Question 1

Since air pollution creates a negative externality,

Accepted Answer

A)  social welfare will be enhanced when some,but not all air pollution is eliminated. 
B)  social welfare is optimal when all air pollution is eliminated. 
C)  governments should encourage private firms to consider only private costs. 
D)  the free market result maximizes social welfare. 
A)  social welfare will be enhanced when some,but not all air pollution is eliminated. 
B)  social welfare is optimal when all air pollution is eliminated. 
C)  governments should encourage private firms to consider only private costs. 
D)  the free market result maximizes social welfare.

Question 2

Government can be used to solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False

Question 3

Table 10-1
The following table shows the private value,private cost,and external cost for various quantities of output in a market.
  
-Refer to Table 10-1.What is the socially-optimal quantity of output in this market?

Accepted Answer

A)  1 unit 
B)  2 units 
C)  3 units 
D)  4 units 
A)  1 unit 
B)  2 units 
C)  3 units 
D)  4 units

Question 4

Table 10-3
The following table shows the marginal costs for each of four firms (A,B,C,and D)to eliminate units of pollution from their production processes.For example,for Firm A to eliminate one unit of pollution,it would cost $54,and for Firm A to eliminate a second unit of pollution it would cost an additional $67.
  
-Refer to Table 10-3.Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal.Which of the following is a likely auction price of the permits?

Accepted Answer

A)  $69 
B)  $81 
C)  $83 
D)  $97 
A)  $69 
B)  $81 
C)  $83 
D)  $97

Question 5

Which of the following is NOT an example of a negative externality?

Accepted Answer

A)  air pollution from a manufacturing plant. 
B)  disrupted sleep from a neighbor's loud music. 
C)  an illness caused by secondhand cigarette smoke. 
D)  a decrease in your property value from neglecting your lawn and garden. 
A)  air pollution from a manufacturing plant. 
B)  disrupted sleep from a neighbor's loud music. 
C)  an illness caused by secondhand cigarette smoke. 
D)  a decrease in your property value from neglecting your lawn and garden.

Question 6

Figure 10-3  
-Refer to Figure 10-3.What price and quantity combination best represents the optimum price and number of concerts that should be organized?

Accepted Answer

A)  P1,Q1 
B)  P2,Q0 
C)  P2,Q1 
D)  The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion. 
A)  P1,Q1 
B)  P2,Q0 
C)  P2,Q1 
D)  The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion.

Question 7

Figure 10-5  
-Refer to Figure 10-5.Which of the following statements is correct?

Accepted Answer

A)  The marginal benefit of the positive externality is measured by P3 - P1. 
B)  The marginal cost of the negative externality is measured by P3 - P2. 
C)  The marginal cost of the negative externality is measured by P3 - P1. 
D)  The marginal cost of the negative externality is measured by P3 - P0. 
A)  The marginal benefit of the positive externality is measured by P3 - P1. 
B)  The marginal cost of the negative externality is measured by P3 - P2. 
C)  The marginal cost of the negative externality is measured by P3 - P1. 
D)  The marginal cost of the negative externality is measured by P3 - P0.

Question 8

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Accepted Answer

A)  social costs equal private costs at the private market solution. 
B)  private costs exceed social costs at the private market solution. 
C)  social costs exceed private costs at the private market solution. 
D)  they internalize externalities. 
A)  social costs equal private costs at the private market solution. 
B)  private costs exceed social costs at the private market solution. 
C)  social costs exceed private costs at the private market solution. 
D)  they internalize externalities.

Question 9

Assuming transaction costs are small,the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

Accepted Answer

A)  One neighbor lets his dog run through another neighbor's garden,damaging her flowers. 
B)  One neighbor doesn't mow her yard. 
C)  One neighbor plays his music loudly. 
D)  All of the above are correct. 
A)  One neighbor lets his dog run through another neighbor's garden,damaging her flowers. 
B)  One neighbor doesn't mow her yard. 
C)  One neighbor plays his music loudly. 
D)  All of the above are correct.

Question 10

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

Accepted Answer

A)  A well-maintained yard conveys a positive externality because it increases the home's market value. 
B)  A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C)  A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. 
D)  A well-maintained yard cannot provide any type of externality. 
A)  A well-maintained yard conveys a positive externality because it increases the home's market value. 
B)  A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. 
C)  A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. 
D)  A well-maintained yard cannot provide any type of externality.

Question 11

The Coase theorem suggests that private solutions to an externality problem

Accepted Answer

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

Question 12

Figure 10-10  
-Refer to Figure 10-10.Which graph illustrates a pollution permit program?

