Question 1

If education produces positive externalities,we would expect

Accepted Answer

A) the government to tax education. 
B) the government to subsidize education. 
C) people to realize the benefits, which would increase the demand for education. 
D) colleges to relax admission requirements. 
A) the government to tax education. 
B) the government to subsidize education. 
C) people to realize the benefits, which would increase the demand for education. 
D) colleges to relax admission requirements.

Question 2

Two firms,A and B,each currently dump 50 tons of chemicals into the local river.The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river.It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river,and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river.The government gives each firm 20 pollution permits.Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other.What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? You should assume that any firm that buys a permit pays the highest price for that permit.

Accepted Answer

A) $3,000; $1,500 
B) $4,500; $3,500 
C) $4,500; $4,000 
D) $4,500; $2,500 
A) $3,000; $1,500 
B) $4,500; $3,500 
C) $4,500; $4,000 
D) $4,500; $2,500

Question 3

If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million,the policy would be considered a

Accepted Answer

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

Question 4

Government intervention is necessary to correct all externalities.

Accepted Answer

A) True 
 B)False

Question 5

Suppose that a firm produces electricity by burning coal.The production process creates a negative externality of air pollution.If the firm does not internalize the cost of the externality,it will produce where

Accepted Answer

A) the value of electricity to consumers equals the private cost of producing electricity. 
B) the value of electricity to consumers equals the social cost of producing electricity. 
C) the cost of the externality is maximized. 
D) the transaction costs of private bargaining are minimized. 
A) the value of electricity to consumers equals the private cost of producing electricity. 
B) the value of electricity to consumers equals the social cost of producing electricity. 
C) the cost of the externality is maximized. 
D) the transaction costs of private bargaining are minimized.

Question 6

Which of the following is an example of a positive externality?

Accepted Answer

A) air pollution 
B) a person littering in a public park 
C) a nice garden in front of your neighbor's house 
D) the pollution of a stream 
A) air pollution 
B) a person littering in a public park 
C) a nice garden in front of your neighbor's house 
D) the pollution of a stream

Question 7

Private markets fail to account for externalities because

Accepted Answer

A) externalities don't occur in private markets. 
B) sellers include costs associated with externalities in the price of their product. 
C) decisionmakers in the market fail to include the costs of their behavior to third parties. 
D) the government cannot easily estimate the optimal quantity of pollution. 
A) externalities don't occur in private markets. 
B) sellers include costs associated with externalities in the price of their product. 
C) decisionmakers in the market fail to include the costs of their behavior to third parties. 
D) the government cannot easily estimate the optimal quantity of pollution.

Question 8

Dioxin emission that results from the production of paper is a good example of a negative externality because

Accepted Answer

A) self-interested paper firms are generally unaware of environmental regulations. 
B) there are fines for producing too much dioxin. 
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create. 
D) toxic emissions are the best example of an externality. 
A) self-interested paper firms are generally unaware of environmental regulations. 
B) there are fines for producing too much dioxin. 
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create. 
D) toxic emissions are the best example of an externality.

Question 9

In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

Accepted Answer

A) it is hard to estimate the market demand curve and thus charge the "right" corrective tax. 
B) selling pollution permits create a net increase in pollution. 
C) Corrective taxes distort incentives. 
D) Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost. 
A) it is hard to estimate the market demand curve and thus charge the "right" corrective tax. 
B) selling pollution permits create a net increase in pollution. 
C) Corrective taxes distort incentives. 
D) Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.

Question 10

If it is illegal for a biochemical manufacturer to release its waste into a nearby stream,then this is an example of

Accepted Answer

A) a market-based policy. 
B) a command-and-control policy. 
C) tradable pollution permits. 
D) transaction costs. 
A) a market-based policy. 
B) a command-and-control policy. 
C) tradable pollution permits. 
D) transaction costs.

Question 11

Figure 10-1
  
-Refer to Figure 10-1.This graph represents the tobacco industry.The socially optimal price and quantity are

Accepted Answer

A) $1.90 and 38 units, respectively. 
B) $1.80 and 35 units, respectively. 
C) $1.60 and 42 units, respectively. 
D) $1.35 and 58 units, respectively. 
A) $1.90 and 38 units, respectively. 
B) $1.80 and 35 units, respectively. 
C) $1.60 and 42 units, respectively. 
D) $1.35 and 58 units, respectively.

Question 12

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Accepted Answer

A) externalize the positive externality. 
B) externalize the negative externality. 
C) internalize the positive externality. 
D) internalize the negative externality. 
A) externalize the positive externality. 
B) externalize the negative externality. 
C) internalize the positive externality. 
D) internalize the negative externality.

