Question 1

When the social cost of an externality is lower than its private cost:

Accepted Answer

A) society is likely to benefit from a corrective tax 
B) the externality is a positive one and society will not consume enough of the good 
C) the externality is a positive one and society will consume too much of the good 
D) society will benefit from the introduction of tradeable permits for production of the good 
A) society is likely to benefit from a corrective tax 
B) the externality is a positive one and society will not consume enough of the good 
C) the externality is a positive one and society will consume too much of the good 
D) society will benefit from the introduction of tradeable permits for production of the good

Question 2

The main goal of a tax on pollution is to raise revenue for the government.

Accepted Answer

A) True 
 B)False

Question 3

If children impose a negative externality, which of the following must be true?

Accepted Answer

A) parents would rather have less children 
B) parents' costs exceed the benefits associated with having children 
C) parents do not bear the full cost imposed by their children 
D) all of the above 
A) parents would rather have less children 
B) parents' costs exceed the benefits associated with having children 
C) parents do not bear the full cost imposed by their children 
D) all of the above

Question 4

A petrol tax is a good way of encouraging people to use safer cars.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most correct about a market that is characterised by a negative production externality?

Accepted Answer

A) the equilibrium quantity of output is equal to the socially optimal quantity 
B) the equilibrium quantity of output is greater than the socially optimal quantity 
C) government intervention is only required for negative externalities 
D) the equilibrium quantity of output is less than the socially optimal quantity 
A) the equilibrium quantity of output is equal to the socially optimal quantity 
B) the equilibrium quantity of output is greater than the socially optimal quantity 
C) government intervention is only required for negative externalities 
D) the equilibrium quantity of output is less than the socially optimal quantity

Question 6

The coalition government has removed the ban on the manufacture and sale of CFCs in Australia.This is an example of:

Accepted Answer

A) a market-based policy 
B) a command-and-control policy 
C) tradeable permits 
D) allowing the market to reach equilibrium taking only private costs into account 
A) a market-based policy 
B) a command-and-control policy 
C) tradeable permits 
D) allowing the market to reach equilibrium taking only private costs into account

Question 7

When one firm sells its pollution permit to another firm:

Accepted Answer

A) both firms benefit 
B) the total amount of pollution remains the same 
C) social welfare is enhanced 
D) all of the above occur 
A) both firms benefit 
B) the total amount of pollution remains the same 
C) social welfare is enhanced 
D) all of the above occur

Question 8

When dealing with consumption externalities, government can potentially correct the market failure:

Accepted Answer

A) only in the case of positive consumption externalities 
B) only in the case of negative consumption externalities 
C) in both the positive and negative cases by inducing market participants to internalise the externality 
D) in neither the positive or negative cases because governments can only correct production externalities 
A) only in the case of positive consumption externalities 
B) only in the case of negative consumption externalities 
C) in both the positive and negative cases by inducing market participants to internalise the externality 
D) in neither the positive or negative cases because governments can only correct production externalities

Question 9

A positive production externality will cause a market to produce:

Accepted Answer

A) less than is socially desirable 
B) more than is socially desirable 
C) more than is market optimal 
D) less than is market optimal 
A) less than is socially desirable 
B) more than is socially desirable 
C) more than is market optimal 
D) less than is market optimal

Question 10

If the government were to limit the release of air pollution produced by a steel mill to 10 000 units, this policy would be considered a:

Accepted Answer

A) regulation 
B) Pigovian tax 
C) subsidy 
D) market-based policy 
A) regulation 
B) Pigovian tax 
C) subsidy 
D) market-based policy

Question 11

If a particular market is associated with an externality, the social optimum should include the wellbeing of:

Accepted Answer

A) buyers, sellers and bystanders 
B) bystanders and buyers 
C) bystanders and sellers 
D) buyers and sellers only 
A) buyers, sellers and bystanders 
B) bystanders and buyers 
C) bystanders and sellers 
D) buyers and sellers only

Question 12

Paul owns a mushroom farm.The smell from the farm reduces the value of adjacent houses by a total of $30 000.Suppose that the benefit of the mushroom farm to Paul is $20 000.Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:

Accepted Answer

A) adjacent property owners pay $20 000 to Paul to stop farming mushrooms 
B) Paul pays the adjacent property-owners $25 000 for their loss in house-values 
C) adjacent property owners pay $25 000 to Paul to stop farming mushrooms 
D) there is no private solution that would improve this situation 
A) adjacent property owners pay $20 000 to Paul to stop farming mushrooms 
B) Paul pays the adjacent property-owners $25 000 for their loss in house-values 
C) adjacent property owners pay $25 000 to Paul to stop farming mushrooms 
D) there is no private solution that would improve this situation

Question 13

Policies aimed at reducing an externality sometimes have unintended consequences.

