Question 1

Which of the following statements is true?

Accepted Answer

A) the initial distribution of rights affects the market's ability to reach an efficient outcome 
B) the initial distribution of rights affects the distribution of economic wellbeing 
C) government intervention is required if the distribution of rights favours Dick 
D) government intervention is always required 
A) the initial distribution of rights affects the market's ability to reach an efficient outcome 
B) the initial distribution of rights affects the distribution of economic wellbeing 
C) government intervention is required if the distribution of rights favours Dick 
D) government intervention is always required

Question 2

Graph 10-3   This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-3.At the private market outcome, the equilibrium price of kiwifruit will be:

Accepted Answer

A) P₁ 
B) P₂ 
C) P₃ 
D) P₄ 
A) P₁ 
B) P₂ 
C) P₃ 
D) P₄

Question 3

Which of the following suggests that the private market can be effective in dealing with externalities?

Accepted Answer

A) the 'invisible hand' 
B) the law of diminishing social returns 
C) the Coase theorem 
D) technology policy 
A) the 'invisible hand' 
B) the law of diminishing social returns 
C) the Coase theorem 
D) technology policy

Question 4

Government can solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False

Question 5

Medical research is often presented as an example of a positive externality.Which of the following options available to policymakers would encourage producers of medical knowledge to provide a socially optimal level of production?
(i) imposing price ceilings on selected medical procedures
(ii) placing taxes on the sale of prescription drugs
(iii) providing subsidies to these firms

Accepted Answer

A) (i), (ii) and (iii) 
B) (i) and (ii) only 
C) (iii) only 
D) none of the above 
A) (i), (ii) and (iii) 
B) (i) and (ii) only 
C) (iii) only 
D) none of the above

Question 6

Which of the following statements is most correct?

Accepted Answer

A) Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost 
B) Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost 
C) Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate 
D) Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate 
A) Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost 
B) Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost 
C) Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate 
D) Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate

Question 7

Consider a local factory that pollutes a nearby stream.Local fishers may be unable to negotiate a deal with the local factory to eliminate the negative externality because:

Accepted Answer

A) the fishers' cost will never exceed the factory's benefit from polluting the stream 
B) the local law gives the factory the right to pollute 
C) the cost of coordinating the fishers into one bargaining body is too large 
D) some of the local fishers work at the factory 
A) the fishers' cost will never exceed the factory's benefit from polluting the stream 
B) the local law gives the factory the right to pollute 
C) the cost of coordinating the fishers into one bargaining body is too large 
D) some of the local fishers work at the factory

Question 8

Dick owns a dog whose barking annoys Dick's neighbour Jane.Dick receives personal benefit from owning the dog and Jane bears a cost of Dick's ownership of the dog.Assuming that Dick has the legal right to keep the dog, which of the following statements is true?

Accepted Answer

A) a private solution can always be arranged 
B) a private solution can be arranged only if Jane's cost equals Dick's benefit from the dog 
C) a private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog 
D) a private solution can be arranged only if Dick's benefit from his dog exceeds Jane's cost 
A) a private solution can always be arranged 
B) a private solution can be arranged only if Jane's cost equals Dick's benefit from the dog 
C) a private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog 
D) a private solution can be arranged only if Dick's benefit from his dog exceeds Jane's cost

Question 9

What is an externality? Give three examples of different types of externalities.

Accepted Answer

An externality is the uncompen

Question 10

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 11

Graph 10-3   This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-3.At the private market outcome, quantity Q₁ represents the:

Accepted Answer

A) quantity of kiwifruit consumers will buy 
B) quantity of kiwifruit and honey consumers will buy 
C) socially optimal quantity of kiwifruit that should be produced 
D) optimal price of a kiwifruit from the standpoint of society as a whole 
A) quantity of kiwifruit consumers will buy 
B) quantity of kiwifruit and honey consumers will buy 
C) socially optimal quantity of kiwifruit that should be produced 
D) optimal price of a kiwifruit from the standpoint of society as a whole

Question 12

Graph 10-5  
-Refer to Graph 10-5.Which of the graphs shown best depicts the case of a negative production externality?

