Question 1

Refer to Figure 10-8.This graph shows the market for pollution when permits are issued to firms and traded in the marketplace.The equilibrium number of permits is

Accepted Answer

A) 50 
B) 100 
C) 1,000 
D) 2,000 
A) 50 
B) 100 
C) 1,000 
D) 2,000

Question 2

A corrective tax places a price on the right to pollute.

Accepted Answer

A) True 
 B)False

Question 3

If the production of computer chips yields greater technology spillovers than the production of potato chips,the government should

Accepted Answer

A) encourage the production of computer chips with subsidies. 
B) discourage the production of potato chips with taxes. 
C) encourage the production of potato chips with subsidies. 
D) discourage the production of computer chips with taxes. 
A) encourage the production of computer chips with subsidies. 
B) discourage the production of potato chips with taxes. 
C) encourage the production of potato chips with subsidies. 
D) discourage the production of computer chips with taxes.

Question 4

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

When negative externalities are present in a market

Accepted Answer

A) private costs will be greater than social costs. 
B) social costs will be greater than private costs. 
C) only government regulation will solve the problem. 
D) the market will not be able to reach any equilibrium. 
A) private costs will be greater than social costs. 
B) social costs will be greater than private costs. 
C) only government regulation will solve the problem. 
D) the market will not be able to reach any equilibrium.

Question 6

Nancy loves to landscape her yard,but her neighbor Lee places a low value on his landscaping.When Lee's grass is neglected and gets long,Nancy will mow it for Lee.This is an example of

Accepted Answer

A) a situation in which the Coase theorem fails to explain the lawn mowing arrangement. 
B) an improper allocation of resources. 
C) a private solution to a negative externality problem. 
D) an exploitation of a common resource. 
A) a situation in which the Coase theorem fails to explain the lawn mowing arrangement. 
B) an improper allocation of resources. 
C) a private solution to a negative externality problem. 
D) an exploitation of a common resource.

Question 7

Figure 10-4
  
-Refer to Figure 10-4.This market

Accepted Answer

A) has no need for government intervention. 
B) would benefit from a tax on the product. 
C) would benefit from a subsidy for the product. 
D) would maximize total well-being at Q₃. 
A) has no need for government intervention. 
B) would benefit from a tax on the product. 
C) would benefit from a subsidy for the product. 
D) would maximize total well-being at Q₃.

Question 8

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Accepted Answer

A) True 
 B)False

Question 9

All remedies for externalities share the goal of

Accepted Answer

A) moving the allocation of resources toward the market equilibrium. 
B) moving the allocation of resources toward the socially optimal equilibrium. 
C) increasing the allocation of resources. 
D) decreasing the allocation of resources. 
A) moving the allocation of resources toward the market equilibrium. 
B) moving the allocation of resources toward the socially optimal equilibrium. 
C) increasing the allocation of resources. 
D) decreasing the allocation of resources.

Question 10

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

Accepted Answer

A) A well-maintained yard conveys a positive externality because it increases the home's market value. 
B) A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C) A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. 
D) A well-maintained yard cannot provide any type of externality. 
A) A well-maintained yard conveys a positive externality because it increases the home's market value. 
B) A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C) A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. 
D) A well-maintained yard cannot provide any type of externality.

Question 11

When a negative externality exists in a market,the cost to producers

Accepted Answer

A) is greater than the cost to society. 
B) will be the same as the cost to society. 
C) will be less than the cost to society. 
D) will differ from the cost to society, regardless of whether an externality is present. 
A) is greater than the cost to society. 
B) will be the same as the cost to society. 
C) will be less than the cost to society. 
D) will differ from the cost to society, regardless of whether an externality is present.

Question 12

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

Accepted Answer

A) if the government does not become involved in the process. 
B) when the number of interested parties is large and bargaining costs are high. 
C) if the firm in the market is a monopoly. 
D) if some people benefit from the externality. 
A) if the government does not become involved in the process. 
B) when the number of interested parties is large and bargaining costs are high. 
C) if the firm in the market is a monopoly. 
D) if some people benefit from the externality.

Question 13

Most taxes distort incentives and move the allocation of resources away from the social optimum.Why do corrective taxes avoid the disadvantages of most other taxes?

Accepted Answer

A) Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol. 
B) Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders. 
C) Corrective taxes provide incentives for the conservation of natural resources. 
D) Corrective taxes do not affect deadweight loss. 
A) Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol. 
B) Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders. 
C) Corrective taxes provide incentives for the conservation of natural resources. 
D) Corrective taxes do not affect deadweight loss.