Question 13

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages.If there are no government subsidies for MBAs,then which of the following statements is correct?

Accepted Answer

A) The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. 
B) The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. 
C) The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. 
D) There is not enough information to answer the question. 
A) The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. 
B) The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. 
C) The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. 
D) There is not enough information to answer the question.

Question 14

If a paper manufacturer does not bear the entire cost of the dioxin it emits,it will

Accepted Answer

A) emit a lower level of dioxin than is socially efficient. 
B) emit a higher level of dioxin than is socially efficient. 
C) emit an acceptable level of dioxin. 
D) not emit any dioxin in an attempt to avoid paying the entire cost. 
A) emit a lower level of dioxin than is socially efficient. 
B) emit a higher level of dioxin than is socially efficient. 
C) emit an acceptable level of dioxin. 
D) not emit any dioxin in an attempt to avoid paying the entire cost.

Question 15

Which of the following statements is not correct?

Accepted Answer

A) Private markets tend to over-produce products with negative externalities. 
B) Private markets tend to under-produce products with positive externalities. 
C) Private parties can bargain to efficient outcomes even in the presence of externalities. 
D) Private parties are usually more successful in achieving efficient outcomes than government policies. 
A) Private markets tend to over-produce products with negative externalities. 
B) Private markets tend to under-produce products with positive externalities. 
C) Private parties can bargain to efficient outcomes even in the presence of externalities. 
D) Private parties are usually more successful in achieving efficient outcomes than government policies.

Question 16

Which of the following is the most effective way to internalize a technology spillover?

Accepted Answer

A) taxes 
B) patents 
C) government regulations 
D) free markets 
A) taxes 
B) patents 
C) government regulations 
D) free markets

Question 17

An externality is an example of

Accepted Answer

A) a corrective tax. 
B) a tradable pollution permit. 
C) a market failure. 
D) Both a and b are correct. 
A) a corrective tax. 
B) a tradable pollution permit. 
C) a market failure. 
D) Both a and b are correct.

Question 18

Figure 10-2
  
-Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?

Accepted Answer

A) Impose a tax of $7.50 per soccer ball. 
B) Impose a tax of $7 per soccer ball. 
C) Offer a subsidy of $3 per soccer ball. 
D) Offer a subsidy of $2.50 per soccer ball. 
A) Impose a tax of $7.50 per soccer ball. 
B) Impose a tax of $7 per soccer ball. 
C) Offer a subsidy of $3 per soccer ball. 
D) Offer a subsidy of $2.50 per soccer ball.

Question 19

Which of the following is not an effective method to reduce negative externalities?

Accepted Answer

A) relying on voluntary compliance 
B) taxing the output of industries that pollute 
C) creating legal environmental standards 
D) increasing public spending on cleanup and reduction of pollution 
A) relying on voluntary compliance 
B) taxing the output of industries that pollute 
C) creating legal environmental standards 
D) increasing public spending on cleanup and reduction of pollution

Question 20

When externalities cause markets to be inefficient,

Accepted Answer

A) government action is always needed to solve the problem. 
B) private solutions can be developed to solve the problem. 
C) given enough time, externalities can be solved through normal market adjustments. 
D) there is no way to eliminate the problem of externalities in a market. 
A) government action is always needed to solve the problem. 
B) private solutions can be developed to solve the problem. 
C) given enough time, externalities can be solved through normal market adjustments. 
D) there is no way to eliminate the problem of externalities in a market.

Exam 10: Externalities

If education produces positive externalities,we would expect

If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million,the policy would be considered a

Government intervention is necessary to correct all externalities.

Suppose that a firm produces electricity by burning coal.The production process creates a negative externality of air pollution.If the firm does not internalize the cost of the externality,it will produce where

Which of the following is an example of a positive externality?

Private markets fail to account for externalities because

Dioxin emission that results from the production of paper is a good example of a negative externality because

In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

If it is illegal for a biochemical manufacturer to release its waste into a nearby stream,then this is an example of

Figure 10-1 -Refer to Figure 10-1.This graph represents the tobacco industry.The socially optimal price and quantity are

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages.If there are no government subsidies for MBAs,then which of the following statements is correct?

If a paper manufacturer does not bear the entire cost of the dioxin it emits,it will

Which of the following statements is not correct?

Which of the following is the most effective way to internalize a technology spillover?

An externality is an example of

Figure 10-2 -Refer to Figure 10-2.Suppose that the production of soccer balls creates a social cost which is depicted in the graph above.If the government wanted to force the firm to internalize the cost of the externality,what action should it take?

Which of the following is not an effective method to reduce negative externalities?

When externalities cause markets to be inefficient,

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

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

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality 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 Basic Tools of Finance

Unemployment

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 Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters