Question 1

A positive externality

Accepted Answer

A) is a benefit to the producer of the good. 
B) is a benefit to the consumer of the good. 
C) is a benefit to someone other than the producer and consumer of the good. 
D) results in an optimal level of output. 
A) is a benefit to the producer of the good. 
B) is a benefit to the consumer of the good. 
C) is a benefit to someone other than the producer and consumer of the good. 
D) results in an optimal level of output.

Question 2

All externalities

Accepted Answer

A) cause markets to fail to allocate resources efficiently. 
B) cause equilibrium prices to be too high. 
C) benefit producers at the expense of consumers. 
D) cause equilibrium prices to be too low. 
A) cause markets to fail to allocate resources efficiently. 
B) cause equilibrium prices to be too high. 
C) benefit producers at the expense of consumers. 
D) cause equilibrium prices to be too low.

Question 3

Does the phenomenon of externalities strengthen the argument that we should rely upon the "invisible hand" of the marketplace, or does it weaken that argument?

Accepted Answer

The phenomenon of ex

Question 4

The difference between social cost and private cost is a measure of the

Accepted Answer

A) loss in profit to the seller as the result of a negative externality. 
B) cost of an externality. 
C) cost reduction when the negative externality is eliminated. 
D) cost incurred by the government when it intervenes in the market. 
A) loss in profit to the seller as the result of a negative externality. 
B) cost of an externality. 
C) cost reduction when the negative externality is eliminated. 
D) cost incurred by the government when it intervenes in the market.

Question 5

To determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the level of output at which private cost equals private value.

Accepted Answer

A) True 
 B)False

Question 6

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3  
-Refer to Figure 10-3. At the private market outcome, the equilibrium price will be

Accepted Answer

A) P0. 
B) P1. 
C) P2. 
D) None of the above is correct. 
A) P0. 
B) P1. 
C) P2. 
D) None of the above is correct.

Question 7

Table 10-5
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67.  
-Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?

Accepted Answer

A) $67 
B) $68 
C) $81 
D) $83 
A) $67 
B) $68 
C) $81 
D) $83

Question 8

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 9

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action

Accepted Answer

A) is always needed because private solutions can never be attained. 
B) is needed when private solutions fail to arise. 
C) will be needed only to correct for positive externalities. 
D) will be needed only to correct for negative externalities. 
A) is always needed because private solutions can never be attained. 
B) is needed when private solutions fail to arise. 
C) will be needed only to correct for positive externalities. 
D) will be needed only to correct for negative externalities.

Question 10

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Accepted Answer

A) True 
 B)False

Question 11

Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a $9-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots 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 12

Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

Accepted Answer

A) Karen should pay Danny $400 so that she may keep her cat. 
B) Karen should pay Danny $350 for tissues and allergy medication. 
C) Danny should pay Karen $325 to give away her cat. 
D) Danny should move. 
A) Karen should pay Danny $400 so that she may keep her cat. 
B) Karen should pay Danny $350 for tissues and allergy medication. 
C) Danny should pay Karen $325 to give away her cat. 
D) Danny should move.

Question 13

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Accepted Answer

A) True 
 B)False

Question 14

Two farmers, A and B, each apply 100 tons of manure on their fields. To reduce manure runoff, the government has decided to require a permit for each ton of manure applied. The government gives each farmer 50 permits. Farmer A incurs losses of $25 for each ton of manure he does not apply, and Farmer B incurs losses of $50 for each ton of manure he does not apply. What is the total cost of reducing runoff if firms are not allowed to buy and sell permits from each other? What is the total cost of reducing runoff if the firms are allowed to buy and sell permits from each other?

Accepted Answer

A) ​$3,750; $2,500 
B) ​$2,500; $3,750 
C) ​$5,000; $2,500 
D) $3,750; $3,750 
A) ​$3,750; $2,500 
B) ​$2,500; $3,750 
C) ​$5,000; $2,500 
D) $3,750; $3,750

Question 15

The supply curve for a product reflects the

Accepted Answer

A) willingness to pay of the marginal buyer. 
B) quantity buyers will ultimately purchase of the product. 
C) cost to sellers of producing the product. 
D) seller's profit from producing the product. 
A) willingness to pay of the marginal buyer. 
B) quantity buyers will ultimately purchase of the product. 
C) cost to sellers of producing the product. 
D) seller's profit from producing the product.

Question 16

A corrective tax

Accepted Answer

A) can be used to internalize a negative externality. 
B) imposed on sellers shifts the supply curve to the left. 
C) imposed on buyers shifts the demand curve to the left. 
D) All of the above are correct. 
A) can be used to internalize a negative externality. 
B) imposed on sellers shifts the supply curve to the left. 
C) imposed on buyers shifts the demand curve to the left. 
D) All of the above are correct.

Question 17

The Coase theorem states that

Accepted Answer

A) taxes are an efficient way for governments to remedy negative externalities. 
B) subsidies are an efficient way for governments to remedy positive externalities. 
C) industrial policies encourage technology spillovers. 
D) in the absence of transaction costs, private parties can solve the problem of externalities on their own. 
A) taxes are an efficient way for governments to remedy negative externalities. 
B) subsidies are an efficient way for governments to remedy positive externalities. 
C) industrial policies encourage technology spillovers. 
D) in the absence of transaction costs, private parties can solve the problem of externalities on their own.

Question 18

An externality is

Accepted Answer

A) the costs that parties incur in the process of agreeing and following through on a bargain. 
B) the uncompensated impact of one person's actions on the well-being of a bystander. 
C) the proposition that private parties can bargain without cost over the allocation of resources. 
D) a market equilibrium tax. 
A) the costs that parties incur in the process of agreeing and following through on a bargain. 
B) the uncompensated impact of one person's actions on the well-being of a bystander. 
C) the proposition that private parties can bargain without cost over the allocation of resources. 
D) a market equilibrium tax.

Question 19

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics.  
-Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

Accepted Answer

A) social optimum has been reached. 
B) market equilibrium has been reached. 
C) government must have imposed a corrective tax to guide the market to this outcome. 
D) government must have offered a corrective subsidy to guide the market to this outcome. 
A) social optimum has been reached. 
B) market equilibrium has been reached. 
C) government must have imposed a corrective tax to guide the market to this outcome. 
D) government must have offered a corrective subsidy to guide the market to this outcome.

Question 20

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

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

Exam 10: Externalities

A positive externality

All externalities

Does the phenomenon of externalities strengthen the argument that we should rely upon the "invisible hand" of the marketplace, or does it weaken that argument?

The difference between social cost and private cost is a measure of the

To determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the level of output at which private cost equals private value.

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods. Figure 10-3 -Refer to Figure 10-3. At the private market outcome, the equilibrium price will be

The Coase theorem suggests that private solutions to an externality problem

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a $9-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

The supply curve for a product reflects the

A corrective tax

The Coase theorem states that

An externality is

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

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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