Question 1

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:

Accepted Answer

A)  farmers would choose not to use any fertiliser 
B)  farmers fully internalise the pollution costs of the fertiliser 
C)  farm output would be maximised 
D)  the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium 
A)  farmers would choose not to use any fertiliser 
B)  farmers fully internalise the pollution costs of the fertiliser 
C)  farm output would be maximised 
D)  the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium

Question 2

The Coase theorem suggests that private solutions to the externality problem:

Accepted Answer

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

Question 3

In the absence of externalities, the invisible hand of the market place:

Accepted Answer

A)  increases the transaction cost of contracting between parties to an exchange 
B)  is unable to resolve inherent inefficiencies in the market system 
C)  induces people to act in a manner inconsistent with self-interest 
D)  leads to a market outcome that maximises total benefit to society 
A)  increases the transaction cost of contracting between parties to an exchange 
B)  is unable to resolve inherent inefficiencies in the market system 
C)  induces people to act in a manner inconsistent with self-interest 
D)  leads to a market outcome that maximises total benefit to society

Question 4

The initial allocation of tradeable pollution permits will affect the level of economic efficiency in a market with a pollution externality.

Accepted Answer

A) True 
 B)False

Question 5

If children impose a negative externality, which of the following must be true?

Accepted Answer

A)  parents would rather have less children 
B)  parents' costs exceed the benefits associated with having children 
C)  parents do not bear the full cost imposed by their children 
D)  all of the above 
A)  parents would rather have less children 
B)  parents' costs exceed the benefits associated with having children 
C)  parents do not bear the full cost imposed by their children 
D)  all of the above

Question 6

The major problem facing private parties wishing to solve an externality problem is that transaction costs may prevent such a solution from occurring.

Accepted Answer

A) True 
 B)False

Question 7

A market for pollution permits can efficiently allocate the right to pollute through the forces of supply and demand.

Accepted Answer

A) True 
 B)False

Question 8

Emission controls on automobiles provide an example of a:

Accepted Answer

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

Question 9

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is true?

Accepted Answer

A)  the initial distribution of rights affects the market's ability to reach an efficient outcome 
B)  the initial distribution of rights affects the distribution of economic wellbeing 
C)  government intervention is required if the distribution of rights favours Dick 
D)  government intervention is always required 
A)  the initial distribution of rights affects the market's ability to reach an efficient outcome 
B)  the initial distribution of rights affects the distribution of economic wellbeing 
C)  government intervention is required if the distribution of rights favours Dick 
D)  government intervention is always required

Question 11

To reduce the externality created by dog faeces in Australian parks:

Accepted Answer

A)  dog owners may be required to carry a pooper scooper 
B)  a tradeable permit system dog poop is being implemented 
C)  there will be an increase in the sales tax on dog food 
D)  all of the above 
A)  dog owners may be required to carry a pooper scooper 
B)  a tradeable permit system dog poop is being implemented 
C)  there will be an increase in the sales tax on dog food 
D)  all of the above

Question 12

To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidise producers by:

Accepted Answer

A)  means of a Pigovian 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 low-income portion of the population 
A)  means of a Pigovian 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 low-income portion of the population

Question 13

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 14

Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

Accepted Answer

A) True 
 B)False

Question 15

Private owners of restored historical buildings are not likely to capture the full benefit of restoration so they tend to discard them too quickly. Many local governments respond to this problem by: (i) condemning historic buildings to make room for new development
(ii) regulating the destruction of historic buildings
(iii) providing tax breaks to owners of historic buildings who restore them.

Accepted Answer

A)  (i), (ii) and (iii) are all used 
B)  only (i) and (iii) are used 
C)  only (ii) and (iii) are used 
D)  only (i) and (ii) are used 
A)  (i), (ii) and (iii) are all used 
B)  only (i) and (iii) are used 
C)  only (ii) and (iii) are used 
D)  only (i) and (ii) are used

Question 16

Wind turbines that generate electricity near towns cannot be considered an externality because they don't generate greenhouse gases like thermal plants.

Accepted Answer

A) True 
 B)False

Question 17

In which of the following ways are Pigovian taxes and pollution permits similar? (i) in both cases, firms pay for their pollution.
(ii) both internalise the externality of pollution by making it costly to pollute.
(iii) each policy allows for a market-based solution.

Accepted Answer

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

Question 18

Private contracts between parties with mutual interests:

Accepted Answer

A)  can only reduce the wellbeing of society 
B)  will always lead to market outcomes in which public interest is sacrificed for personal gain 
C)  can solve some inefficiencies associated with positive externalities 
D)  will always cause negative externalities to arise 
A)  can only reduce the wellbeing of society 
B)  will always lead to market outcomes in which public interest is sacrificed for personal gain 
C)  can solve some inefficiencies associated with positive externalities 
D)  will always cause negative externalities to arise

Question 19

Negative externalities occur when one person's actions:

Accepted Answer

A)  cause another person to lose money in a stock-market transaction. 
B)  cause his or her employer to lose business. 
C)  adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange. 
D)  reveal his or her preference for foreign produced goods. 
A)  cause another person to lose money in a stock-market transaction. 
B)  cause his or her employer to lose business. 
C)  adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange. 
D)  reveal his or her preference for foreign produced goods.

Question 20

Graph 10-2
   This graph depicts the market for pork. Use this information to answer the following question(s).
-In Graph 10-2, what price and quantity combination efficiently allocates resources in such a way that the total value to consumers who buy and use pork minus the total costs to the producers who make and sell pork is maximised?

Accepted Answer

A)  P1, Q1 
B)  P2, quantity of zero 
C)  price of zero, Q2 
D)  P0, Q2 
A)  P1, Q1 
B)  P2, quantity of zero 
C)  price of zero, Q2 
D)  P0, Q2

Exam 10: Externalities

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:

The Coase theorem suggests that private solutions to the externality problem:

In the absence of externalities, the invisible hand of the market place:

The initial allocation of tradeable pollution permits will affect the level of economic efficiency in a market with a pollution externality.

If children impose a negative externality, which of the following must be true?

The major problem facing private parties wishing to solve an externality problem is that transaction costs may prevent such a solution from occurring.

A market for pollution permits can efficiently allocate the right to pollute through the forces of supply and demand.

Emission controls on automobiles provide an example of a:

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Which of the following statements is true?

To reduce the externality created by dog faeces in Australian parks:

To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidise producers by:

Because a driver's private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.

Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

Wind turbines that generate electricity near towns cannot be considered an externality because they don't generate greenhouse gases like thermal plants.

In which of the following ways are Pigovian taxes and pollution permits similar? (i) in both cases, firms pay for their pollution. (ii) both internalise the externality of pollution by making it costly to pollute. (iii) each policy allows for a market-based solution.

Private contracts between parties with mutual interests:

Negative externalities occur when one person's actions:

Ten Lessons From 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

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity 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 Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

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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