Question 1

Internalizing a positive externality will cause the demand curve to

Accepted Answer

A) shift to the right. 
B) shift to the left. 
C) become more elastic. 
D) remain unchanged. 
A) shift to the right. 
B) shift to the left. 
C) become more elastic. 
D) remain unchanged.

Question 2

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

Accepted Answer

A) the Pigovian theorem. 
B) a corrective tax. 
C) the externality theorem. 
D) the Coase theorem. 
A) the Pigovian theorem. 
B) a corrective tax. 
C) the externality theorem. 
D) the Coase theorem.

Question 3

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome.

Accepted Answer

A) True 
 B)False

Question 4

Since almost all forms of transportation produce some type of pollution,

Accepted Answer

A) the government should ban all transportation. 
B) the government should ban all pollution. 
C) society has to weigh the cost and benefits when deciding how much pollution to allow. 
D) refrain from intervening because the market can best solve this problem. 
A) the government should ban all transportation. 
B) the government should ban all pollution. 
C) society has to weigh the cost and benefits when deciding how much pollution to allow. 
D) refrain from intervening because the market can best solve this problem.

Question 5

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 6

Which of the following is an example of an externality?

Accepted Answer

A) cigarette smoke that permeates an entire restaurant 
B) a flu shot that prevents a student from transmitting the virus to her roommate 
C) a beautiful flower garden outside of the local post office 
D) All of the above are correct. 
A) cigarette smoke that permeates an entire restaurant 
B) a flu shot that prevents a student from transmitting the virus to her roommate 
C) a beautiful flower garden outside of the local post office 
D) All of the above are correct.

Question 7

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 railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes an 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 8

Suppose the government levies a corrective tax on firms that pollute in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution?

Accepted Answer

With a corrective ta

Question 9

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 is the equation of the social-cost curve?

Accepted Answer

The equati

Question 10

Education yields positive externalities. For example,

Accepted Answer

A) colleges and universities have benefited, in recent years, from increases in tuition paid by students. 
B) as a result of earning a college degree, a person becomes a more productive worker and benefits by earning higher wages. 
C) a more educated population tends to result in lower crime rates. 
D) All of the above are correct. 
A) colleges and universities have benefited, in recent years, from increases in tuition paid by students. 
B) as a result of earning a college degree, a person becomes a more productive worker and benefits by earning higher wages. 
C) a more educated population tends to result in lower crime rates. 
D) All of the above are correct.

Question 11

Corrective taxes are unlike most other taxes because they

Accepted Answer

A) distort incentives. 
B) move the allocation of resources away from the social optimum. 
C) raise revenue for the government. 
D) move the allocation of resources closer to the social optimum. 
A) distort incentives. 
B) move the allocation of resources away from the social optimum. 
C) raise revenue for the government. 
D) move the allocation of resources closer to the social optimum.

Question 12

Dioxin emission that results from the production of paper is a good example of a negative externality because

Accepted Answer

A) self-interested paper firms are generally unaware of environmental regulations. 
B) there are fines for producing too much dioxin. 
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create. 
D) toxic emissions are the best example of an externality. 
A) self-interested paper firms are generally unaware of environmental regulations. 
B) there are fines for producing too much dioxin. 
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create. 
D) toxic emissions are the best example of an externality.

Question 13

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

Accepted Answer

A) impose a tax on alcohol that is equal to the per-unit externality 
B) offer a subsidy on alcohol that is equal to the per-unit externality 
C) impose a regulation limiting the amount of alcohol that each consumer can purchase 
D) nothing 
A) impose a tax on alcohol that is equal to the per-unit externality 
B) offer a subsidy on alcohol that is equal to the per-unit externality 
C) impose a regulation limiting the amount of alcohol that each consumer can purchase 
D) nothing

Question 14

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as

Accepted Answer

A) the externalities that are present are positive, not negative. 
B) government assigns property rights to the harmed party. 
C) private parties can bargain with sufficiently low transaction costs. 
D) businesses determine an appropriate level of production. 
A) the externalities that are present are positive, not negative. 
B) government assigns property rights to the harmed party. 
C) private parties can bargain with sufficiently low transaction costs. 
D) businesses determine an appropriate level of production.

Question 15

When externalities are present in a market, the well-being of market participants

Accepted Answer

A) and market bystanders are both directly affected. 
B) and market bystanders are both indirectly affected. 
C) is directly affected, and market bystanders are indirectly affected. 
D) is indirectly affected, and market bystanders are directly affected. 
A) and market bystanders are both directly affected. 
B) and market bystanders are both indirectly affected. 
C) is directly affected, and market bystanders are indirectly affected. 
D) is indirectly affected, and market bystanders are directly affected.

Question 16

A positive externality

Accepted Answer

A) causes the product to be overproduced. 
B) provides an additional benefit to market participants. 
C) benefits consumers because it results in a lower equilibrium price. 
D) is a benefit to a market bystander. 
A) causes the product to be overproduced. 
B) provides an additional benefit to market participants. 
C) benefits consumers because it results in a lower equilibrium price. 
D) is a benefit to a market bystander.

Question 17

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to

Accepted Answer

A) stop her messy habits or else move out. 
B) pay you at least $60 but less than $80 to live with the clutter. 
C) continue to be messy and force you to move out. 
D) demand payment of at least $60 but no more than $80 to clean up after herself. 
A) stop her messy habits or else move out. 
B) pay you at least $60 but less than $80 to live with the clutter. 
C) continue to be messy and force you to move out. 
D) demand payment of at least $60 but no more than $80 to clean up after herself.

Question 18

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the

Accepted Answer

A) private benefit equals the social benefit at the private market solution. 
B) private cost exceeds the private benefit at the private market solution. 
C) social value exceeds the private value at the private market solution. 
D) private cost exceeds the social benefit at the private market solution. 
A) private benefit equals the social benefit at the private market solution. 
B) private cost exceeds the private benefit at the private market solution. 
C) social value exceeds the private value at the private market solution. 
D) private cost exceeds the social benefit at the private market solution.

Question 19

Tradable pollution permits

Accepted Answer

A) have prices that are set by the government. 
B) will be more valuable to firms that can reduce pollution only at high costs. 
C) are likely to create a higher level of total pollution. 
D) are less desirable than command-and-control policies to reduce pollution. 
A) have prices that are set by the government. 
B) will be more valuable to firms that can reduce pollution only at high costs. 
C) are likely to create a higher level of total pollution. 
D) are less desirable than command-and-control policies to reduce pollution.

Question 20

The gasoline tax

Accepted Answer

A) is similar to most other taxes in that it causes deadweight losses. 
B) produces the unfortunate side-effect of making the roads more dangerous. 
C) can be viewed as a corrective tax aimed at multiple negative externalities associated with driving. 
D) can be viewed as a command-and-control policy aimed at discouraging people from driving. 
A) is similar to most other taxes in that it causes deadweight losses. 
B) produces the unfortunate side-effect of making the roads more dangerous. 
C) can be viewed as a corrective tax aimed at multiple negative externalities associated with driving. 
D) can be viewed as a command-and-control policy aimed at discouraging people from driving.

Exam 10: Externalities

Internalizing a positive externality will cause the demand curve to

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome.

Since almost all forms of transportation produce some type of pollution,

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

Which of the following is an example of an externality?

Suppose the government levies a corrective tax on firms that pollute in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution?

Education yields positive externalities. For example,

Corrective taxes are unlike most other taxes because they

Dioxin emission that results from the production of paper is a good example of a negative externality because

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as

When externalities are present in a market, the well-being of market participants

A positive externality

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the

Tradable pollution permits

The gasoline tax

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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