Question 1

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

Accepted Answer

A) a negative externality requires a subsidy to move the market equilibrium closer to the social optimum. 
B) the social cost of education exceeds the private cost of education. 
C) the social value of education exceeds the private value of education. 
D) the market-equilibrium quantity of education exceeds the optimal quantity of education. 
A) a negative externality requires a subsidy to move the market equilibrium closer to the social optimum. 
B) the social cost of education exceeds the private cost of education. 
C) the social value of education exceeds the private value of education. 
D) the market-equilibrium quantity of education exceeds the optimal quantity of education.

Question 2

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research produced?

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 3

Negative externalities lead markets to produce

Accepted Answer

A) greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. 
B) smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. 
C) greater than efficient output levels and positive externalities lead markets to produce efficient output levels. 
D) efficient output levels and positive externalities lead markets to produce greater than efficient output levels. 
A) greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. 
B) smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. 
C) greater than efficient output levels and positive externalities lead markets to produce efficient output levels. 
D) efficient output levels and positive externalities lead markets to produce greater than efficient output levels.

Question 4

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Accepted Answer

A) Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. 
B) Mary pays Cathy $16 so that Mary can smoke. 
C) Mary pays Cathy $14 so that Mary can smoke. 
D) Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke. 
A) Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. 
B) Mary pays Cathy $16 so that Mary can smoke. 
C) Mary pays Cathy $14 so that Mary can smoke. 
D) Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.

Question 5

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.  
-Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

Accepted Answer

A) 1 unit 
B) 2 units 
C) 3 units 
D) 4 units 
A) 1 unit 
B) 2 units 
C) 3 units 
D) 4 units

Question 6

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution?

Accepted Answer

A) Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). 
B) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. 
C) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. 
D) Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. 
A) Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). 
B) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. 
C) Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. 
D) Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.

Question 7

Tyler owns a dog and receives a $300 benefit from owning it. Tyler's neighbor, Liz, incurs a cost of $450 from the dog's barking. Suggest a deal between Tyler and Liz that would result in both individuals becoming better off.

Accepted Answer

Since Liz's cost exceeds Tyler's benefit

Question 8

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

Accepted Answer

A) tax university researchers 
B) offer grants to university researchers 
C) eliminate subsidized student loans 
D) nothing 
A) tax university researchers 
B) offer grants to university researchers 
C) eliminate subsidized student loans 
D) nothing

Question 9

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

Accepted Answer

A) True 
 B)False

Question 10

When a negative externality exists in a market, the cost to producers

Accepted Answer

A) is greater than the cost to society. 
B) will be the same as the cost to society. 
C) will be less than the cost to society. 
D) will differ from the cost to society, regardless of whether an externality is present. 
A) is greater than the cost to society. 
B) will be the same as the cost to society. 
C) will be less than the cost to society. 
D) will differ from the cost to society, regardless of whether an externality is present.

Question 11

When a particular negative externality affects a very large number of people, it is likely that

Accepted Answer

A) government will not find it worthwhile to impose a corrective tax. 
B) private solutions to the problem will dominate any attempt by government to alleviate the problem. 
C) the solution to externalities suggested by the Coase theorem will work very well. 
D) the solution to externalities suggested by the Coase theorem will not work. 
A) government will not find it worthwhile to impose a corrective tax. 
B) private solutions to the problem will dominate any attempt by government to alleviate the problem. 
C) the solution to externalities suggested by the Coase theorem will work very well. 
D) the solution to externalities suggested by the Coase theorem will not work.

Question 12

In many cases the Coase theorem does not work well because

Accepted Answer

A) there are too few parties at the negotiation table. 
B) the government does not know about the Coase theorem. 
C) transaction costs are too high. 
D) transaction costs are too low. 
A) there are too few parties at the negotiation table. 
B) the government does not know about the Coase theorem. 
C) transaction costs are too high. 
D) transaction costs are too low.