Accepted Answer

A)  the left graph 
B)  the right graph 
C)  both graphs 
D)  neither graph 
A)  the left graph 
B)  the right graph 
C)  both graphs 
D)  neither graph

Question 13

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

Accepted Answer

A) True 
 B)False

Question 14

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then

Accepted Answer

A)  the equilibrium quantity of education will equal the socially optimal quantity of education. 
B)  the equilibrium quantity of education will be greater than the socially optimal quantity of education. 
C)  the equilibrium quantity of education will be less than the socially optimal quantity of education. 
D)  There is not enough information to answer the question. 
A)  the equilibrium quantity of education will equal the socially optimal quantity of education. 
B)  the equilibrium quantity of education will be greater than the socially optimal quantity of education. 
C)  the equilibrium quantity of education will be less than the socially optimal quantity of education. 
D)  There is not enough information to answer the question.

Question 15

Private solutions may not be possible due to the costs of negotiating and enforcing these solutions.Such costs are called

Accepted Answer

A)  transaction costs. 
B)  corrective costs. 
C)  input costs. 
D)  private costs. 
A)  transaction costs. 
B)  corrective costs. 
C)  input costs. 
D)  private costs.

Question 16

When an industry is characterized by technology spillover,what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Accepted Answer

A)  Impose a tax greater than the value of the technology spillover. 
B)  Not allow production of any product that causes a technology spillover. 
C)  Provide a subsidy equal to the value of the technology spillover. 
D)  Require producers to "clean up" any spillover that results from their production process. 
A)  Impose a tax greater than the value of the technology spillover. 
B)  Not allow production of any product that causes a technology spillover. 
C)  Provide a subsidy equal to the value of the technology spillover. 
D)  Require producers to "clean up" any spillover that results from their production process.

Question 17

Why are efficiency taxes preferred to regulatory policies as methods remedy externalities?

Accepted Answer

Efficiency taxes allow markets to coordi

Question 18

Figure 10-4  
-Refer to Figure 10-4.If this market is currently producing at Q4,then total economic well-being would be maximized if output

Accepted Answer

A)  decreased to Q1. 
B)  decreased to Q2. 
C)  decreased to Q3. 
D)  stayed at Q4. 
A)  decreased to Q1. 
B)  decreased to Q2. 
C)  decreased to Q3. 
D)  stayed at Q4.

Question 19

In a market with positive externalities,the market equilibrium quantity maximizes the welfare of society as a whole.

Accepted Answer

A) True 
 B)False

Question 20

Figure 10-6  
-Refer to Figure 10-6.Which price represents the equilibrium price of the product in this market?

Accepted Answer

A)  P 
B)  P' 
C)  Either P or P'.It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price. 
D)  Some price between P and P'.The equilibrium price depends on the negotiating skills of the interested parties. 
A)  P 
B)  P' 
C)  Either P or P'.It is necessary to know whether the externality is positive or negative to determine which of these is the equilibrium price. 
D)  Some price between P and P'.The equilibrium price depends on the negotiating skills of the interested parties.

Exam 10: Externalities

Since air pollution creates a negative externality,

Government can be used to solve externality problems that are too costly for private parties to solve.

Table 10-1 The following table shows the private value,private cost,and external cost for various quantities of output in a market. -Refer to Table 10-1.What is the socially-optimal quantity of output in this market?

Which of the following is NOT an example of a negative externality?

Figure 10-3 -Refer to Figure 10-3.What price and quantity combination best represents the optimum price and number of concerts that should be organized?

Figure 10-5 -Refer to Figure 10-5.Which of the following statements is correct?

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Assuming transaction costs are small,the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

The Coase theorem suggests that private solutions to an externality problem

Figure 10-10 -Refer to Figure 10-10.Which graph illustrates a pollution permit program?

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then

Private solutions may not be possible due to the costs of negotiating and enforcing these solutions.Such costs are called

When an industry is characterized by technology spillover,what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Why are efficiency taxes preferred to regulatory policies as methods remedy externalities?

Figure 10-4 -Refer to Figure 10-4.If this market is currently producing at Q4,then total economic well-being would be maximized if output

In a market with positive externalities,the market equilibrium quantity maximizes the welfare of society as a whole.

Figure 10-6 -Refer to Figure 10-6.Which price represents the equilibrium price of the product in this market?

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

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

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

Figure 10-4 -Refer to Figure 10-4.If this market is currently producing at Q₄,then total economic well-being would be maximized if output