Question 1

Restored historic buildings convey a positive externality because people who walk or ride by them can enjoy their beauty and the sense of history they provide.

Accepted Answer

A) True 
 B)False

Question 2

Often parties affected by an externality are unable to reach a private solution due to negotiation and enforcement costs. These costs are known as

Accepted Answer

A)  transaction costs 
B)  opportunity costs 
C)  negative externalities 
D)  transport costs 
A)  transaction costs 
B)  opportunity costs 
C)  negative externalities 
D)  transport costs

Question 3

It is generally difficult or impossible for private markets to take externalities into account because:

Accepted Answer

A)  decision makers in the market fail to take account of the spillover effects of their behaviour 
B)  buyers and sellers in private markets are only interested in social wellbeing 
C)  people are only interested in short-term gains 
D)  governments are responsible for externality problems 
A)  decision makers in the market fail to take account of the spillover effects of their behaviour 
B)  buyers and sellers in private markets are only interested in social wellbeing 
C)  people are only interested in short-term gains 
D)  governments are responsible for externality problems

Question 4

To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, increasing the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality and how might the solution be reached.

Accepted Answer

One solution would be to have the farmer

Question 5

The government attempts to resolve negative externalities caused by automobile exhaust by: (i) taxing gasoline to reduce the amount that people drive
(ii) building safer highways
(iii) setting emission standards for automobiles

Accepted Answer

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

Question 6

To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results in:

Accepted Answer

A)  positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain 
B)  no significant additional benefit to anyone 
C)  a positive externality that benefits only the owner of the fields of fruit and grain 
D)  a positive externality that solely benefits the beekeeper 
A)  positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain 
B)  no significant additional benefit to anyone 
C)  a positive externality that benefits only the owner of the fields of fruit and grain 
D)  a positive externality that solely benefits the beekeeper

Question 7

Graph 10-3
   This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-3. The social cost curve is above the supply curve because:

Accepted Answer

A)  it takes into account the external costs imposed on society by the kiwifruit farmers 
B)  honeybees are also a cost to society 
C)  kiwifruits are likely to cost more than growing the kiwifruit costs the organisers 
D)  workers on kiwifruit orchards also benefit from the job opportunities 
A)  it takes into account the external costs imposed on society by the kiwifruit farmers 
B)  honeybees are also a cost to society 
C)  kiwifruits are likely to cost more than growing the kiwifruit costs the organisers 
D)  workers on kiwifruit orchards also benefit from the job opportunities

Question 8

Pigovian taxes:

Accepted Answer

A)  encourage consumers to avoid sales taxes by shopping online 
B)  are frequently used to encourage exports 
C)  are rarely preferred to direct regulation 
D)  give factory owners an economic incentive to reduce pollution 
A)  encourage consumers to avoid sales taxes by shopping online 
B)  are frequently used to encourage exports 
C)  are rarely preferred to direct regulation 
D)  give factory owners an economic incentive to reduce pollution

Question 9

Inventors in developing countries are usually unable to capture the full benefit of their innovations. They therefore tend to devote too few resources to research. Government can address this problem of under-investment in research by: (i) increasing restrictions on trade
(ii) establishing a patent system to provide inventors with exclusive control over their inventions for a period of time
(iii) subsidising the purchase of technology from other countries.

Accepted Answer

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

Question 10

Externalities tend to keep markets from reaching a socially optimal equilibrium. Therefore, government action:

Accepted Answer

A)  is always needed, because private solutions can never be attained. 
B)  is needed when private solutions fail to arise. 
C)  will be needed only to correct positive consumption externalities. 
D)  will be needed only to compensate consumers. 
A)  is always needed, because private solutions can never be attained. 
B)  is needed when private solutions fail to arise. 
C)  will be needed only to correct positive consumption externalities. 
D)  will be needed only to compensate consumers.

Question 11

Pigovian 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 12

Once tradeable 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 is always lower than the market value of a pollution permit 
D)  the total amount of pollution governed by the permit will always decrease 
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 is always lower than the market value of a pollution permit 
D)  the total amount of pollution governed by the permit will always decrease

Question 13

Pigovian taxes enhance efficiency but the cost of administering such taxes frequently exceeds the revenue they raise for the government.

Accepted Answer

A) True 
 B)False

Question 14

Graph 10-1
  
-Refer to Graph 10-1. Which price and quantity combination represents the social optimum?

Accepted Answer

A)  P1, Q1 
B)  P2, Q1 
C)  P1, Q2 
D)  P2, Q2 
A)  P1, Q1 
B)  P2, Q1 
C)  P1, Q2 
D)  P2, Q2

Question 15

An externality will:

Accepted Answer

A)  usually be characterised as a form of market failure 
B)  cause markets to allocate resources efficiently 
C)  strengthen the role of the 'invisible hand' in the marketplace 
D)  always require the producer to compensate society 
A)  usually be characterised as a form of market failure 
B)  cause markets to allocate resources efficiently 
C)  strengthen the role of the 'invisible hand' in the marketplace 
D)  always require the producer to compensate society

Question 16

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Accepted Answer

A) True 
 B)False

Question 17

According to the Coase theorem, private parties are likely to solve the problem of externalities if:

Accepted Answer

A)  the cost of bargaining is small. 
B)  the contract is easy to enforce 
C)  the number of parties involved is relatively small 
D)  all of the above are true 
A)  the cost of bargaining is small. 
B)  the contract is easy to enforce 
C)  the number of parties involved is relatively small 
D)  all of the above are true

Question 18

Government policies to encourage technology spillovers may go to industries with the most political clout rather than industries with the largest spillovers.

Accepted Answer

A) True 
 B)False

Question 19

In a market characterised by externalities, the market equilibrium fails to maximise the total benefit to society as a whole.

Accepted Answer

A) True 
 B)False

Question 20

The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

Restored historic buildings convey a positive externality because people who walk or ride by them can enjoy their beauty and the sense of history they provide.

Often parties affected by an externality are unable to reach a private solution due to negotiation and enforcement costs. These costs are known as

It is generally difficult or impossible for private markets to take externalities into account because:

The government attempts to resolve negative externalities caused by automobile exhaust by: (i) taxing gasoline to reduce the amount that people drive (ii) building safer highways (iii) setting emission standards for automobiles

To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results in:

Graph 10-3 This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees. -Refer to Graph 10-3. The social cost curve is above the supply curve because:

Pigovian taxes:

Externalities tend to keep markets from reaching a socially optimal equilibrium. Therefore, government action:

Pigovian taxes are unlike most other taxes because they:

Once tradeable pollution permits have been allocated to firms:

Pigovian taxes enhance efficiency but the cost of administering such taxes frequently exceeds the revenue they raise for the government.

Graph 10-1 -Refer to Graph 10-1. Which price and quantity combination represents the social optimum?

An externality will:

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

According to the Coase theorem, private parties are likely to solve the problem of externalities if:

Government policies to encourage technology spillovers may go to industries with the most political clout rather than industries with the largest spillovers.

In a market characterised by externalities, the market equilibrium fails to maximise the total benefit to society as a whole.

The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.

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

Filters