Question 1

Why do private markets fail to account for externalities

Accepted Answer

A) The effect of externalities are difficult to measure in private markets. 
B) Sellers include costs associated with externalities in the price of their products. 
C) Decision makers in the market fail to take into account the external effects of their behaviour. 
D) The government can easily correct any adverse effect on the market that externalities may cause. 
A) The effect of externalities are difficult to measure in private markets. 
B) Sellers include costs associated with externalities in the price of their products. 
C) Decision makers in the market fail to take into account the external effects of their behaviour. 
D) The government can easily correct any adverse effect on the market that externalities may cause.

Question 2

Despite the stated goals of some environmentalists,it would be impossible to prohibit all polluting activity.

Accepted Answer

A) True 
 B)False

Question 3

According to the Coase theorem,how can an efficient outcome be reached

Accepted Answer

A) Private parties can bargain to reach an efficient outcome. 
B) Government assistance is necessary for markets with externalities to reach an efficient outcome. 
C) Both positive and negative externalities will always lead to inefficient outcomes in the markets. 
D) No market will experience long-term externalities since normal market adjustments will eliminate externalities. 
A) Private parties can bargain to reach an efficient outcome. 
B) Government assistance is necessary for markets with externalities to reach an efficient outcome. 
C) Both positive and negative externalities will always lead to inefficient outcomes in the markets. 
D) No market will experience long-term externalities since normal market adjustments will eliminate externalities.

Question 4

When externalities are present in a market,what is the result

Accepted Answer

A) The established equilibrium maximizes the total benefit to society as a whole. 
B) Market participants lose some market benefits to bystanders. 
C) Both equity and efficiency are maximized. 
D) The market fails to allocate resources efficiently. 
A) The established equilibrium maximizes the total benefit to society as a whole. 
B) Market participants lose some market benefits to bystanders. 
C) Both equity and efficiency are maximized. 
D) The market fails to allocate resources efficiently.

Question 5

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 do what

Accepted Answer

A) increase attorney fees by charging a percentage of the final settlement 
B) reduce the incentive of attorneys to take on class action lawsuits 
C) reduce the transaction costs of finding a private solution to an externality 
D) regulate attorney fees in class action lawsuits 
A) increase attorney fees by charging a percentage of the final settlement 
B) reduce the incentive of attorneys to take on class action lawsuits 
C) reduce the transaction costs of finding a private solution to an externality 
D) regulate attorney fees in class action lawsuits

Question 6

Under what conditions do positive externalities exist

Accepted Answer

A) Social value exceeds private value, and market quantity exceeds the socially optimal quantity. 
B) Social value is less than private value, and market quantity exceeds the socially optimal quantity. 
C) Social value exceeds private value, and market quantity is less than the socially optimal quantity. 
D) Social value seldom exceeds private value, and therefore social quantity is less than private quantity. 
A) Social value exceeds private value, and market quantity exceeds the socially optimal quantity. 
B) Social value is less than private value, and market quantity exceeds the socially optimal quantity. 
C) Social value exceeds private value, and market quantity is less than the socially optimal quantity. 
D) Social value seldom exceeds private value, and therefore social quantity is less than private quantity.

Question 7

Brennan owns a dog whose barking annoys Brennan's neighbour Emily.Suppose that the benefit of owning the dog is worth $700 to Brennan and that Emily bears a cost of $500 from the barking.Assuming Brennan has the legal right to keep the dog,what is a possible private solution to this problem

Accepted Answer

A) Emily pays Brennan $650 to get rid of the dog. 
B) Emily pays Brennan $700 to get rid of the dog. 
C) Brennan pays Emily $500 for her inconvenience. 
D) There is no private solution that would improve this situation. 
A) Emily pays Brennan $650 to get rid of the dog. 
B) Emily pays Brennan $700 to get rid of the dog. 
C) Brennan pays Emily $500 for her inconvenience. 
D) There is no private solution that would improve this situation.

Question 8

What is emission controls on automobiles an example of

Accepted Answer

A) a collective tax on automobiles, based on how much they pollute 
B) a command-and-control policy to increase social efficiency 
C) a policy that reduces pollution by allocating resources through market mechanisms 
D) a policy to reduce congestion on urban highways 
A) a collective tax on automobiles, based on how much they pollute 
B) a command-and-control policy to increase social efficiency 
C) a policy that reduces pollution by allocating resources through market mechanisms 
D) a policy to reduce congestion on urban highways

Question 9

Which statement about a well-maintained yard best conveys the general nature of externalities

Accepted Answer

A) A maintained yard conveys a positive externality because it increases the home's market value. 
B) A maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C) A maintained yard conveys a negative externality because it makes other property owners in the neighbourhood feel like their homes are less valuable. 
D) A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighbourhood. 
A) A maintained yard conveys a positive externality because it increases the home's market value. 
B) A maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C) A maintained yard conveys a negative externality because it makes other property owners in the neighbourhood feel like their homes are less valuable. 
D) A maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighbourhood.

Question 10

Which concept suggests that the private market can be effective in dealing with externalities

Accepted Answer

A) the "invisible hand" 
B) the law of diminishing social returns 
C) the Coase theorem 
D) technology policy 
A) the "invisible hand" 
B) the law of diminishing social returns 
C) the Coase theorem 
D) technology policy

Question 11

Brennan and Emily are neighbours; Brennan owns a dog named Spot. Spot barks and disturbs Emily.
a.Brennan gets a $500 benefit from the dog and Emily bears an $800 cost from the dog’s barking. Can Brennan and Emily reach a solution from private bargaining? Is this solution an efficient outcome?
b.Brennan gets $1000 benefit from the dog and Emily bears an $800 cost from the dog’s barking. Can Brennan and Emily reach a solution from private bargaining? Is this solution an efficient outcome?
c.If there are another 20 people who live on the same street as Brennan and Emily and some of them also did not like Spot, will the solution reached in parts a and b change?

