Question 1

According to the Coase theorem, only when transaction costs are extremely high can two parties internalize a negative externality.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is a negative externality?

Accepted Answer

A)  high prices for necessities such as drinking water in the aftermath of a natural disaster 
B)  the risks to nonsmokers from second-hand smoke 
C)  the increased risk of a traffic accident to an individual who uses a cell phone while driving 
D)  unemployment in the steel industry caused by low prices of imported (external) steel 
A)  high prices for necessities such as drinking water in the aftermath of a natural disaster 
B)  the risks to nonsmokers from second-hand smoke 
C)  the increased risk of a traffic accident to an individual who uses a cell phone while driving 
D)  unemployment in the steel industry caused by low prices of imported (external) steel

Question 3

Suppose the production of roses generates a positive externality in that travelers enjoy the scenic beauty of the garden. An appropriate government policy yielding the efficient outcome would be a:

Accepted Answer

A)  Pigouvian tax. 
B)  Pigouvian subsidy. 
C)  system of rose production permits. 
D)  reduction in transaction costs. 
A)  Pigouvian tax. 
B)  Pigouvian subsidy. 
C)  system of rose production permits. 
D)  reduction in transaction costs.

Question 4

According to the Coase theorem, the inefficiencies caused by externalities can be removed by the private sector if individuals enter into appropriately structured deals, provided that the transaction costs of such deals are sufficiently low.

Accepted Answer

A) True 
 B)False

Question 5

Use the following to answer questions:
Figure: Pollution and Efficiency  
-(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emissions are a result of production, an efficient solution takes place at a price of _____ and a quantity of _____.

Accepted Answer

A)  $5; 40 
B)  $15; 30 
C)  $25; 30 
D)  $15; 15 
A)  $5; 40 
B)  $15; 30 
C)  $25; 30 
D)  $15; 15

Question 6

Use the following to answer questions:  
-(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the outcome is _____ because _____.

Accepted Answer

A) efficient; MSB = MSC B) efficient; MSB > MSC C) inefficient; MSB > MSC D) inefficient; MSB < MSC A) efficient; MSB = MSC B) efficient; MSB > MSC C) inefficient; MSB > MSC D) inefficient; MSB < MSC

Question 7

A principal cause of market failure is actions generating side effects that are not properly taken into account by the market.

Accepted Answer

A) True 
 B)False

Question 8

A market economy will produce _____ without any government regulation.

Accepted Answer

A)  too little pollution 
B)  too much pollution 
C)  the socially optimal amount of pollution 
D)  the amount of pollution that maximizes total surplus 
A)  too little pollution 
B)  too much pollution 
C)  the socially optimal amount of pollution 
D)  the amount of pollution that maximizes total surplus

Question 9

Both emissions taxes and tradable emissions permits:

Accepted Answer

A)  are efficient cost-minimizing methods of pollution reduction. 
B)  work only if they are coupled with environmental standards. 
C)  encourage more pollution. 
D)  are usually less effective than environmental standards. 
A)  are efficient cost-minimizing methods of pollution reduction. 
B)  work only if they are coupled with environmental standards. 
C)  encourage more pollution. 
D)  are usually less effective than environmental standards.

Question 10

Which of the following is a positive externality?

Accepted Answer

A)  Sam dug a pond so he could go fishing, but the pond has contributed to an explosion of mosquitoes in your neighborhood. 
B)  Sam has dozens of cats, and they come into your yard to hunt the birds that come to your birdbath. 
C)  Sam buys a dilapidated house, renovates it, and increases the property values of all houses in the neighborhood. 
D)  Liquid waste from Sam's chicken farm flows into a neighbor's well water. 
A)  Sam dug a pond so he could go fishing, but the pond has contributed to an explosion of mosquitoes in your neighborhood. 
B)  Sam has dozens of cats, and they come into your yard to hunt the birds that come to your birdbath. 
C)  Sam buys a dilapidated house, renovates it, and increases the property values of all houses in the neighborhood. 
D)  Liquid waste from Sam's chicken farm flows into a neighbor's well water.

Question 11

Use the following to answer questions:  
-(Table: Externalities from Parks) The table Externalities from Parks shows the marginal social benefit and the marginal social cost of preserving various amounts of land in a city for a public park. The socially optimum amount of land dedicated to the public park will be _____ acres.

Accepted Answer

A)  0 
B)  1 
C)  3 
D)  9 
A)  0 
B)  1 
C)  3 
D)  9

Question 12

Which of the following is NOT an activity that generates an externality?

