging a private solution to a positive-externality problem. 
D) encouraging a private solution to a negative-externality problem. 
A) alleviating the negative externalities that are associated with charitable giving. 
B) imposing a negative externality on those who do not pay income taxes. 
C) encouraging a private solution to a positive-externality problem. 
D) encouraging a private solution to a negative-externality problem.

Question 7

When negative externalities are present in a market,

Accepted Answer

A) producers will be affected but consumers will not. 
B) producers will supply too much of the product. 
C) demand will be too high. 
D) the market will still maximize total benefits. 
A) producers will be affected but consumers will not. 
B) producers will supply too much of the product. 
C) demand will be too high. 
D) the market will still maximize total benefits.

Question 8

Figure 10-9      
-Refer to Figure 10-9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit of smokestack scrubber installation is represented by

Accepted Answer

A) Q3 - Q2. 
B) Q5 - Q4. 
C) P3a - P3b. 
D) P4a - P4b. 
A) Q3 - Q2. 
B) Q5 - Q4. 
C) P3a - P3b. 
D) P4a - P4b.

Question 9

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command-and-control policy or is it a market-based policy?

Accepted Answer

A Pigovian

Question 10

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

Accepted Answer

A) The social cost of producing good X includes the private cost plus the cost to bystanders of the externality. 
B) The increased social cost can be graphed as a decrease in demand. 
C) The market equilibrium quantity will be the socially optimal quantity as long as the government does not interfere. 
D) Both a and b are correct. 
A) The social cost of producing good X includes the private cost plus the cost to bystanders of the externality. 
B) The increased social cost can be graphed as a decrease in demand. 
C) The market equilibrium quantity will be the socially optimal quantity as long as the government does not interfere. 
D) Both a and b are correct.

Question 11

Scenario 10-3
Suppose the equation for the demand curve in a market is   , where   is the quantity demanded and   is the price. Also, suppose the equation for the supply curve in the same market is   , where   is the quantity supplied.
-Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What are the socially optimal quantity and price?

Accepted Answer

The socially optimal

Question 12

One drawback to industrial policy is that

Accepted Answer

A) technology spillovers are too expensive to control. 
B) measuring the size of spillovers from different markets is difficult. 
C) spillovers often occur in industries that produce undesirable products for society. 
D) positive side effects are often outweighed by negative side effects. 
A) technology spillovers are too expensive to control. 
B) measuring the size of spillovers from different markets is difficult. 
C) spillovers often occur in industries that produce undesirable products for society. 
D) positive side effects are often outweighed by negative side effects.

Question 13

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

Accepted Answer

A) impose a tax on alcohol that is equal to the per-unit externality 
B) offer a subsidy on alcohol that is equal to the per-unit externality 
C) impose a regulation limiting the amount of alcohol that each consumer can purchase 
D) nothing 
A) impose a tax on alcohol that is equal to the per-unit externality 
B) offer a subsidy on alcohol that is equal to the per-unit externality 
C) impose a regulation limiting the amount of alcohol that each consumer can purchase 
D) nothing

Question 14

According to the Coase theorem, in the presence of externalities

Accepted Answer

A) private parties can bargain to reach an efficient outcome. 
B) government assistance is necessary to reach an efficient outcome. 
C) the assignment of legal rights can prevent externalities. 
D) the initial distribution of property rights will determine the efficient outcome. 
A) private parties can bargain to reach an efficient outcome. 
B) government assistance is necessary to reach an efficient outcome. 
C) the assignment of legal rights can prevent externalities. 
D) the initial distribution of property rights will determine the efficient outcome.

Question 15

A patent is used to

Accepted Answer

A) disseminate information. 
B) offset the negative effects of taxes. 
C) protect inventors for as long as they live. 
D) assign property rights. 
A) disseminate information. 
B) offset the negative effects of taxes. 
C) protect inventors for as long as they live. 
D) assign property rights.

Question 16

In which of the following cases is the Coase theorem most likely to solve the externality?

Accepted Answer

A) Ed is allergic to his roommate's cat. 
B) Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. 
C) Polluted water runoff from farms is making residents of a nearby town sick. 
D) Industrialization around the world is causing global warming. 
A) Ed is allergic to his roommate's cat. 
B) Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. 
C) Polluted water runoff from farms is making residents of a nearby town sick. 
D) Industrialization around the world is causing global warming.

Question 17

Which of the following is an example of a positive externality?

Accepted Answer

A) Sue not catching the flu because she got a flu vaccine 
B) Mary not catching the flu from Sue because Sue got a flu vaccine 
C) Sue catching the flu because she did not get a flu vaccine 
D) Mary catching the flu from Sue because Sue did not get a flu vaccine 
A) Sue not catching the flu because she got a flu vaccine 
B) Mary not catching the flu from Sue because Sue got a flu vaccine 
C) Sue catching the flu because she did not get a flu vaccine 
D) Mary catching the flu from Sue because Sue did not get a flu vaccine

Question 18

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

Accepted Answer

A) The impact of William's activity on the bystander is adverse, and William compensates the bystander accordingly. 
B) The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander. 
C) The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly. 
D) Externalities arise in all of the above cases. 
A) The impact of William's activity on the bystander is adverse, and William compensates the bystander accordingly. 
B) The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander. 
C) The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly. 
D) Externalities arise in all of the above cases.

Question 19

In some situations, private economic actors cannot solve the problem of externalities among themselves because of substantial _________ costs.

Accepted Answer

The answer of In some situations, private economic actors cannot...

Question 20

Figure 10-19  
-Refer to Figure 10-19. Each additional unit of the good that is produced yields an external

Accepted Answer

A) benefit of $15. 
B) benefit of $36. 
C) cost of $15. 
D) cost of $36. 
A) benefit of $15. 
B) benefit of $36. 
C) cost of $15. 
D) cost of $36.

Exam 10: Externalities

Figure 10-9 -Refer to Figure 10-9, Panel (b). The market equilibrium price is

Which of the following statements is not correct?

The Coase theorem suggests that private solutions to an externality problem

Which of the following is a problem that keeps people from privately solving externality problems?

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

When the government reduces my income tax by $0.30 for every $1.00 that I contribute to a charity, the government is effectively

When negative externalities are present in a market,

Figure 10-9 -Refer to Figure 10-9, Panel (b) and Panel (c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the external benefit of smokestack scrubber installation is represented by

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command-and-control policy or is it a market-based policy?

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

One drawback to industrial policy is that

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

According to the Coase theorem, in the presence of externalities

A patent is used to

In which of the following cases is the Coase theorem most likely to solve the externality?

Which of the following is an example of a positive externality?

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

In some situations, private economic actors cannot solve the problem of externalities among themselves because of substantial _________ costs.

Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external

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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