Accepted Answer

a.  Emily can offer a price between $500

Question 12

When dealing with externalities,how can the market equilibrium be moved closer to the social equilibrium

Accepted Answer

A) by taxing negative externalities and subsidizing positive externalities 
B) by taxing both positive and negative externalities 
C) by subsidizing both positive and negative externalities 
D) by taxing users of goods that have externalities 
A) by taxing negative externalities and subsidizing positive externalities 
B) by taxing both positive and negative externalities 
C) by subsidizing both positive and negative externalities 
D) by taxing users of goods that have externalities

Question 13

Why are corrective taxes unlike most other taxes

Accepted Answer

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

Question 14

With technology spillover,to ensure that the market equilibrium equals the social optimum,what should government do

Accepted Answer

A) It should impose a tax greater than the value of the technology spillover. 
B) It should not allow production of any product that causes a technology spillover. 
C) It should provide a subsidy equal to the value of the technology spillover. 
D) It should reward those who benefit from the spillover. 
A) It should impose a tax greater than the value of the technology spillover. 
B) It should not allow production of any product that causes a technology spillover. 
C) It should provide a subsidy equal to the value of the technology spillover. 
D) It should reward those who benefit from the spillover.

Question 15

Organizers of an outdoor concert in a park surrounded by residential neighbourhoods are likely to consider the noise and traffic cost to residential neighbourhoods when they assess the financial viability of the concert venture.

Accepted Answer

A) True 
 B)False

Question 16

When does technology spillover occur

Accepted Answer

A) when a firm passes the high costs of technical research on to society through higher prices 
B) when a firm's research yields technical knowledge that is used by society as a whole 
C) when the government subsidizes firms engaged in high-tech research 
D) when copyright laws prohibit firms from profiting from the research of others 
A) when a firm passes the high costs of technical research on to society through higher prices 
B) when a firm's research yields technical knowledge that is used by society as a whole 
C) when the government subsidizes firms engaged in high-tech research 
D) when copyright laws prohibit firms from profiting from the research of others

Question 17

What can be said when the government reverts to a command-and-control policy to solve an externality

Accepted Answer

A) It is usually the most effective policy option available. 
B) It creates policies that directly regulate behaviour. 
C) It usually involves taxing consumption of a commodity. 
D) It typically refers to the Coase theorem to structure the policy. 
A) It is usually the most effective policy option available. 
B) It creates policies that directly regulate behaviour. 
C) It usually involves taxing consumption of a commodity. 
D) It typically refers to the Coase theorem to structure the policy.

Question 18

When would a positive externality occur

Accepted Answer

A) when Jack receives a benefit from John's consumption of a certain good 
B) when Jack receives personal benefits from his own consumption of a certain good 
C) when Jack's benefit exceeds John's benefit when they each consume the same good 
D) when Jack's consumption is not beneficial to John 
A) when Jack receives a benefit from John's consumption of a certain good 
B) when Jack receives personal benefits from his own consumption of a certain good 
C) when Jack's benefit exceeds John's benefit when they each consume the same good 
D) when Jack's consumption is not beneficial to John

Question 19

What do externalities cause markets to do

Accepted Answer

A) fail to allocate resources efficiently 
B) cause price to be different than the equilibrium price 
C) benefit producers at the expense of consumers 
D) cause markets to operate more equitably 
A) fail to allocate resources efficiently 
B) cause price to be different than the equilibrium price 
C) benefit producers at the expense of consumers 
D) cause markets to operate more equitably

Question 20

Which statement best describes most economists' attitudes toward corrective taxes and direct regulation

Accepted Answer

A) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B) Corrective taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost. 
C) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D) Corrective taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate. 
A) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B) Corrective taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost. 
C) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D) Corrective taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate.

Exam 10: Externalities

Why do private markets fail to account for externalities

Despite the stated goals of some environmentalists,it would be impossible to prohibit all polluting activity.

According to the Coase theorem,how can an efficient outcome be reached

When externalities are present in a market,what is the result

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 do what

Under what conditions do positive externalities exist

Brennan owns a dog whose barking annoys Brennan's neighbour Emily.Suppose that the benefit of owning the dog is worth $700 to Brennan and that Emily bears a cost of $500 from the barking.Assuming Brennan has the legal right to keep the dog,what is a possible private solution to this problem

What is emission controls on automobiles an example of

Which statement about a well-maintained yard best conveys the general nature of externalities

Which concept suggests that the private market can be effective in dealing with externalities

When dealing with externalities,how can the market equilibrium be moved closer to the social equilibrium

Why are corrective taxes unlike most other taxes

With technology spillover,to ensure that the market equilibrium equals the social optimum,what should government do

Organizers of an outdoor concert in a park surrounded by residential neighbourhoods are likely to consider the noise and traffic cost to residential neighbourhoods when they assess the financial viability of the concert venture.

When does technology spillover occur

What can be said when the government reverts to a command-and-control policy to solve an externality

When would a positive externality occur

What do externalities cause markets to do

Which statement best describes most economists' attitudes toward corrective taxes and direct regulation

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

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

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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