Accepted Answer

A)  Bob's Service Station dumps used oil in the river. 
B)  Bob renovates a run-down house in the neighborhood. 
C)  Bob occasionally drives while drunk. 
D)  Bob's Service Station donates a car to charity. 
A)  Bob's Service Station dumps used oil in the river. 
B)  Bob renovates a run-down house in the neighborhood. 
C)  Bob occasionally drives while drunk. 
D)  Bob's Service Station donates a car to charity.

Question 13

Pollution has _____ and _____.

Accepted Answer

A)  no benefits; only costs 
B)  benefits; costs 
C)  no opposition; only advocates 
D)  short-term effects; very little long-term effect 
A)  no benefits; only costs 
B)  benefits; costs 
C)  no opposition; only advocates 
D)  short-term effects; very little long-term effect

Question 14

Use the following to answer questions:
Figure: Efficiency and Pollution  
-(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the government imposed an environmental standard that did NOT allow the quantity of pollution to exceed 30 tons, there would be:

Accepted Answer

A)  a socially optimal quantity of pollution. 
B)  too little pollution, because its marginal social benefit would exceed its marginal social cost. 
C)  too much pollution, because its marginal social cost would exceed its marginal social benefit. 
D)  too much pollution, because any pollution is too much from an economist's perspective. 
A)  a socially optimal quantity of pollution. 
B)  too little pollution, because its marginal social benefit would exceed its marginal social cost. 
C)  too much pollution, because its marginal social cost would exceed its marginal social benefit. 
D)  too much pollution, because any pollution is too much from an economist's perspective.

Question 15

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters:

Accepted Answer

A)  emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax. 
B)  emit the same amount of pollution, regardless of the marginal benefit of polluting. 
C)  pay the same total tax bill for their pollution. 
D)  reduce pollution emissions to zero. 
A)  emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax. 
B)  emit the same amount of pollution, regardless of the marginal benefit of polluting. 
C)  pay the same total tax bill for their pollution. 
D)  reduce pollution emissions to zero.

Question 16

Use the following to answer questions:
Figure: The Socially Optimal Quantity of Pollution  
-(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal Quantity of Pollution, the optimal quantity of pollution:

Accepted Answer

A)  could be achieved with a Pigouvian subsidy. 
B)  is unlikely to be achieved without government intervention. 
C)  could be achieved with a Pigouvian tax. 
D)  is unlikely to be achieved without government intervention, but it could be achieved with a Pigouvian tax. 
A)  could be achieved with a Pigouvian subsidy. 
B)  is unlikely to be achieved without government intervention. 
C)  could be achieved with a Pigouvian tax. 
D)  is unlikely to be achieved without government intervention, but it could be achieved with a Pigouvian tax.

Question 17

Assume the price of a tradable emissions permit for a ton of sulfur dioxide is $150. Which of the following is INCORRECT?

Accepted Answer

A)  A firm that buys permits has an incentive to limit pollution to the point at which the marginal benefit of emissions is equal to $150. 
B)  A firm that has more permits than it plans to use has an incentive to limit pollution to the point at which the marginal benefit of emissions is equal to $150. 
C)  The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. 
D)  The opportunity cost of emitting a ton of sulfur dioxide is $150 for all firms. 
A)  A firm that buys permits has an incentive to limit pollution to the point at which the marginal benefit of emissions is equal to $150. 
B)  A firm that has more permits than it plans to use has an incentive to limit pollution to the point at which the marginal benefit of emissions is equal to $150. 
C)  The opportunity cost of emitting a ton of sulfur dioxide is $75 for all firms. 
D)  The opportunity cost of emitting a ton of sulfur dioxide is $150 for all firms.

Question 18

Use the following to answer questions:  
-(Table: Externalities from Parks) The table Externalities from Parks shows the marginal social benefit and the marginal social cost of preserving various amounts of land in a city for a public park. At the socially optimum amount of land dedicated to the public park the marginal social cost will be:

Accepted Answer

A)  $225. 
B)  $150. 
C)  $100. 
D)  $0. 
A)  $225. 
B)  $150. 
C)  $100. 
D)  $0.

Question 19

Suppose the federal government determines the total level of municipal sewage that can be discharged by cities along a river. If the cities are able to buy and sell rights to the total discharge level among themselves, then the government's environmental policy includes:

Accepted Answer

A)  emissions taxes. 
B)  regulations. 
C)  tradable pollution permits. 
D)  command and control. 
A)  emissions taxes. 
B)  regulations. 
C)  tradable pollution permits. 
D)  command and control.

