Question 1

According to the Coase theorem,the private market will need government intervention in order to reach an efficient outcome.

Accepted Answer

A) True 
 B)False

Question 2

Flu shots provide a positive externality.Suppose that the market for vaccinations is perfectly competitive.Without government intervention in the vaccination market,which of the following statements is correct?

Accepted Answer

A) At the current output level, the marginal social benefit exceeds the marginal private benefit. 
B) The current output level is inefficiently low. 
C) A per-shot subsidy could turn an inefficient situation into an efficient one. 
D) All of the above are correct. 
A) At the current output level, the marginal social benefit exceeds the marginal private benefit. 
B) The current output level is inefficiently low. 
C) A per-shot subsidy could turn an inefficient situation into an efficient one. 
D) All of the above are correct.

Question 3

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Accepted Answer

A) True 
 B)False

Question 4

Figure 10-1
  
-Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much tax revenue will the government receive?

Accepted Answer

A) $7.00 
B) $10.50 
C) $63.00 
D) $67.20 
A) $7.00 
B) $10.50 
C) $63.00 
D) $67.20

Question 5

A positive externality occurs when

Accepted Answer

A) Jack receives a benefit from John's consumption of a certain good. 
B) Jack receives personal benefits from his own consumption of a certain good. 
C) Jack's benefit exceeds John's benefit when they each consume the same good. 
D) Jack's receives a loss from John's consumption of a certain good. 
A) Jack receives a benefit from John's consumption of a certain good. 
B) Jack receives personal benefits from his own consumption of a certain good. 
C) Jack's benefit exceeds John's benefit when they each consume the same good. 
D) Jack's receives a loss from John's consumption of a certain good.

Question 6

If an externality is present in a market,economic efficiency may be enhanced by

Accepted Answer

A) increased competition. 
B) weakening property rights. 
C) better informed market participants. 
D) government intervention. 
A) increased competition. 
B) weakening property rights. 
C) better informed market participants. 
D) government intervention.

Question 7

Which of the following statements is correct?

Accepted Answer

A) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B) Corrective taxes distort economic incentives. 
C) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D) Both a and b are correct. 
A) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B) Corrective taxes distort economic incentives. 
C) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D) Both a and b are correct.

Question 8

Corrective taxes

Accepted Answer

A) encourage consumers to avoid sales taxes by shopping online. 
B) are frequently used to discourage imports. 
C) are less efficient than direct regulation. 
D) give factory owners an economic incentive to reduce pollution. 
A) encourage consumers to avoid sales taxes by shopping online. 
B) are frequently used to discourage imports. 
C) are less efficient than direct regulation. 
D) give factory owners an economic incentive to reduce pollution.

Question 9

To ensure the market reaches the socially optimal equilibrium in presence of a technology spillover,the government should subsidize producers by

Accepted Answer

A) imposing a corrective 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 poor by offering them free technology. 
A) imposing a corrective 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 poor by offering them free technology.

Question 10

A corrective tax

Accepted Answer

A) causes each factory to reduce pollution by the same amount. 
B) assigns a legal pollution limit for firms. 
C) places a price on the right to pollute. 
D) costs society more than pollution regulations. 
A) causes each factory to reduce pollution by the same amount. 
B) assigns a legal pollution limit for firms. 
C) places a price on the right to pollute. 
D) costs society more than pollution regulations.

Question 11

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government imposes a $6 per-unit tax on the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Accepted Answer

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

Question 12

Externalities

Accepted Answer

A) cause markets to fail to allocate resources efficiently. 
B) cause equilibrium prices to be too high. 
C) benefit producers at the expense of consumers. 
D) cause equilibrium prices to be too low. 
A) cause markets to fail to allocate resources efficiently. 
B) cause equilibrium prices to be too high. 
C) benefit producers at the expense of consumers. 
D) cause equilibrium prices to be too low.

Question 13

Figure 10-4
  
-Refer to Figure 10-4.If all external costs were internalized,then the market's equilibrium output would be

Accepted Answer

A) Q₁. 
B) Q₂. 
C) Q₃. 
D) Q₄. 
A) Q₁. 
B) Q₂. 
C) Q₃. 
D) Q₄.