Question 14

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.The government gives each firm 20 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.It is likely that

Accepted Answer

A) Firm A will buy all of Firm B's pollution permits.Each one will cost between $50 and $100. 
B) Firm B will buy all of Firm A's pollution permits.Each one will cost between $50 and $100. 
C) Both firms will use their own pollution permits. 
D) Firm A will buy some of Firm B's pollution permits.Each one will cost less than $50. 
A) Firm A will buy all of Firm B's pollution permits.Each one will cost between $50 and $100. 
B) Firm B will buy all of Firm A's pollution permits.Each one will cost between $50 and $100. 
C) Both firms will use their own pollution permits. 
D) Firm A will buy some of Firm B's pollution permits.Each one will cost less than $50.

Question 15

In the case of a technology spillover,internalizing a positive externality will cause the supply curve of an industry to

Accepted Answer

A) shift down. 
B) shift up. 
C) become more elastic. 
D) remain unchanged. 
A) shift down. 
B) shift up. 
C) become more elastic. 
D) remain unchanged.

Question 16

Externalities can be corrected by each of the following except

Accepted Answer

A) self-interest. 
B) moral codes and social sanctions. 
C) charity. 
D) normal market adjustments. 
A) self-interest. 
B) moral codes and social sanctions. 
C) charity. 
D) normal market adjustments.

Question 17

The proposition that if private parties can bargain without cost over the allocation of resources,they can solve the problem of externalities on their own,is called

Accepted Answer

A) the transaction cost theorem. 
B) a corrective tax. 
C) the externality theorem. 
D) the Coase theorem. 
A) the transaction cost theorem. 
B) a corrective tax. 
C) the externality theorem. 
D) the Coase theorem.

Question 18

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover,it should

Accepted Answer

A) impose a corrective tax on any firm producing a technology spillover. 
B) offer tax credits to consumers who are adversely affected by the new technology. 
C) subsidize producers by an amount equal to the value of the technology spillover. 
D) provide research grants to those firms not currently engaging in research to increase competition in the industry. 
A) impose a corrective tax on any firm producing a technology spillover. 
B) offer tax credits to consumers who are adversely affected by the new technology. 
C) subsidize producers by an amount equal to the value of the technology spillover. 
D) provide research grants to those firms not currently engaging in research to increase competition in the industry.

Question 19

Suppose that at present there are no laws to restrict pollution produced by the widget industry.Assume that the supply and demand curves are linear and that the market price of a widget is $20.If the government imposes a tax equal in value to the cost of the pollution,then firms would continue to produce widgets if

Accepted Answer

A) the cost imposed by the pollution is less than $20 per widget produced. 
B) the private cost of producing a widget equals the cost of the pollution generated per widget. 
C) $20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget. 
D) $20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget. 
A) the cost imposed by the pollution is less than $20 per widget produced. 
B) the private cost of producing a widget equals the cost of the pollution generated per widget. 
C) $20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget. 
D) $20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget.

Question 20

Figure 10-4
  
-Refer to Figure 10-4.If this market currently produces Q₂,total economic well-being would be maximized if

Accepted Answer

A) production decreased to Q₁. 
B) production increased to Q₃. 
C) this product were no longer produced. 
D) output stayed at Q₂. 
A) production decreased to Q₁. 
B) production increased to Q₃. 
C) this product were no longer produced. 
D) output stayed at Q₂.

Exam 10: Externalities

Refer to Figure 10-8.This graph shows the market for pollution when permits are issued to firms and traded in the marketplace.The equilibrium number of permits is

A corrective tax places a price on the right to pollute.

If the production of computer chips yields greater technology spillovers than the production of potato chips,the government should

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

When negative externalities are present in a market

Nancy loves to landscape her yard,but her neighbor Lee places a low value on his landscaping.When Lee's grass is neglected and gets long,Nancy will mow it for Lee.This is an example of

Figure 10-4 -Refer to Figure 10-4.This market

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

All remedies for externalities share the goal of

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

When a negative externality exists in a market,the cost to producers

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

Most taxes distort incentives and move the allocation of resources away from the social optimum.Why do corrective taxes avoid the disadvantages of most other taxes?

In the case of a technology spillover,internalizing a positive externality will cause the supply curve of an industry to

Externalities can be corrected by each of the following except

The proposition that if private parties can bargain without cost over the allocation of resources,they can solve the problem of externalities on their own,is called

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover,it should

Figure 10-4 -Refer to Figure 10-4.If this market currently produces Q₂,total economic well-being would be maximized if

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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