Question 20

If the marginal social benefit received from pollution is equal to its marginal social cost:

Accepted Answer

A)  society's well-being can be improved if the quantity of pollution increases. 
B)  society's well-being can be improved if the quantity of pollution decreases. 
C)  society has achieved its socially optimal level of pollution. 
D)  the market is producing too much pollution. 
A)  society's well-being can be improved if the quantity of pollution increases. 
B)  society's well-being can be improved if the quantity of pollution decreases. 
C)  society has achieved its socially optimal level of pollution. 
D)  the market is producing too much pollution.

According to the Coase theorem, only when transaction costs are extremely high can two parties internalize a negative externality.

Which of the following is a negative externality?

Suppose the production of roses generates a positive externality in that travelers enjoy the scenic beauty of the garden. An appropriate government policy yielding the efficient outcome would be a:

According to the Coase theorem, the inefficiencies caused by externalities can be removed by the private sector if individuals enter into appropriately structured deals, provided that the transaction costs of such deals are sufficiently low.

Use the following to answer questions: Figure: Pollution and Efficiency -(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emissions are a result of production, an efficient solution takes place at a price of _ and a quantity of _.

Use the following to answer questions: -(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the outcome is _ because _.

A principal cause of market failure is actions generating side effects that are not properly taken into account by the market.

A market economy will produce _____ without any government regulation.

Both emissions taxes and tradable emissions permits:

Which of the following is a positive externality?

Which of the following is NOT an activity that generates an externality?

Pollution has _ and _.

Use the following to answer questions: Figure: Efficiency and Pollution -(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the government imposed an environmental standard that did NOT allow the quantity of pollution to exceed 30 tons, there would be:

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters:

Use the following to answer questions: Figure: The Socially Optimal Quantity of Pollution -(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal Quantity of Pollution, the optimal quantity of pollution:

Assume the price of a tradable emissions permit for a ton of sulfur dioxide is $150. Which of the following is INCORRECT?

Suppose the federal government determines the total level of municipal sewage that can be discharged by cities along a river. If the cities are able to buy and sell rights to the total discharge level among themselves, then the government's environmental policy includes:

If the marginal social benefit received from pollution is equal to its marginal social cost:

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Uncertainty, Risk, and Private Information

Filters

Exam 16: Externalities

According to the Coase theorem, only when transaction costs are extremely high can two parties internalize a negative externality.

Which of the following is a negative externality?

Suppose the production of roses generates a positive externality in that travelers enjoy the scenic beauty of the garden. An appropriate government policy yielding the efficient outcome would be a:

According to the Coase theorem, the inefficiencies caused by externalities can be removed by the private sector if individuals enter into appropriately structured deals, provided that the transaction costs of such deals are sufficiently low.

Use the following to answer questions: Figure: Pollution and Efficiency -(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emissions are a result of production, an efficient solution takes place at a price of _____ and a quantity of _____.

Use the following to answer questions: -(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the outcome is _____ because _____.

A principal cause of market failure is actions generating side effects that are not properly taken into account by the market.

A market economy will produce _____ without any government regulation.

Both emissions taxes and tradable emissions permits:

Which of the following is a positive externality?

Which of the following is NOT an activity that generates an externality?

Pollution has _____ and _____.

Use the following to answer questions: Figure: Efficiency and Pollution -(Figure: Efficiency and Pollution) Look at the figure Efficiency and Pollution. If the government imposed an environmental standard that did NOT allow the quantity of pollution to exceed 30 tons, there would be:

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters:

Use the following to answer questions: Figure: The Socially Optimal Quantity of Pollution -(Figure: The Socially Optimal Quantity of Pollution) In the figure The Socially Optimal Quantity of Pollution, the optimal quantity of pollution:

Assume the price of a tradable emissions permit for a ton of sulfur dioxide is $150. Which of the following is INCORRECT?

Suppose the federal government determines the total level of municipal sewage that can be discharged by cities along a river. If the cities are able to buy and sell rights to the total discharge level among themselves, then the government's environmental policy includes:

If the marginal social benefit received from pollution is equal to its marginal social cost:

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Oligopoly

Monopolistic Competition and Product Differentiation

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Uncertainty, Risk, and Private Information

Filters

Use the following to answer questions: Figure: Pollution and Efficiency -(Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emissions are a result of production, an efficient solution takes place at a price of _ and a quantity of _.

Use the following to answer questions: -(Table: Coal Mine Pollution) The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. If 5 tons of pollution is produced, the outcome is _ because _.

Pollution has _ and _.