Accepted Answer

A) True 
 B)False

Question 14

The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.

Accepted Answer

A) True 
 B)False

Question 15

Some economists believe that technology spillovers are pervasive and industries with the largest spillovers should be encouraged.

Accepted Answer

A) True 
 B)False

Question 16

Graph 10-1  
-Refer to Graph 10-1.Which price and quantity combination represents the social optimum?

Accepted Answer

A) P₁, Q₁ 
B) P₂, Q₁ 
C) P₁, Q₂ 
D) P₂, Q₂ 
A) P₁, Q₁ 
B) P₂, Q₁ 
C) P₁, Q₂ 
D) P₂, Q₂

Question 17

Assuming that Jane has the legal right to peace and quiet, which of the following statements is true?

Accepted Answer

A) if Dick's benefit exceeds Jane's cost, government intervention is necessary 
B) if Jane has legal right to peace and quiet, she only has to pay Dick when her cost is below his benefit 
C) if Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog 
D) Dick will pay to keep his dog if his benefit exceeds Jane's cost 
A) if Dick's benefit exceeds Jane's cost, government intervention is necessary 
B) if Jane has legal right to peace and quiet, she only has to pay Dick when her cost is below his benefit 
C) if Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog 
D) Dick will pay to keep his dog if his benefit exceeds Jane's cost

Question 18

Using the information in question 30, what would be a private solution to the above externality?

Accepted Answer

A) under the Coase theorem the two companies should be able to negotiate away the externality 
B) the two companies would need to trade permits for river pollution in order to achieve an optimal outcome 
C) the fishing firm could buy the fish-food manufacturing company 
D) the fishing firm should continue to make the most of the positive externality 
A) under the Coase theorem the two companies should be able to negotiate away the externality 
B) the two companies would need to trade permits for river pollution in order to achieve an optimal outcome 
C) the fishing firm could buy the fish-food manufacturing company 
D) the fishing firm should continue to make the most of the positive externality

Question 19

Internalising a positive production externality will cause the supply curve faced by an industry to:

Accepted Answer

A) shift to the right 
B) shift to the left 
C) expand 
D) remain unchanged 
A) shift to the right 
B) shift to the left 
C) expand 
D) remain unchanged

Question 20

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

When the social cost of an externality is lower than its private cost:

The main goal of a tax on pollution is to raise revenue for the government.

If children impose a negative externality, which of the following must be true?

A petrol tax is a good way of encouraging people to use safer cars.

Which of the following statements is most correct about a market that is characterised by a negative production externality?

The coalition government has removed the ban on the manufacture and sale of CFCs in Australia.This is an example of:

When one firm sells its pollution permit to another firm:

When dealing with consumption externalities, government can potentially correct the market failure:

A positive production externality will cause a market to produce:

If the government were to limit the release of air pollution produced by a steel mill to 10 000 units, this policy would be considered a:

If a particular market is associated with an externality, the social optimum should include the wellbeing of:

Paul owns a mushroom farm.The smell from the farm reduces the value of adjacent houses by a total of $30 000.Suppose that the benefit of the mushroom farm to Paul is $20 000.Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:

Policies aimed at reducing an externality sometimes have unintended consequences.

The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.

Some economists believe that technology spillovers are pervasive and industries with the largest spillovers should be encouraged.

Graph 10-1 -Refer to Graph 10-1.Which price and quantity combination represents the social optimum?

Assuming that Jane has the legal right to peace and quiet, which of the following statements is true?

Using the information in question 30, what would be a private solution to the above externality?

Internalising a positive production externality will cause the supply curve faced by an industry to:

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

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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