Question 13

Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that

Accepted Answer

A) flu shots provide a positive externality, and that flu shots should be subsidized. 
B) if flu shots are not subsidized, then the number of people getting flu shots will be smaller than the socially optimal number. 
C) the externality generated by flu shots is more like the externality generated by education than the externality generated by pollution. 
D) All of the above are correct. 
A) flu shots provide a positive externality, and that flu shots should be subsidized. 
B) if flu shots are not subsidized, then the number of people getting flu shots will be smaller than the socially optimal number. 
C) the externality generated by flu shots is more like the externality generated by education than the externality generated by pollution. 
D) All of the above are correct.

Question 14

Figure 10-9      
-Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Accepted Answer

A) Q2 to point Q3. 
B) Q3 to point Q2. 
C) Q4 to point Q5. 
D) Q5 to point Q4. 
A) Q2 to point Q3. 
B) Q3 to point Q2. 
C) Q4 to point Q5. 
D) Q5 to point Q4.

Question 15

Table 10-4  
-Refer to Table 10-4. Taking into account private and external costs, total surplus in the market equilibrium amounts to

Accepted Answer

A) $28. 
B) $39. 
C) $45. 
D) $51. 
A) $28. 
B) $39. 
C) $45. 
D) $51.

Question 16

When technology spillover occurs,

Accepted Answer

A) it is the government's responsibility to own firms that are engaged in high-tech research. 
B) a firm's research yields technological knowledge that can then be used by society as a whole. 
C) those firms engaged in technology research should be taxed by the government. 
D) firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product. 
A) it is the government's responsibility to own firms that are engaged in high-tech research. 
B) a firm's research yields technological knowledge that can then be used by society as a whole. 
C) those firms engaged in technology research should be taxed by the government. 
D) firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product.

Question 17

Figure 10-12  
-Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?

Accepted Answer

A) social cost 
B) social value 
C) private cost 
D) private value 
A) social cost 
B) social value 
C) private cost 
D) private value

Question 18

Which of the following statements is not correct?

Accepted Answer

A) Patents help internalize the externalities associated with technological advances. 
B) Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution. 
C) Allowing firms to trade pollution permits will lower the total cost of reducing pollution. 
D) A big impediment to implementing the Coase theorem in many cases is high transactions costs. 
A) Patents help internalize the externalities associated with technological advances. 
B) Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution. 
C) Allowing firms to trade pollution permits will lower the total cost of reducing pollution. 
D) A big impediment to implementing the Coase theorem in many cases is high transactions costs.

Question 19

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Accepted Answer

A) True 
 B)False

Question 20

Figure 10-6  
-Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?

Accepted Answer

A) P 
B) P' 
C) Either P or P'. It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price. 
D) Some price between P and P'. The equilibrium price depends on the negotiating skills of the interested parties. 
A) P 
B) P' 
C) Either P or P'. It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price. 
D) Some price between P and P'. The equilibrium price depends on the negotiating skills of the interested parties.

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

Negative externalities lead markets to produce

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

Tyler owns a dog and receives a $300 benefit from owning it. Tyler's neighbor, Liz, incurs a cost of $450 from the dog's barking. Suggest a deal between Tyler and Liz that would result in both individuals becoming better off.

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

When a negative externality exists in a market, the cost to producers

When a particular negative externality affects a very large number of people, it is likely that

In many cases the Coase theorem does not work well because

Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that

Figure 10-9 -Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Table 10-4 -Refer to Table 10-4. Taking into account private and external costs, total surplus in the market equilibrium amounts to

When technology spillover occurs,

Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?

Which of the following statements is not correct?

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Figure 10-6 -Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?

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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Exam 10: Externalities

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

Negative externalities lead markets to produce

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the socially-optimal quantity of output in this market?

Tyler owns a dog and receives a $300 benefit from owning it. Tyler's neighbor, Liz, incurs a cost of $450 from the dog's barking. Suggest a deal between Tyler and Liz that would result in both individuals becoming better off.

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

When a negative externality exists in a market, the cost to producers

When a particular negative externality affects a very large number of people, it is likely that

In many cases the Coase theorem does not work well because

Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that

Figure 10-9 -Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Table 10-4 -Refer to Table 10-4. Taking into account private and external costs, total surplus in the market equilibrium amounts to

When technology spillover occurs,

Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?

Which of the following statements is not correct?

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Figure 10-6 -Refer to Figure 10-6. Which price represents the equilibrium price of the product in this market?

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

Filters