Question 1

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Accepted Answer

A) True 
 B)False

Question 2

What is the Coase theorem? What are the conditions needed for the Coase theorem to hold?

Accepted Answer

The Coase theorem says that in the absen

Question 3

Which of the following policies is government most inclined to use when faced with a positive externality?

Accepted Answer

A) taxation 
B) permits 
C) subsidies 
D) usage fees 
A) taxation 
B) permits 
C) subsidies 
D) usage fees

Question 4

If the consumption of bananas is at a less than socially optimal level, we can say that:

Accepted Answer

A) consumption of bananas creates a positive consumption externality 
B) production of bananas creates a negative consumption externality 
C) consumption of bananas creates a negative production externality 
D) production of bananas creates a neutral production externality 
A) consumption of bananas creates a positive consumption externality 
B) production of bananas creates a negative consumption externality 
C) consumption of bananas creates a negative production externality 
D) production of bananas creates a neutral production externality

Question 5

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

Accepted Answer

A) give sellers the incentive to take account of the external effects of their actions 
B) have an offsetting effect that reduces the producer's private production costs 
C) increase the amount of the commodity exchanged in market equilibrium 
D) restrict the producer's ability to take the costs of the externality into account when deciding how much to supply 
A) give sellers the incentive to take account of the external effects of their actions 
B) have an offsetting effect that reduces the producer's private production costs 
C) increase the amount of the commodity exchanged in market equilibrium 
D) restrict the producer's ability to take the costs of the externality into account when deciding how much to supply

Question 6

Graph 10-5  
-Refer to Graph 10-5.In the figure shown, which set of graphs depict a situation most likely to benefit from a Pigovian tax?

Accepted Answer

A) panels (a) and (c) 
B) panels (b) and (d) 
C) panels (b) and (c) 
D) panels (a) and (d) 
A) panels (a) and (c) 
B) panels (b) and (d) 
C) panels (b) and (c) 
D) panels (a) and (d)

Question 7

Private contracts between parties with mutual interests:

Accepted Answer

A) can only reduce the wellbeing of society 
B) will always lead to market outcomes in which public interest is sacrificed for personal gain 
C) can solve some inefficiencies associated with positive externalities 
D) will always cause negative externalities to arise 
A) can only reduce the wellbeing of society 
B) will always lead to market outcomes in which public interest is sacrificed for personal gain 
C) can solve some inefficiencies associated with positive externalities 
D) will always cause negative externalities to arise

Question 8

Contracts cannot solve the inefficiency that arises from externalities.

Accepted Answer

A) True 
 B)False

Question 9

Graph 10-2   This graph depicts the market for pork.Use this information to answer the following question(s).
-In Graph 10-2, producer and consumer surplus at the point of market efficiency is represented by area(s):

Accepted Answer

A) a + b 
B) a + d 
C) b + c 
D) c + d 
A) a + b 
B) a + d 
C) b + c 
D) c + d

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidise producers by:

Accepted Answer

A) means of a Pigovian tax 
B) an amount equal to the value of the technology spillover 
C) helping those companies that are adversely affected by the new technology 
D) transferring income to the low-income portion of the population 
A) means of a Pigovian tax 
B) an amount equal to the value of the technology spillover 
C) helping those companies that are adversely affected by the new technology 
D) transferring income to the low-income portion of the population

Question 12

When developing a new technology for operating guided missiles, inventors are likely to consider the other uses this technology might have in domestic use.

