Question 1

An additional electric automobile on a congested freeway creates:

Accepted Answer

A)  no production or consumption externality because electric cars do not pollute 
B)  a positive production externality because electric cars reduce pollution 
C)  a positive consumption externality because existing cars will increase their speed after the car enters the freeway 
D)  a negative consumption externality because its presence reduces the speed of traffic for cars already on the freeway 
A)  no production or consumption externality because electric cars do not pollute 
B)  a positive production externality because electric cars reduce pollution 
C)  a positive consumption externality because existing cars will increase their speed after the car enters the freeway 
D)  a negative consumption externality because its presence reduces the speed of traffic for cars already on the freeway

Question 2

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. What price and quantity combination best represents the optimum price and number of kiwifruit trays that should be produced?

Accepted Answer

A)  P1, Q1 
B)  P2, Q0 
C)  P3, Q1 
D)  The optimum quantity is zero kiwifruit as long as honey production by beekeepers is lower because of pesticide use. 
A)  P1, Q1 
B)  P2, Q0 
C)  P3, Q1 
D)  The optimum quantity is zero kiwifruit as long as honey production by beekeepers is lower because of pesticide use.

Question 3

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

Accepted Answer

A) True 
 B)False

Question 4

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 difference between the social cost curve and the supply curve reflects the:

Accepted Answer

A)  profit margin of each kiwifruit tray 
B)  cost of spillover effects from the kiwifruit orchards (replacing bees, lost honey output) 
C)  value of kiwifruit to society as a whole 
D)  amount by which the government should subsidise the kiwifruit orchardists 
A)  profit margin of each kiwifruit tray 
B)  cost of spillover effects from the kiwifruit orchards (replacing bees, lost honey output) 
C)  value of kiwifruit to society as a whole 
D)  amount by which the government should subsidise the kiwifruit orchardists

Question 5

Internalising a negative consumption externality will cause the market supply curve to shift to the left.

Accepted Answer

A) True 
 B)False

Question 6

Many countries now have laws to discourage and hinder unwanted emails (spam) being sent over the Internet. Are spammers merely a minor nuisance or do they generate enough of an externality to merit laws being passed to stop it?

Accepted Answer

Spammers create several externalities th

Question 7

Which of the following statements about internalising a negative production externality is most correct?

Accepted Answer

A)  internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced 
B)  internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced 
C)  internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced 
D)  internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced 
A)  internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and decrease the price of the good produced 
B)  internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced 
C)  internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced 
D)  internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced

Question 8

Mobile phones are banned in some public places. This is likely to be because:

Accepted Answer

A)  there are negative externalities associated with use of a mobile phone in public places 
B)  a mobile phone user's private costs do not reflect the cost he or she imposes on bystanders 
C)  mobile phone conversations in public are likely to annoy bystanders 
D)  all of the above are true 
A)  there are negative externalities associated with use of a mobile phone in public places 
B)  a mobile phone user's private costs do not reflect the cost he or she imposes on bystanders 
C)  mobile phone conversations in public are likely to annoy bystanders 
D)  all of the above are true

Question 9

Social welfare can be enhanced by allowing firms to trade their carbon credits.

Accepted Answer

A) True 
 B)False

Question 10

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. For each tray of kiwifruit produced, the social cost would include which of the following? (i) the private costs of the kiwifruit farmers
(ii) the enjoyment that buyers get from eating kiwifruit
(iii) the cost beekeepers incur to replace hives that die because of pesticide use

Accepted Answer

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

Question 11

When Jake takes into account how his actions affect Jill, and changes these, an externality is solved.

Accepted Answer

A) True 
 B)False

Question 12

Market outcomes cannot be improved by government policies.

Accepted Answer

A) True 
 B)False

Question 13

Assume that your housemate is very messy. (There is no law against being messy.) Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you to:

Accepted Answer

A)  pay your housemate at least $100 but no more than $200 to clean up after herself 
B)  pay your housemate at least $201 to clean up after herself 
C)  charge your housemate at least $100 to have you clean up after her 
D)  charge your housemate at least $200 but no more than $300 to keep you from complaining about the mess 
A)  pay your housemate at least $100 but no more than $200 to clean up after herself 
B)  pay your housemate at least $201 to clean up after herself 
C)  charge your housemate at least $100 to have you clean up after her 
D)  charge your housemate at least $200 but no more than $300 to keep you from complaining about the mess

Question 14

When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality:

Accepted Answer

A)  it provides incentives to private decision makers to induce them to solve the externality problem on their own 
B)  it typically uses command-and-control techniques 
C)  the use of taxes is strictly forbidden 
D)  subsidies are always the best policy 
A)  it provides incentives to private decision makers to induce them to solve the externality problem on their own 
B)  it typically uses command-and-control techniques 
C)  the use of taxes is strictly forbidden 
D)  subsidies are always the best policy

Question 15

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. At the private market outcome, price P3 represents the:

Accepted Answer

A)  value of kiwifruit to kiwifruit consumers 
B)  value of kiwifruit to honey consumers 
C)  social cost of producing the last kiwifruit 
D)  optimal price of a kiwifruit from the standpoint of society as a whole 
A)  value of kiwifruit to kiwifruit consumers 
B)  value of kiwifruit to honey consumers 
C)  social cost of producing the last kiwifruit 
D)  optimal price of a kiwifruit from the standpoint of society as a whole

Question 16

In essence, the Pigovian tax places a price on the right to pollute.

Accepted Answer

A) True 
 B)False

Question 17

Education has negative externalities for society.

Accepted Answer

A) True 
 B)False

Question 18

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Accepted Answer

A) True 
 B)False

Question 19

Government subsidies to scientific research is aimed at controlling the negative externalities associated with technological advances.

Accepted Answer

A) True 
 B)False

Question 20

Private markets fail to reach a socially optimal level when negative consumption externalities are present because:

Accepted Answer

A)  social costs equal private costs at the private market solution 
B)  private value exceeds social value at the private market solution 
C)  private value exceeds social costs at the private market solution 
D)  consumption externalities lead to production externalities 
A)  social costs equal private costs at the private market solution 
B)  private value exceeds social value at the private market solution 
C)  private value exceeds social costs at the private market solution 
D)  consumption externalities lead to production externalities

Exam 10: Externalities

An additional electric automobile on a congested freeway creates:

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. What price and quantity combination best represents the optimum price and number of kiwifruit trays that should be produced?

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

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 difference between the social cost curve and the supply curve reflects the:

Internalising a negative consumption externality will cause the market supply curve to shift to the left.

Many countries now have laws to discourage and hinder unwanted emails (spam) being sent over the Internet. Are spammers merely a minor nuisance or do they generate enough of an externality to merit laws being passed to stop it?

Which of the following statements about internalising a negative production externality is most correct?

Mobile phones are banned in some public places. This is likely to be because:

Social welfare can be enhanced by allowing firms to trade their carbon credits.

When Jake takes into account how his actions affect Jill, and changes these, an externality is solved.

Market outcomes cannot be improved by government policies.

Assume that your housemate is very messy. (There is no law against being messy.) Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you to:

When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality:

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. At the private market outcome, price P3 represents the:

In essence, the Pigovian tax places a price on the right to pollute.

Education has negative externalities for society.

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Government subsidies to scientific research is aimed at controlling the negative externalities associated with technological advances.

Private markets fail to reach a socially optimal level when negative consumption externalities are present 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

Filters

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. At the private market outcome, price P₃ represents the: