Question 1

Figure 10-17  
-Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Accepted Answer

A) An amount equal to P' minus P. 
B) An amount equal to P'. 
C) An amount equal to P. 
D) An amount equal to the external cost. 
A) An amount equal to P' minus P. 
B) An amount equal to P'. 
C) An amount equal to P. 
D) An amount equal to the external cost.

Question 2

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

Accepted Answer

A) The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C) The farmer will incur $1,500 in damages to his crops. 
D) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. 
A) The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C) The farmer will incur $1,500 in damages to his crops. 
D) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

Question 3

Even if possible, it would be inefficient to prohibit all polluting activity.

Accepted Answer

A) True 
 B)False

Question 4

An externality is an example of

Accepted Answer

A) a corrective tax. 
B) a tradable pollution permit. 
C) a market failure. 
D) Both a and b are correct. 
A) a corrective tax. 
B) a tradable pollution permit. 
C) a market failure. 
D) Both a and b are correct.

Question 5

Markets are often inefficient when negative externalities are present because

Accepted Answer

A) private costs exceed social costs at the private market solution. 
B) externalities cannot be corrected without government regulation. 
C) social costs exceed private costs at the private market solution. 
D) production externalities lead to consumption externalities. 
A) private costs exceed social costs at the private market solution. 
B) externalities cannot be corrected without government regulation. 
C) social costs exceed private costs at the private market solution. 
D) production externalities lead to consumption externalities.

Question 6

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, the external cost of antibiotic overuse 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 7

Assume each gallon of gasoline that is produced gives rise to an external cost of $1.25. On any given day, the production of the 10,000th gallon of gasoline entails a private value of $4.00 and a social cost of $3.50. What is the private cost of the 10,000th gallon?

Accepted Answer

For each gallon, the social co

Question 8

Table 10-3  
-Refer to Table 10-3. The table represents a market in which

Accepted Answer

A) there is no externality. 
B) there is a positive externality. 
C) there is a negative externality. 
D) The answer cannot be determined from inspection of the table. 
A) there is no externality. 
B) there is a positive externality. 
C) there is a negative externality. 
D) The answer cannot be determined from inspection of the table.

Question 9

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

Accepted Answer

A) True 
 B)False

Question 10

To economists, good environmental policy begins by acknowledging one of the Ten Principles of Economics:

Accepted Answer

A) Trade can make everyone better off. 
B) People face trade-offs. 
C) Markets are usually a good way to organize economic activity. 
D) A country's standard of living depends on its ability to produce goods and services. 
A) Trade can make everyone better off. 
B) People face trade-offs. 
C) Markets are usually a good way to organize economic activity. 
D) A country's standard of living depends on its ability to produce goods and services.

Question 11

Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

Accepted Answer

A) One neighbor doesn't mow his lawn. 
B) One neighbor doesn't paint her house. 
C) One neighbor comes home on his noisy motorcycle late at night. 
D) All of the above are correct. 
A) One neighbor doesn't mow his lawn. 
B) One neighbor doesn't paint her house. 
C) One neighbor comes home on his noisy motorcycle late at night. 
D) All of the above are correct.

Question 12

Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000S1U1P1thS1S1P0 gallon of gasoline entails the following:
• a private cost of $3.10;
• a social cost of $3.55;
• a value to consumers of $3.70.
-Refer to Scenario 10-1. From the given information, it is apparent that

Accepted Answer

A) the production of gasoline involves a negative externality, so the market will produce a smaller quantity of gasoline than is socially desirable. 
B) the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable. 
C) the production of gasoline involves a positive externality, so the market will produce a smaller quantity of gasoline than is socially desirable. 
D) the production of gasoline involves a positive externality, so the market will produce a larger quantity of gasoline than is socially desirable. 
A) the production of gasoline involves a negative externality, so the market will produce a smaller quantity of gasoline than is socially desirable. 
B) the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable. 
C) the production of gasoline involves a positive externality, so the market will produce a smaller quantity of gasoline than is socially desirable. 
D) the production of gasoline involves a positive externality, so the market will produce a larger quantity of gasoline than is socially desirable.

Question 13

The tax on cigarettes is an example of

Accepted Answer

A) a consumption tax. 
B) a corrective tax. 
C) an income tax. 
D) a command-and-control policy. 
A) a consumption tax. 
B) a corrective tax. 
C) an income tax. 
D) a command-and-control policy.

Question 14

The concept of external cost is associated with a negative externality, but not with a positive externality.