Accepted Answer

A) True 
 B)False

Question 13

In which of the following situations may tradeable pollution permits be preferred to Pigovian taxes?
(i) where they internalise the externality of pollution
(ii) where regulatory agencies do not know the demand curve for pollution
(iii) where the government is not interested in generating maximum revenue from polluting firms

Accepted Answer

A) (i) only 
B) (ii) only 
C) (ii) and (iii) only 
D) (i), (ii) and (iii) 
A) (i) only 
B) (ii) only 
C) (ii) and (iii) only 
D) (i), (ii) and (iii)

Question 14

A positive externality exists when:

Accepted Answer

A) a person engages in an activity that has a spillover that makes a bystander better off 
B) the market has only one seller 
C) a firm sells its product in an external foreign market 
D) a person engages in an activity that has a spillover that makes a bystander worse off 
A) a person engages in an activity that has a spillover that makes a bystander better off 
B) the market has only one seller 
C) a firm sells its product in an external foreign market 
D) a person engages in an activity that has a spillover that makes a bystander worse off

Question 15

Which of the following is true of the Coase theorem?

Accepted Answer

A) parties will always reach an optimal bargaining outcome 
B) the bargain outcome will be inefficient 
C) interested parties will need an arbitrator in order to reach an agreement that is efficient 
D) none of the options is true 
A) parties will always reach an optimal bargaining outcome 
B) the bargain outcome will be inefficient 
C) interested parties will need an arbitrator in order to reach an agreement that is efficient 
D) none of the options is true

Question 16

In a market characterised by externalities, the market equilibrium fails to maximise the total benefit to society as a whole.

Accepted Answer

A) True 
 B)False

Question 17

According to the Coase theorem, private parties are likely to solve the problem of externalities if:

Accepted Answer

A) the cost of bargaining is small. 
B) the contract is easy to enforce 
C) the number of parties involved is relatively small 
D) all of the above are true 
A) the cost of bargaining is small. 
B) the contract is easy to enforce 
C) the number of parties involved is relatively small 
D) all of the above are true

Question 18

Technology spillover occurs when:

Accepted Answer

A) the firm's innovations allow it to establish monopoly power 
B) new products by high-tech firms create harmful wastes 
C) research by a firm creates innovations that are easily applied and used by others 
D) patent laws are used to hinder other firms adopting new technology 
A) the firm's innovations allow it to establish monopoly power 
B) new products by high-tech firms create harmful wastes 
C) research by a firm creates innovations that are easily applied and used by others 
D) patent laws are used to hinder other firms adopting new technology

Question 19

Social welfare can be enhanced by allowing firms to trade their carbon credits.

Accepted Answer

A) True 
 B)False

Question 20

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall.If a tax on fertiliser was set at the optimal level:

Accepted Answer

A) farmers would choose not to use any fertiliser 
B) farmers fully internalise the pollution costs of the fertiliser 
C) farm output would be maximised 
D) the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium 
A) farmers would choose not to use any fertiliser 
B) farmers fully internalise the pollution costs of the fertiliser 
C) farm output would be maximised 
D) the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium

Exam 10: Externalities

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

What is the Coase theorem? What are the conditions needed for the Coase theorem to hold?

Which of the following policies is government most inclined to use when faced with a positive externality?

If the consumption of bananas is at a less than socially optimal level, we can say that:

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

Graph 10-5 -Refer to Graph 10-5.In the figure shown, which set of graphs depict a situation most likely to benefit from a Pigovian tax?

Private contracts between parties with mutual interests:

Contracts cannot solve the inefficiency that arises from externalities.

Graph 10-2 This graph depicts the market for pork.Use this information to answer the following question(s). -In Graph 10-2, producer and consumer surplus at the point of market efficiency is represented by area(s):

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

To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidise producers by:

When developing a new technology for operating guided missiles, inventors are likely to consider the other uses this technology might have in domestic use.

A positive externality exists when:

Which of the following is true of the Coase theorem?

In a market characterised by externalities, the market equilibrium fails to maximise the total benefit to society as a whole.

According to the Coase theorem, private parties are likely to solve the problem of externalities if:

Technology spillover occurs when:

Social welfare can be enhanced by allowing firms to trade their carbon credits.

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall.If a tax on fertiliser was set at the optimal level:

Ten Lessons From 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

Application: 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

Business Strategy and Oligopoly

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

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 Trade-Off Between Inflation and Unemployment

Global Financial Crisis of 2008 and Beyond

Five Debates Over Macroeconomic Policy

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