Question 1

Figure 10-10  
-Refer to Figure 10-10. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

Accepted Answer

A) $760. 
B) $1,080. 
C) $1,440. 
D) $1,920. 
A) $760. 
B) $1,080. 
C) $1,440. 
D) $1,920.

Question 2

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Accepted Answer

A) True 
 B)False

Question 3

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to

Accepted Answer

A) equalize private value and private cost. 
B) equalize private cost and external cost. 
C) externalize the actions of the buyers and sellers. 
D) internalize the externality. 
A) equalize private value and private cost. 
B) equalize private cost and external cost. 
C) externalize the actions of the buyers and sellers. 
D) internalize the externality.

Question 4

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Accepted Answer

A) True 
 B)False

Question 5

Suppose the socially-optimal quantity of good x is larger than the market-equilibrium quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

Accepted Answer

The production of go

Question 6

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Accepted Answer

When there is a large number o

Question 7

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Accepted Answer

A) externalize the positive externality. 
B) externalize the negative externality. 
C) internalize the positive externality. 
D) internalize the negative externality. 
A) externalize the positive externality. 
B) externalize the negative externality. 
C) internalize the positive externality. 
D) internalize the negative externality.

Question 8

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics.  
-Refer to Figure 10-13. In order to reach the social optimum, the government could

Accepted Answer

A) impose a tax of $2 per unit on plastics. 
B) impose a tax of $6 per unit on plastics. 
C) impose a tax of $8 per unit on plastics. 
D) offer a subsidy of $6 per unit on plastics. 
A) impose a tax of $2 per unit on plastics. 
B) impose a tax of $6 per unit on plastics. 
C) impose a tax of $8 per unit on plastics. 
D) offer a subsidy of $6 per unit on plastics.

Question 9

Figure 10-11  
-Refer to Figure 10-11. The graph 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 graph. 
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 graph.

Question 10

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 11

The Environmental Protection Agency (EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy?

Accepted Answer

The requirement that

Question 12

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 13

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Accepted Answer

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

Question 14

Firms that can reduce pollution easily would be willing to sell their pollution permits.

Accepted Answer

A) True 
 B)False

Question 15

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is correct?

Accepted Answer

A) Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced. 
B) Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced. 
C) Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced. 
D) Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced. 
A) Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced. 
B) Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced. 
C) Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced. 
D) Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

Question 17

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by

Accepted Answer

A) making it illegal to "disturb the peace." 
B) having a well-funded animal control department. 
C) subsidizing local animal shelters. 
D) encouraging people to adopt cats. 
A) making it illegal to "disturb the peace." 
B) having a well-funded animal control department. 
C) subsidizing local animal shelters. 
D) encouraging people to adopt cats.

Question 18

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 19

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that

Accepted Answer

A) Wally pays Corrine $600 for her inconvenience. 
B) Corrine pays Wally $400 to give the dog to his parents who live on an isolated farm. 
C) Corrine pays Wally $550 to give the dog to his parents who live on an isolated farm. 
D) The current situation is efficient. 
A) Wally pays Corrine $600 for her inconvenience. 
B) Corrine pays Wally $400 to give the dog to his parents who live on an isolated farm. 
C) Corrine pays Wally $550 to give the dog to his parents who live on an isolated farm. 
D) The current situation is efficient.

Question 20

Gretchen is a writer who works from her home. Gretchen lives next door to Randall, the trumpet player for a local band. Randall needs lots of practice to earn his share of the band's profit, which will amount to $350. Gretchen gets distracted by Randall's trumpet playing but she needs to get her writing done to earn $570 for her current article. If Randall owns the right to play his music and Gretchen needs to hire a lawyer to help her reach an agreement with Randall, then what price is Gretchen willing to pay the lawyer?

Accepted Answer

A) less than $220 
B) less than $350 
C) less than $570 
D) less than $920 
A) less than $220 
B) less than $350 
C) less than $570 
D) less than $920

Exam 10: Externalities

Figure 10-10 -Refer to Figure 10-10. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Suppose the socially-optimal quantity of good x is larger than the market-equilibrium quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. In order to reach the social optimum, the government could

Figure 10-11 -Refer to Figure 10-11. The graph represents a market in which

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

The Environmental Protection Agency (EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy?

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

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Firms that can reduce pollution easily would be willing to sell their pollution permits.

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Which of the following statements is correct?

Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that

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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