Accepted Answer

A) True 
 B)False

Question 15

Research into new technologies

Accepted Answer

A) provides positive externalities because it creates knowledge others can use. 
B) results in negative externalities because government funding for research causes less government spending in other areas. 
C) is protected by patent laws, which eliminates the need for government intervention. 
D) should only be funded by the corporations that will receive the profits from the research. 
A) provides positive externalities because it creates knowledge others can use. 
B) results in negative externalities because government funding for research causes less government spending in other areas. 
C) is protected by patent laws, which eliminates the need for government intervention. 
D) should only be funded by the corporations that will receive the profits from the research.

Question 16

Figure 10-8  
-Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the socially-optimal level of output, it would

Accepted Answer

A) introduce a subsidy of $2 per unit. 
B) impose a tax of $2 per unit. 
C) introduce a subsidy of $4 per unit. 
D) impose a tax of $4 per unit. 
A) introduce a subsidy of $2 per unit. 
B) impose a tax of $2 per unit. 
C) introduce a subsidy of $4 per unit. 
D) impose a tax of $4 per unit.

Question 17

Suppose that elementary education creates a positive externality. If the government does not subsidize education, then

Accepted Answer

A) the equilibrium quantity of education will be equal to the socially optimal quantity of education. 
B) the equilibrium quantity of education will be greater than the socially optimal quantity of education. 
C) the equilibrium quantity of education will be less than the socially optimal quantity of education. 
D) There is not enough information to answer the question. 
A) the equilibrium quantity of education will be equal to the socially optimal quantity of education. 
B) the equilibrium quantity of education will be greater than the socially optimal quantity of education. 
C) the equilibrium quantity of education will be less than the socially optimal quantity of education. 
D) There is not enough information to answer the question.

Question 18

Figure 10-10  
-Refer to Figure 10-10. Which of the following statements is correct?

Accepted Answer

A) The private cost of producing the 160th unit of output is $16. 
B) The social cost of producing the 160th unit of output is $22. 
C) The external cost of producing the 160th unit of output is $6. 
D) All of the above are correct. 
A) The private cost of producing the 160th unit of output is $16. 
B) The social cost of producing the 160th unit of output is $22. 
C) The external cost of producing the 160th unit of output is $6. 
D) All of the above are correct.

Question 19

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain?
(i)corrective taxes
(ii)tradable pollution permits
(iii)amendments to the Clean Air Act

Accepted Answer

A) (i) only 
B) both (i) and (ii) 
C) (iii) only 
D) both (ii) and (iii) 
A) (i) only 
B) both (i) and (ii) 
C) (iii) only 
D) both (ii) and (iii)

Question 20

The tax on gasoline

Accepted Answer

A) reduces efficiency by causing large deadweight losses. 
B) reduces efficiency by decreasing consumer surplus and producer surplus. 
C) enhances efficiency by serving as a corrective device in a market with positive externalities. 
D) enhances efficiency by serving as a corrective device in a market with negative externalities. 
A) reduces efficiency by causing large deadweight losses. 
B) reduces efficiency by decreasing consumer surplus and producer surplus. 
C) enhances efficiency by serving as a corrective device in a market with positive externalities. 
D) enhances efficiency by serving as a corrective device in a market with negative externalities.

Exam 10: Externalities

Figure 10-17 -Refer to Figure 10-17. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Even if possible, it would be inefficient to prohibit all polluting activity.

An externality is an example of

Markets are often inefficient when negative externalities are present because

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, the external cost of antibiotic overuse is represented by

Assume each gallon of gasoline that is produced gives rise to an external cost of $1.25. On any given day, the production of the 10,000th gallon of gasoline entails a private value of $4.00 and a social cost of $3.50. What is the private cost of the 10,000th gallon?

Table 10-3 -Refer to Table 10-3. The table represents a market in which

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

To economists, good environmental policy begins by acknowledging one of the Ten Principles of Economics:

Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

The tax on cigarettes is an example of

The concept of external cost is associated with a negative externality, but not with a positive externality.

Research into new technologies

Figure 10-8 -Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the socially-optimal level of output, it would

Suppose that elementary education creates a positive externality. If the government does not subsidize education, then

Figure 10-10 -Refer to Figure 10-10. Which of the following statements is correct?

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? (i)corrective taxes (ii)tradable pollution permits (iii)amendments to the Clean Air Act

The tax on gasoline

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

Applications: 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

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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Assume each gallon of gasoline that is produced gives rise to an external cost of $1.25. On any given day, the production of the 10,000^th gallon of gasoline entails a private value of $4.00 and a social cost of $3.50. What is the private cost of the 10,000^th gallon?