Question 1

Government subsidized scholarships are an example of a government policy aimed at correcting for negative externalities associated with education.

Accepted Answer

A) True 
 B)False

Question 2

When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.

Accepted Answer

A) True 
 B)False

Question 3

With pollution permits,the supply curve for pollution rights is

Accepted Answer

A) perfectly elastic. 
B) perfectly inelastic. 
C) upward sloping. 
D) downward sloping. 
A) perfectly elastic. 
B) perfectly inelastic. 
C) upward sloping. 
D) downward sloping.

Question 4

In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly.This is an example of an attempt to

Accepted Answer

A) maximize attorney fees. 
B) reduce the incentive of attorneys to file class action lawsuits. 
C) reduce the transaction costs of finding a private solution to an externality. 
D) regulate attorney fees. 
A) maximize attorney fees. 
B) reduce the incentive of attorneys to file class action lawsuits. 
C) reduce the transaction costs of finding a private solution to an externality. 
D) regulate attorney fees.

Question 5

Figure 10-1
  
-Refer to Figure 10-1.This graph represents the tobacco industry.The industry creates

Accepted Answer

A) positive externalities. 
B) negative externalities. 
C) no externalities. 
D) no equilibrium in the market. 
A) positive externalities. 
B) negative externalities. 
C) no externalities. 
D) no equilibrium in the market.

Question 6

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then

Accepted Answer

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

Question 7

When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of producing it,then

Accepted Answer

A) at market equilibrium the demand curve lies below the social cost curve. 
B) reducing production to a level below the equilibrium level could possibly raise total economic well-being. 
C) the equilibrium price is higher than necessary to insure maximum economic well-being. 
D) Both a and b are correct. 
A) at market equilibrium the demand curve lies below the social cost curve. 
B) reducing production to a level below the equilibrium level could possibly raise total economic well-being. 
C) the equilibrium price is higher than necessary to insure maximum economic well-being. 
D) Both a and b are correct.

Question 8

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs.If there are no subsidies,what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research 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 9

The supply curve for a product reflects the

Accepted Answer

A) willingness to pay of the marginal buyer. 
B) quantity buyers will ultimately purchase of the product. 
C) cost to sellers of producing the product. 
D) seller's profit from producing the product. 
A) willingness to pay of the marginal buyer. 
B) quantity buyers will ultimately purchase of the product. 
C) cost to sellers of producing the product. 
D) seller's profit from producing the product.

Question 10

The Coase theorem suggests that private solutions to an externality problem

Accepted Answer

A) are effective under all conditions. 
B) will always allocate resources efficiently if private parties can bargain without cost. 
C) are only efficient when there are negative externalities. 
D) may not be possible because of the distribution of property rights. 
A) are effective under all conditions. 
B) will always allocate resources efficiently if private parties can bargain without cost. 
C) are only efficient when there are negative externalities. 
D) may not be possible because of the distribution of property rights.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is correct?

Accepted Answer

A) Government should tax goods with either positive or negative externalities. 
B) Government should tax goods with negative externalities and subsidize goods with positive externalities. 
C) Government should subsidize goods with either positive or negative externalities. 
D) Government should tax goods with positive externalities and subsidize goods with negative externalities. 
A) Government should tax goods with either positive or negative externalities. 
B) Government should tax goods with negative externalities and subsidize goods with positive externalities. 
C) Government should subsidize goods with either positive or negative externalities. 
D) Government should tax goods with positive externalities and subsidize goods with negative externalities.

Question 13

Which of the following is an advantage of tradable pollution permits?

Accepted Answer

A) The government knows exactly how much each firm is allowed to pollute. 
B) Revenue from the sale of permits is greater than revenue from a corrective tax. 
C) The initial allocation of permits to firms does not affect the efficiency of the market. 
D) Firms will engage in joint research efforts to reduce pollution. 
A) The government knows exactly how much each firm is allowed to pollute. 
B) Revenue from the sale of permits is greater than revenue from a corrective tax. 
C) The initial allocation of permits to firms does not affect the efficiency of the market. 
D) Firms will engage in joint research efforts to reduce pollution.

