Question 1

Which of the following statements is not true of both pollution permits and corrective taxes?

Accepted Answer

A) Both policies internalize the externality of pollution. 
B) Both policies require firms to pay for their pollution. 
C) Both policies lead to the establishment of an equilibrium price of pollution. 
D) Both policies increase the amount of pollution compared to the market equilibrium. 
A) Both policies internalize the externality of pollution. 
B) Both policies require firms to pay for their pollution. 
C) Both policies lead to the establishment of an equilibrium price of pollution. 
D) Both policies increase the amount of pollution compared to the market equilibrium.

Question 2

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Accepted Answer

A) True 
 B)False

Question 3

Research into new technologies conveys neither negative externalities nor positive externalities.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is not a characteristic of pollution permits?

Accepted Answer

A) Prices are set by supply and demand. 
B) Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. 
C) Real-world markets for pollution permits include sulfur dioxide and carbon. 
D) Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive. 
A) Prices are set by supply and demand. 
B) Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. 
C) Real-world markets for pollution permits include sulfur dioxide and carbon. 
D) Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive.

Question 6

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Accepted Answer

A) True 
 B)False

Question 7

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. Is the socially-optimal quantity of fire extinguishers less than, equal to, or greater than 500? Explain.

Accepted Answer

For the 500^th fire extinguisher,

Question 8

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution

Accepted Answer

A) is less efficient. 
B) can result in a greater increase in pollution. 
C) lowers revenue for the government. 
D) is less costly to society. 
A) is less efficient. 
B) can result in a greater increase in pollution. 
C) lowers revenue for the government. 
D) is less costly to society.

Question 9

Which of the following is not an advantage of corrective taxes?

Accepted Answer

A) They raise revenues for the government. 
B) They enhance economic efficiency. 
C) They subsidize the production of goods with positive externalities. 
D) They move the allocation of resources closer to the social optimum. 
A) They raise revenues for the government. 
B) They enhance economic efficiency. 
C) They subsidize the production of goods with positive externalities. 
D) They move the allocation of resources closer to the social optimum.

Question 10

When positive externalities are present in a market

Accepted Answer

A) private benefits will be greater than social benefits. 
B) social benefits will be greater than private benefits. 
C) only government regulation will solve the problem. 
D) the market will not be able to generate an equilibrium. 
A) private benefits will be greater than social benefits. 
B) social benefits will be greater than private benefits. 
C) only government regulation will solve the problem. 
D) the market will not be able to generate an equilibrium.

Question 11

Which of the following illustrates the concept of a negative externality?

Accepted Answer

A) A college professor plays a vigorous game of racquet ball with the racquet she recently purchased. 
B) You experience a decrease in your property value from neglecting your lawn and garden. 
C) Your neighbor plays loud music that you dislike through stereo speakers set up on his deck. 
D) A drought causes a poor crop for farmer's blueberry fields. 
A) A college professor plays a vigorous game of racquet ball with the racquet she recently purchased. 
B) You experience a decrease in your property value from neglecting your lawn and garden. 
C) Your neighbor plays loud music that you dislike through stereo speakers set up on his deck. 
D) A drought causes a poor crop for farmer's blueberry fields.

Question 12

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Accepted Answer

A) True 
 B)False

Question 13

Figure 10-8   ​
-Refer to Figure 10-8. This market is characterized by a negative externality.

Accepted Answer

A) True 
 B)False

Question 14

Figure 10-5  
-Refer to Figure 10-5. The socially optimal quantity of output is

Accepted Answer

A) 40 units, since the value to the buyer of the 40th unit is equal to the cost incurred by the seller of the 40th unit. 
B) 40 units, since the value to society of the 40th unit is equal to the cost incurred by the seller of the 40th unit. 
C) 70 units, since the value to the buyer of the 70th unit is equal to the cost incurred by the seller of the 70th unit. 
D) 70 units, since the value to society of the 70th unit is equal to the cost incurred by the seller of the 70th unit. 
A) 40 units, since the value to the buyer of the 40th unit is equal to the cost incurred by the seller of the 40th unit. 
B) 40 units, since the value to society of the 40th unit is equal to the cost incurred by the seller of the 40th unit. 
C) 70 units, since the value to the buyer of the 70th unit is equal to the cost incurred by the seller of the 70th unit. 
D) 70 units, since the value to society of the 70th unit is equal to the cost incurred by the seller of the 70th unit.

