Question 1

Which of the following is a command-and-control policy?

Accepted Answer

A)  taxes 
B)  pollution permits 
C)  regulation 
D)  subsidies 
A)  taxes 
B)  pollution permits 
C)  regulation 
D)  subsidies

Question 2

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Accepted Answer

A) True 
 B)False

Question 3

Externalities are generated by the consumption of goods.

Accepted Answer

A) True 
 B)False

Question 4

The problems of externalities are often solved through:

Accepted Answer

A)  self-interest 
B)  moral codes and social sanctions 
C)  charity 
D)  all of the above 
A)  self-interest 
B)  moral codes and social sanctions 
C)  charity 
D)  all of the above

Question 5

If sparks from trains sets adjacent farmland on fire, one way to internalise the externality is:

Accepted Answer

A)  for the rail company to increase the volume of rail traffic 
B)  for the rail company to purchase the adjacent farmland 
C)  for the government to buy the farmland 
D)  for the rail company to lower their freight charges 
A)  for the rail company to increase the volume of rail traffic 
B)  for the rail company to purchase the adjacent farmland 
C)  for the government to buy the farmland 
D)  for the rail company to lower their freight charges

Question 6

Suppose that large scale pork production has the potential to create groundwater pollution. Why might this type of pollution be considered an externality?

Accepted Answer

A)  the groundwater pollution reduces the cost of large scale pork production 
B)  the economic impact of a large-scale pork production facility is localised in a small geographic area 
C)  the pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility 
D)  consumers will not reap the benefits of lower production cost from large-scale pork production 
A)  the groundwater pollution reduces the cost of large scale pork production 
B)  the economic impact of a large-scale pork production facility is localised in a small geographic area 
C)  the pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility 
D)  consumers will not reap the benefits of lower production cost from large-scale pork production

Question 7

In some cases, pollution permits may be better than a Pigovian tax because:

Accepted Answer

A)  Pigovian taxes reduce pollution by a greater amount than pollution permits 
B)  pollution permits generate more revenue for the government than a Pigovian tax 
C)  pollution is difficult to measure 
D)  the government has more explicit control over the quantity of pollution created with permits 
A)  Pigovian taxes reduce pollution by a greater amount than pollution permits 
B)  pollution permits generate more revenue for the government than a Pigovian tax 
C)  pollution is difficult to measure 
D)  the government has more explicit control over the quantity of pollution created with permits

Question 8

Graph 10-2
   This graph depicts the market for pork. Use this information to answer the following question(s).
-In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

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

Question 9

When the government reverts to command-and-control policy to solve an externality, it:

Accepted Answer

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

Question 10

A positive production externality will cause a market to produce:

Accepted Answer

A)  less than is socially desirable 
B)  more than is socially desirable 
C)  more than is market optimal 
D)  less than is market optimal 
A)  less than is socially desirable 
B)  more than is socially desirable 
C)  more than is market optimal 
D)  less than is market optimal

Question 11

Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

Accepted Answer

A) True 
 B)False

Question 12

Unfortunately, the petrol tax does not make people take into account the risk they impose on others by driving large vehicles.

Accepted Answer

A) True 
 B)False

Question 13

When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of producing it, which of the following are true? (i) at market equilibrium the demand curve lies below the social cost curve
(ii) reducing production to a level below the equilibrium level could possibly raise total economic wellbeing
(iii) the equilibrium price is higher than necessary to insure maximum economic wellbeing

Accepted Answer

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

Question 14

The manufacture and sale of CFCs in Australia is now banned. This is an example of a:

Accepted Answer

A)  a market-based policy 
B)  a command-and-control policy 
C)  tradeable permit 
D)  transaction costs 
A)  a market-based policy 
B)  a command-and-control policy 
C)  tradeable permit 
D)  transaction costs

Question 15

A positive consumption externality will cause a private market to produce:

Accepted Answer

A)  less than is socially desirable 
B)  more than is socially desirable 
C)  more than is market optimal 
D)  less than is market optimal 
A)  less than is socially desirable 
B)  more than is socially desirable 
C)  more than is market optimal 
D)  less than is market optimal

Question 16

Assuming that Jane has the legal right to peace and quiet, which of the following statements is true?

Accepted Answer

A)  if Dick's benefit exceeds Jane's cost, government intervention is necessary 
B)  if Jane has legal right to peace and quiet, she only has to pay Dick when her cost is below his benefit 
C)  if Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog 
D)  Dick will pay to keep his dog if his benefit exceeds Jane's cost 
A)  if Dick's benefit exceeds Jane's cost, government intervention is necessary 
B)  if Jane has legal right to peace and quiet, she only has to pay Dick when her cost is below his benefit 
C)  if Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog 
D)  Dick will pay to keep his dog if his benefit exceeds Jane's cost

Question 17

The height of the supply curve at any given quantity of coal shows the:

Accepted Answer

A)  value to the consumer of the last unit of coal bought 
B)  consumer's willingness to pay for coal at each quantity 
C)  cost to the producer of the last unit of coal sold 
D)  total quantity of coal exchanged in the market 
A)  value to the consumer of the last unit of coal bought 
B)  consumer's willingness to pay for coal at each quantity 
C)  cost to the producer of the last unit of coal sold 
D)  total quantity of coal exchanged in the market

Question 18

Graph 10-5
  
-Refer to Graph 10-5. Which of the graphs shown best depicts the case of a negative production externality?

Accepted Answer

A)  panel (a) 
B)  panel (b) 
C)  panel (c) 
D)  panel (d) 
A)  panel (a) 
B)  panel (b) 
C)  panel (c) 
D)  panel (d)

Question 19

The height of the demand curve for aluminum for any given quantity, shows the:

Accepted Answer

A)  willingness to pay of the marginal supplier 
B)  willingness to pay of the marginal buyer 
C)  the gains from trade 
D)  opportunity cost 
A)  willingness to pay of the marginal supplier 
B)  willingness to pay of the marginal buyer 
C)  the gains from trade 
D)  opportunity cost

Question 20

The production of paper is a chemical-intensive process that generates dioxin. Dioxin is a negative externality associated with the paper industry because:

Accepted Answer

A)  the paper industry does not know that dioxin is a spillover 
B)  the paper industry often does not know what the regulations for dioxin are 
C)  self-interested paper producers have no incentive to incorporate the costs of dioxin pollution into their output decisions 
D)  corporations are only interested in short-term profits 
A)  the paper industry does not know that dioxin is a spillover 
B)  the paper industry often does not know what the regulations for dioxin are 
C)  self-interested paper producers have no incentive to incorporate the costs of dioxin pollution into their output decisions 
D)  corporations are only interested in short-term profits

Exam 10: Externalities

Which of the following is a command-and-control policy?

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Externalities are generated by the consumption of goods.

The problems of externalities are often solved through:

If sparks from trains sets adjacent farmland on fire, one way to internalise the externality is:

Suppose that large scale pork production has the potential to create groundwater pollution. Why might this type of pollution be considered an externality?

In some cases, pollution permits may be better than a Pigovian tax because:

Graph 10-2 This graph depicts the market for pork. Use this information to answer the following question(s). -In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

When the government reverts to command-and-control policy to solve an externality, it:

A positive production externality will cause a market to produce:

Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

Unfortunately, the petrol tax does not make people take into account the risk they impose on others by driving large vehicles.

The manufacture and sale of CFCs in Australia is now banned. This is an example of a:

A positive consumption externality will cause a private market to produce:

Assuming that Jane has the legal right to peace and quiet, which of the following statements is true?

The height of the supply curve at any given quantity of coal shows the:

Graph 10-5 -Refer to Graph 10-5. Which of the graphs shown best depicts the case of a negative production externality?

The height of the demand curve for aluminum for any given quantity, shows the:

The production of paper is a chemical-intensive process that generates dioxin. Dioxin is a negative externality associated with the paper industry because:

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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