Question 1

Economists believe that the optimal level of pollution is zero.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Figure 10-1  
-Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Accepted Answer

A) $1.90 and 38 units, respectively. 
B) $1.80 and 35 units, respectively. 
C) $1.60 and 42 units, respectively. 
D) $1.35 and 58 units, respectively. 
A) $1.90 and 38 units, respectively. 
B) $1.80 and 35 units, respectively. 
C) $1.60 and 42 units, respectively. 
D) $1.35 and 58 units, respectively.

Question 4

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

Accepted Answer

A) True 
 B)False

Question 5

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50S1U1P1thS1S1P0 restored historic building entails the following:
• a private cost of $800,000;
• a private value of $650,000;
• a social value of $800,000.
-Refer to Scenario 10-2. Is there an external cost associated with the restoration of the 50th historic building, or is there an external benefit? What is the amount of that external cost or external benefit?

Accepted Answer

There is an external benefit o

Question 6

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip

Accepted Answer

A) increases the social cost above the private cost. 
B) lowers the social cost below the private cost. 
C) increases the social value above the private benefit. 
D) decreases the social value below the private benefit. 
A) increases the social cost above the private cost. 
B) lowers the social cost below the private cost. 
C) increases the social value above the private benefit. 
D) decreases the social value below the private benefit.

Question 7

When the government intervenes in markets with externalities, it does so in order to

Accepted Answer

A) increase production when negative externalities are present. 
B) protect the interests of bystanders. 
C) make certain all benefits are received by market participants. 
D) reduce production when positive externalities are present. 
A) increase production when negative externalities are present. 
B) protect the interests of bystanders. 
C) make certain all benefits are received by market participants. 
D) reduce production when positive externalities are present.

Question 8

To enhance the well-being of society, a social planner will encourage firms to increase production when

Accepted Answer

A) the firms are producing basic goods. 
B) there is a shortage in the market. 
C) technology spillovers are associated with production. 
D) negative externalities "spill over" into production. 
A) the firms are producing basic goods. 
B) there is a shortage in the market. 
C) technology spillovers are associated with production. 
D) negative externalities "spill over" into production.

Question 9

Figure 10-12  
-Refer to Figure 10-12. The graph, as drawn, could apply to the market for

Accepted Answer

A) automobiles. 
B) aluminum. 
C) industrial robots. 
D) All of the above are correct. 
A) automobiles. 
B) aluminum. 
C) industrial robots. 
D) All of the above are correct.

Question 10

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 11

In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following statements is correct?

Accepted Answer

A) Despite the increase in the carbon tax, emissions of greenhouse gases in British Columbia have continued to increase at a rapid rate. 
B) Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and corporations. 
C) Few, if any, economists favor carbon taxes such as the one that British Columbia has imposed. 
D) All of the above are correct. 
A) Despite the increase in the carbon tax, emissions of greenhouse gases in British Columbia have continued to increase at a rapid rate. 
B) Along with the increase in the carbon tax, British Columbia has decreased income-tax rates on individuals and corporations. 
C) Few, if any, economists favor carbon taxes such as the one that British Columbia has imposed. 
D) All of the above are correct.

Question 12

Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500S1U1P1thS1S1P0 fire extinguisher entails the following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
-Refer to Scenario 10-4. Does the production of fire extinguishers convey a positive externality, a negative externality, or neither?

Accepted Answer

The social value exceeds the p

Question 13

An externality exists whenever

Accepted Answer

A) the economy cannot benefit from government intervention. 
B) markets are not able to reach equilibrium. 
C) a firm sells its product in a foreign market. 
D) Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays nor receives payment for that influence. 
A) the economy cannot benefit from government intervention. 
B) markets are not able to reach equilibrium. 
C) a firm sells its product in a foreign market. 
D) Bobbi engages in an activity that influences the well-being of Rosa and yet Bobbi neither pays nor receives payment for that influence.

Question 14

Suppose the Environmental Protection Agency uses a corrective tax to set a price for pollution. Under this policy, is the supply curve for pollution rights vertical or is it horizontal?

Accepted Answer

The supply

Question 15

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 16

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution.  
-Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

Accepted Answer

A) "Demand for clean air" 
B) "Demand for pollution rights" 
C) "Supply of pollution permits" 
D) "Tax paid to government" 
A) "Demand for clean air" 
B) "Demand for pollution rights" 
C) "Supply of pollution permits" 
D) "Tax paid to government"

Question 17

Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500S1U1P1thS1S1P0 fire extinguisher entails the following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
-Refer to Scenario 10-4. In order to reach the social optimum, should fire extinguishers be taxed or subsidized? What is the appropriate amount of the tax or subsidy on each fire extinguisher?

Accepted Answer

Each fire extinguish

Question 18

Private markets fail to account for externalities because

Accepted Answer

A) externalities don't occur in private markets. 
B) sellers include costs associated with externalities in the price of their product. 
C) decisionmakers in the market fail to include the costs of their behavior to third parties. 
D) the government cannot easily estimate the optimal quantity of pollution. 
A) externalities don't occur in private markets. 
B) sellers include costs associated with externalities in the price of their product. 
C) decisionmakers in the market fail to include the costs of their behavior to third parties. 
D) the government cannot easily estimate the optimal quantity of pollution.

Question 19

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will

Accepted Answer

A) emit a lower level of smoke than is socially efficient. 
B) emit a higher level of smoke than is socially efficient. 
C) emit an acceptable level of smoke. 
D) not emit any smoke in an attempt to avoid paying the entire cost. 
A) emit a lower level of smoke than is socially efficient. 
B) emit a higher level of smoke than is socially efficient. 
C) emit an acceptable level of smoke. 
D) not emit any smoke in an attempt to avoid paying the entire cost.

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.

Exam 10: Externalities

Economists believe that the optimal level of pollution is zero.

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?

Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip

When the government intervenes in markets with externalities, it does so in order to

To enhance the well-being of society, a social planner will encourage firms to increase production when

Figure 10-12 -Refer to Figure 10-12. The graph, as drawn, could apply to the market for

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

In recent years, the Canadian province of British Columbia has increased its carbon tax. Which of the following statements is correct?

An externality exists whenever

Suppose the Environmental Protection Agency uses a corrective tax to set a price for pollution. Under this policy, is the supply curve for pollution rights vertical or is it horizontal?

Which of the following statements is not correct?

Figure 10-18. The graph represents a corrective tax to reduce pollution. On the axes, Q denotes the quantity of pollution and P represents the price of pollution. -Refer to Figure 10-18. What is the appropriate label for the downward-sloping line on the graph?

Private markets fail to account for externalities because

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will

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

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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