Question 15

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. What is the social value of the 500th fire extinguisher?

Accepted Answer

The social value is equal to t

Question 16

Suppose the market-equilibrium quantity of good x is larger than the socially-optimal 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 17

Figure 10-7  
-Refer to Figure 10-7. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Accepted Answer

A) 25 units. 
B) 50 units. 
C) 75 units. 
D) 100 units. 
A) 25 units. 
B) 50 units. 
C) 75 units. 
D) 100 units.

Question 18

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command-and-control policy or is it a market-based policy?

Accepted Answer

A Pigovian

Question 19

Table 10-2
​
​
 $$\begin{array} { | c | c | c | c | } 
\hline \begin{array} { c } 
\text { Quantity } \
\text { (Units) }
\end{array} & \begin{array} { c } 
\text { Private Value } \
\text { (Dollars) }
\end{array} & \begin{array} { c } 
\text { Private Cost } \
\text { (Dollars) }
\end{array} & \begin{array} { c } 
\text { Social Value } \
\text { (Dollars) }
\end{array} \
\hline 1 & 51 & 45 & 57 \
\hline 2 & 48 & 48 & 54 \
\hline 3 & 45 & 51 & 51 \
\hline 4 & 42 & 54 & 48 \
\hline 5 & 39 & 57 & 45 \
\hline 6 & 36 & 60 & 42 \
\hline
\end{array}$$ ​
-Refer to Table 10-2. What is the socially optimal level of output in this market?

Accepted Answer

A) 4 units 
B) 2 units 
C) 3 units 
D) 5 units 
A) 4 units 
B) 2 units 
C) 3 units 
D) 5 units

Question 20

Figure 10-6
​  
-Refer to Figure 10-6. If 250 units of plastics are produced and consumed, then the

Accepted Answer

A) social optimum has been reached. 
B) market equilibrium has been reached. 
C) negative externality associated with plastics has been eliminated. 
D) positive externality associated with plastics has been eliminated. 
A) social optimum has been reached. 
B) market equilibrium has been reached. 
C) negative externality associated with plastics has been eliminated. 
D) positive externality associated with plastics has been eliminated.

Exam 10: Externalities

Which of the following statements is not true of both pollution permits and corrective taxes?

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Research into new technologies conveys neither negative externalities nor positive externalities.

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

Which of the following is not a characteristic of pollution permits?

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution

Which of the following is not an advantage of corrective taxes?

When positive externalities are present in a market

Which of the following illustrates the concept of a negative externality?

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Figure 10-8 ​ -Refer to Figure 10-8. This market is characterized by a negative externality.

Figure 10-5 -Refer to Figure 10-5. The socially optimal quantity of output is

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

Figure 10-7 -Refer to Figure 10-7. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command-and-control policy or is it a market-based policy?

Table 10-2 ​ ​ Quantity (Units) Private Value (Dollars) Private Cost (Dollars) Social Value (Dollars) 1 51 45 57 2 48 48 54 3 45 51 51 4 42 54 48 5 39 57 45 6 36 60 42 ​ -Refer to Table 10-2. What is the socially optimal level of output in this market?

Figure 10-6 ​ -Refer to Figure 10-6. If 250 units of plastics are produced and consumed, then the

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 Nations 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

Filters

Figure 10-8 -Refer to Figure 10-8. This market is characterized by a negative externality.

Table 10-2 Quantity (Units) Private Value (Dollars) Private Cost (Dollars) Social Value (Dollars) 1 51 45 57 2 48 48 54 3 45 51 51 4 42 54 48 5 39 57 45 6 36 60 42 -Refer to Table 10-2. What is the socially optimal level of output in this market?

Figure 10-6 -Refer to Figure 10-6. If 250 units of plastics are produced and consumed, then the