Question 1

The difference between a corrective tax and a tradable pollution permit is that

Accepted Answer

A) a corrective tax sets the price of pollution and a permit sets the quantity of pollution. 
B) a corrective tax creates a more efficient outcome than a permit. 
C) a corrective tax sets the quantity of pollution and a permit sets the price of pollution. 
D) a permit creates a more efficient outcome than a corrective tax. 
A) a corrective tax sets the price of pollution and a permit sets the quantity of pollution. 
B) a corrective tax creates a more efficient outcome than a permit. 
C) a corrective tax sets the quantity of pollution and a permit sets the price of pollution. 
D) a permit creates a more efficient outcome than a corrective tax.

Question 2

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Accepted Answer

A) social costs equal private costs at the private market solution. 
B) private costs exceed social costs at the private market solution. 
C) social costs exceed private costs at the private market solution. 
D) they internalize externalities. 
A) social costs equal private costs at the private market solution. 
B) private costs exceed social costs at the private market solution. 
C) social costs exceed private costs at the private market solution. 
D) they internalize externalities.

Question 3

Once tradable pollution permits have been allocated to firms,

Accepted Answer

A) the government controls the price of permits. 
B) firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits. 
C) the value of pollution-saving technology will be lower than the market value of a pollution permit. 
D) the Coase theorem is no longer applicable as a solution to reducing pollution. 
A) the government controls the price of permits. 
B) firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits. 
C) the value of pollution-saving technology will be lower than the market value of a pollution permit. 
D) the Coase theorem is no longer applicable as a solution to reducing pollution.

Question 4

One example of a real-world market for tradable pollution permits is the market for carbon permits in Europe.

Accepted Answer

A) True 
 B)False

Question 5

When externalities are present in a market,

Accepted Answer

A) the market equilibrium maximizes the total benefit to society as a whole. 
B) participants lose some market benefits to bystanders. 
C) firms produce too much output. 
D) the market fails to allocate resources efficiently. 
A) the market equilibrium maximizes the total benefit to society as a whole. 
B) participants lose some market benefits to bystanders. 
C) firms produce too much output. 
D) the market fails to allocate resources efficiently.

Question 6

Figure 10-2
  
-Refer to Figure 10-2.Assume the production of the product shown by the graph imposes a cost on society of $7.00 per unit.If the free market equilibrium output is 50 units,the government should

Accepted Answer

A) impose a tax of $2.50 per unit. 
B) increase the output of the firm by 25 units. 
C) impose a lump-sum tax of $350 per period. 
D) impose a tax of $7.00 per unit. 
A) impose a tax of $2.50 per unit. 
B) increase the output of the firm by 25 units. 
C) impose a lump-sum tax of $350 per period. 
D) impose a tax of $7.00 per unit.

Question 7

One advantage market economies have over other types of economies is that market economies

Accepted Answer

A) provide an equal distribution of goods and services to consumers. 
B) establish government economic control. 
C) solve the problem of scarcity. 
D) are more efficient. 
A) provide an equal distribution of goods and services to consumers. 
B) establish government economic control. 
C) solve the problem of scarcity. 
D) are more efficient.

Question 8

Figure 10-1
  
-Refer to Figure 10-1.This graph represents the tobacco industry.Without any government intervention,the equilibrium 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 9

Technology spillover is one type of

Accepted Answer

A) negative externality. 
B) positive externality. 
C) subsidy. 
D) producer surplus. 
A) negative externality. 
B) positive externality. 
C) subsidy. 
D) producer surplus.

Question 10

Figure 10-4
  
-Refer to Figure 10-4.This market is characterized by

Accepted Answer

A) government intervention. 
B) a positive externality. 
C) a negative externality. 
D) None of the above is correct. 
A) government intervention. 
B) a positive externality. 
C) a negative externality. 
D) None of the above is correct.

Question 11

Suppose that electricity producers create a negative externality equal to $5 per unit.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

Which of the following statements is not correct?

Accepted Answer

A) Corrective taxes can be used to place a price on the right to pollute. 
B) Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution. 
C) Corrective taxes provide incentives to develop cleaner technologies. 
D) Corrective taxes require the government to set a target level of pollution. 
A) Corrective taxes can be used to place a price on the right to pollute. 
B) Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution. 
C) Corrective taxes provide incentives to develop cleaner technologies. 
D) Corrective taxes require the government to set a target level of pollution.