Question 14

A fertilizer plant emits a very foul odor during the production process.If the government forces the plant to internalize the negative externality,then the

Accepted Answer

A) supply curve for fertilizer would shift down. 
B) supply curve for fertilizer would shift up. 
C) demand curve for fertilizer would shift down. 
D) demand curve for fertilizer would shift up. 
A) supply curve for fertilizer would shift down. 
B) supply curve for fertilizer would shift up. 
C) demand curve for fertilizer would shift down. 
D) demand curve for fertilizer would shift up.

Question 15

The Golden Rule can be used as a private solution for

Accepted Answer

A) subsidizing higher education. 
B) internalizing externalities. 
C) increasing production. 
D) reducing scarcity. 
A) subsidizing higher education. 
B) internalizing externalities. 
C) increasing production. 
D) reducing scarcity.

Question 16

Figure 10-6
  
-Refer to Figure 10-6.Which quantity represents the social optimum for this market?

Accepted Answer

A) Q₁. 
B) Q₂. 
C) Q₃. 
D) Q₄. 
A) Q₁. 
B) Q₂. 
C) Q₃. 
D) Q₄.

Question 17

Assuming transaction costs are small,the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

Accepted Answer

A) One neighbor lets his dog run through another neighbor's garden, damaging her flowers. 
B) One neighbor doesn't mow her yard. 
C) One neighbor deals drugs out of his house. 
D) All of the above are correct. 
A) One neighbor lets his dog run through another neighbor's garden, damaging her flowers. 
B) One neighbor doesn't mow her yard. 
C) One neighbor deals drugs out of his house. 
D) All of the above are correct.

Question 18

Which of the following is an example of an externality?

Accepted Answer

A) cigarette smoke that permeates an entire restaurant 
B) a flu shot that prevents a student from transmitting the virus to her roommate 
C) a beautiful flower garden outside of the local post office 
D) All of the above are correct. 
A) cigarette smoke that permeates an entire restaurant 
B) a flu shot that prevents a student from transmitting the virus to her roommate 
C) a beautiful flower garden outside of the local post office 
D) All of the above are correct.

Question 19

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
  
-Refer to Figure 10-3.The difference between the social cost curve and the supply curve reflects the

Accepted Answer

A) profit margin of each concert. 
B) cost of spillover effects from the concert (e.g., noise and traffic). 
C) value of concerts to society as a whole. 
D) amount by which the city should subsidize the concert organizers. 
A) profit margin of each concert. 
B) cost of spillover effects from the concert (e.g., noise and traffic). 
C) value of concerts to society as a whole. 
D) amount by which the city should subsidize the concert organizers.

Question 20

Suppose that Company A's railroad cars pass through Farmer B's corn fields.The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops.There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks.The grease costs $1,200.Suppose that the farmer has the right to compensation for any damage that his crops suffer.Assume that there are no transaction costs.Which of the following characterizes the efficient outcome?

Accepted Answer

A) The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C) The farmer will incur $1,500 in damages to his crops. 
D) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. 
A) The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B) The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C) The farmer will incur $1,500 in damages to his crops. 
D) The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

Exam 10: Externalities

According to the Coase theorem,the private market will need government intervention in order to reach an efficient outcome.

Flu shots provide a positive externality.Suppose that the market for vaccinations is perfectly competitive.Without government intervention in the vaccination market,which of the following statements is correct?

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Figure 10-1 -Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much tax revenue will the government receive?

A positive externality occurs when

If an externality is present in a market,economic efficiency may be enhanced by

Which of the following statements is correct?

Corrective taxes

To ensure the market reaches the socially optimal equilibrium in presence of a technology spillover,the government should subsidize producers by

A corrective tax

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government imposes a $6 per-unit tax on the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Externalities

Figure 10-4 -Refer to Figure 10-4.If all external costs were internalized,then the market's equilibrium output would be

A fertilizer plant emits a very foul odor during the production process.If the government forces the plant to internalize the negative externality,then the

The Golden Rule can be used as a private solution for

Figure 10-6 -Refer to Figure 10-6.Which quantity represents the social optimum for this market?

Assuming transaction costs are small,the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

Which of the following is an example of an externality?

This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods. Figure 10-3 -Refer to Figure 10-3.The difference between the social cost curve and the supply curve reflects the

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

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