Accepted Answer

A) panel (a) 
B) panel (b) 
C) panel (c) 
D) panel (d) 
A) panel (a) 
B) panel (b) 
C) panel (c) 
D) panel (d)

Question 13

When the government reverts to command-and-control policy to solve an externality, it:

Accepted Answer

A) is usually the most effective policy option available 
B) creates policies that directly regulate behaviour 
C) usually involves taxing consumption of a commodity 
D) typically refers to the Coase theorem to structure the policy 
A) is usually the most effective policy option available 
B) creates policies that directly regulate behaviour 
C) usually involves taxing consumption of a commodity 
D) typically refers to the Coase theorem to structure the policy

Question 14

If the government were to decide that for the best interests of the country each litre of petrol should cost $2.50 instead of $1.50, it would be making an assumption about:

Accepted Answer

A) subsidies 
B) Pigovian taxes 
C) the social cost of petrol 
D) the private cost of petrol 
A) subsidies 
B) Pigovian taxes 
C) the social cost of petrol 
D) the private cost of petrol

Question 15

The distribution of rights among parties affected by an externality:

Accepted Answer

A) hinders the ability of private parties to properly price the externality 
B) enhances the market incentive to reach an efficient solution 
C) determines who bears the cost of the solution but has no effect on the efficiency of this outcome 
D) affects the efficiency of the outcome, but does not determine who bears the cost 
A) hinders the ability of private parties to properly price the externality 
B) enhances the market incentive to reach an efficient solution 
C) determines who bears the cost of the solution but has no effect on the efficiency of this outcome 
D) affects the efficiency of the outcome, but does not determine who bears the cost

Question 16

Assuming that transaction costs are small, the Coase theorem is likely to be helpful in articulating a solution to:

Accepted Answer

A) a neighbourhood problem with unattended dogs running loose 
B) a neighbour who doesn't care for his yard 
C) a neighbour who deals drugs out of his house 
D) all of the above issues 
A) a neighbourhood problem with unattended dogs running loose 
B) a neighbour who doesn't care for his yard 
C) a neighbour who deals drugs out of his house 
D) all of the above issues

Question 17

The externality associated with the consumption of fatty foods will lead the market to produce a larger quantity than socially desirable.

Accepted Answer

A) True 
 B)False

Question 18

Graph 10-3   This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-3.For each tray of kiwifruit produced, the social cost would include which of the following?
(i) the private costs of the kiwifruit farmers
(ii) the enjoyment that buyers get from eating kiwifruit
(iii) the cost beekeepers incur to replace hives that die because of pesticide use

Accepted Answer

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

Question 19

Assume that your housemate is very messy.Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you.The Coase theorem would suggest that an efficient solution would be for you to:

Accepted Answer

A) continue to live with your messy housemate until you are able to make other living arrangements elsewhere 
B) encourage your messy housemate to stop her messy habits or force her to move out 
C) pay your housemate at least $100 but no more than $200 to clean up after herself 
D) charge your housemate at least $100 but no more than $200 to have you clean up after her 
A) continue to live with your messy housemate until you are able to make other living arrangements elsewhere 
B) encourage your messy housemate to stop her messy habits or force her to move out 
C) pay your housemate at least $100 but no more than $200 to clean up after herself 
D) charge your housemate at least $100 but no more than $200 to have you clean up after her

Question 20

It is generally difficult or impossible for private markets to take externalities into account because:

Accepted Answer

A) decision makers in the market fail to take account of the spillover effects of their behaviour 
B) buyers and sellers in private markets are only interested in social wellbeing 
C) people are only interested in short-term gains 
D) governments are responsible for externality problems 
A) decision makers in the market fail to take account of the spillover effects of their behaviour 
B) buyers and sellers in private markets are only interested in social wellbeing 
C) people are only interested in short-term gains 
D) governments are responsible for externality problems

Exam 10: Externalities

Which of the following statements is true?

Graph 10-3 This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees. -Refer to Graph 10-3.At the private market outcome, the equilibrium price of kiwifruit will be:

Which of the following suggests that the private market can be effective in dealing with externalities?

Government can solve externality problems that are too costly for private parties to solve.

Which of the following statements is most correct?

Consider a local factory that pollutes a nearby stream.Local fishers may be unable to negotiate a deal with the local factory to eliminate the negative externality because:

Dick owns a dog whose barking annoys Dick's neighbour Jane.Dick receives personal benefit from owning the dog and Jane bears a cost of Dick's ownership of the dog.Assuming that Dick has the legal right to keep the dog, which of the following statements is true?

What is an externality? Give three examples of different types of externalities.

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Graph 10-3 This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees. -Refer to Graph 10-3.At the private market outcome, quantity Q₁ represents the:

Graph 10-5 -Refer to Graph 10-5.Which of the graphs shown best depicts the case of a negative production externality?

When the government reverts to command-and-control policy to solve an externality, it:

If the government were to decide that for the best interests of the country each litre of petrol should cost $2.50 instead of $1.50, it would be making an assumption about:

The distribution of rights among parties affected by an externality:

Assuming that transaction costs are small, the Coase theorem is likely to be helpful in articulating a solution to:

The externality associated with the consumption of fatty foods will lead the market to produce a larger quantity than socially desirable.

Assume that your housemate is very messy.Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you.The Coase theorem would suggest that an efficient solution would be for you to:

It is generally difficult or impossible for private markets to take externalities into account because:

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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