Question 13

In the absence of externalities,the "invisible hand" leads a market to maximize

Accepted Answer

A) producer profit from that market. 
B) total benefit to society from that market. 
C) both equity and efficiency in that market. 
D) output of goods or services in that market. 
A) producer profit from that market. 
B) total benefit to society from that market. 
C) both equity and efficiency in that market. 
D) output of goods or services in that market.

Question 14

Which of the following helped reduce sulfur dioxide emissions,a leading cause of acid rain? (i)	corrective taxes
(ii)	tradable pollution permits
(iii)	amendments to the Clean Air Act

Accepted Answer

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

Question 15

When externalities exist,buyers and sellers

Accepted Answer

A) neglect the external effects of their actions, but the market equilibrium is still efficient. 
B) do not neglect the external effects of their actions, and the market equilibrium is efficient. 
C) neglect the external effects of their actions, and the market equilibrium is not efficient. 
D) do not neglect the external effects of their actions, and the market equilibrium is not efficient. 
A) neglect the external effects of their actions, but the market equilibrium is still efficient. 
B) do not neglect the external effects of their actions, and the market equilibrium is efficient. 
C) neglect the external effects of their actions, and the market equilibrium is not efficient. 
D) do not neglect the external effects of their actions, and the market equilibrium is not efficient.

Question 16

Tradable pollution permits

Accepted Answer

A) are widely viewed as a cost-effective way to reduce pollution. 
B) have helped reduce carbon emissions. 
C) have helped reduce sulfur dioxide emissions. 
D) All of the above are correct. 
A) are widely viewed as a cost-effective way to reduce pollution. 
B) have helped reduce carbon emissions. 
C) have helped reduce sulfur dioxide emissions. 
D) All of the above are correct.

Question 17

Corrective taxes are unlike most other taxes because they

Accepted Answer

A) distort incentives. 
B) move the allocation of resources away from the social optimum. 
C) raise revenue for the government. 
D) move the allocation of resources closer to the social optimum. 
A) distort incentives. 
B) move the allocation of resources away from the social optimum. 
C) raise revenue for the government. 
D) move the allocation of resources closer to the social optimum.

Question 18

Figure 10-4
  
-Refer to Figure 10-4.If this market is currently producing at Q₄,then total economic well-being would increase if output

Accepted Answer

A) increased beyond Q₄. 
B) decreased to Q₂. 
C) decreased to zero. 
D) stayed at Q₄. 
A) increased beyond Q₄. 
B) decreased to Q₂. 
C) decreased to zero. 
D) stayed at Q₄.

Question 19

Suppose that elementary education creates a positive externality.If the government does not subsidize education,then

Accepted Answer

A) the equilibrium quantity of education will be 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 be 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 20

Which of the following statements is not correct?

Accepted Answer

A) Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level. 
B) Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution. 
C) Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution. 
D) Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment. 
A) Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level. 
B) Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution. 
C) Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution. 
D) Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.

Exam 10: Externalities

The difference between a corrective tax and a tradable pollution permit is that

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Once tradable pollution permits have been allocated to firms,

One example of a real-world market for tradable pollution permits is the market for carbon permits in Europe.

When externalities are present in a market,

Figure 10-2 -Refer to Figure 10-2.Assume the production of the product shown by the graph imposes a cost on society of $7.00 per unit.If the free market equilibrium output is 50 units,the government should

One advantage market economies have over other types of economies is that market economies

Figure 10-1 -Refer to Figure 10-1.This graph represents the tobacco industry.Without any government intervention,the equilibrium price and quantity are

Technology spillover is one type of

Figure 10-4 -Refer to Figure 10-4.This market is characterized by

Suppose that electricity producers create a negative externality equal to $5 per unit.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Which of the following statements is not correct?

In the absence of externalities,the "invisible hand" leads a market to maximize

Which of the following helped reduce sulfur dioxide emissions,a leading cause of acid rain? (i) corrective taxes (ii) tradable pollution permits (iii) amendments to the Clean Air Act

When externalities exist,buyers and sellers

Tradable pollution permits

Corrective taxes are unlike most other taxes because they

Figure 10-4 -Refer to Figure 10-4.If this market is currently producing at Q₄,then total economic well-being would increase if output

Suppose that elementary education creates a positive externality.If the government does not subsidize education,then

Which of the following statements is not correct?

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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