Question 14

One of the Ten Principles of Economics is that "markets are usually a good way to organize market behavior." This statement does not imply which of the following?

Accepted Answer

A) Some markets produce negative externalities. 
B) The invisible hand of the marketplace does not always lead buyers and sellers to maximize total benefit to society. 
C) Some markets are characterized by market failure. 
D) Other types of economies are more efficient than market economies. 
A) Some markets produce negative externalities. 
B) The invisible hand of the marketplace does not always lead buyers and sellers to maximize total benefit to society. 
C) Some markets are characterized by market failure. 
D) Other types of economies are more efficient than market economies.

Question 15

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) the total amount of pollution decreases. 
D) Both a and b are correct. 
A) both firms benefit. 
B) the total amount of pollution remains the same. 
C) the total amount of pollution decreases. 
D) Both a and b are correct.

Question 16

Two firms,A and B,each currently dump 20 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.The government gives each firm 10 pollution permits,which it can either use or sell to the other firm.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.After the two firms buy or sell pollution permits from each other,we would expect that

Accepted Answer

A) Firm A will no longer pollute, and Firm B will not reduce its pollution at all. 
B) Firm B will no longer pollute, and Firm A will not reduce its pollution at all. 
C) Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river. 
D) Firm A will increase its pollution and Firm B will reduce its pollution. 
A) Firm A will no longer pollute, and Firm B will not reduce its pollution at all. 
B) Firm B will no longer pollute, and Firm A will not reduce its pollution at all. 
C) Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river. 
D) Firm A will increase its pollution and Firm B will reduce its pollution.

Question 17

When a market is characterized by an externality,the government

Accepted Answer

A) can correct the market failure only in the case of positive externalities. 
B) can correct the market failure only in the case of negative externalities. 
C) can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality. 
D) cannot correct for externalities due to the existence of patents. 
A) can correct the market failure only in the case of positive externalities. 
B) can correct the market failure only in the case of negative externalities. 
C) can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality. 
D) cannot correct for externalities due to the existence of patents.

Question 18

A positive externality

Accepted Answer

A) causes the product to be overproduced. 
B) provides an additional benefit to market participants. 
C) benefits consumers because it results in a lower equilibrium price. 
D) is a benefit to a market bystander. 
A) causes the product to be overproduced. 
B) provides an additional benefit to market participants. 
C) benefits consumers because it results in a lower equilibrium price. 
D) is a benefit to a market bystander.

Question 19

Figure 10-1
  
-Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much of a tax must be imposed on each unit of production?

Accepted Answer

A) $1.90 
B) $1.80 
C) $1.60 
D) $0.30 
A) $1.90 
B) $1.80 
C) $1.60 
D) $0.30

Question 20

When correcting for an externality,command-and-control policies are always preferable to market-based policies.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

Government subsidized scholarships are an example of a government policy aimed at correcting for negative externalities associated with education.

When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.

With pollution permits,the supply curve for pollution rights is

In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly.This is an example of an attempt to

Figure 10-1 -Refer to Figure 10-1.This graph represents the tobacco industry.The industry creates

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then

When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of producing it,then

The supply curve for a product reflects the

The Coase theorem suggests that private solutions to an externality problem

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

Which of the following statements is correct?

Which of the following is an advantage of tradable pollution permits?

One of the Ten Principles of Economics is that "markets are usually a good way to organize market behavior." This statement does not imply which of the following?

When one firm sells its pollution permit to another firm,

When a market is characterized by an externality,the government

A positive externality

Figure 10-1 -Refer to Figure 10-1.This graph represents the tobacco industry.If the government uses a pollution tax,how much of a tax must be imposed on each unit of production?

When correcting for an externality,command-and-control policies are always preferable to market-based policies.

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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