Question 1

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is a difference between corrective taxes and tradable pollution permits?

Accepted Answer

A)  Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control policy. 
B)  With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution. 
C)  With corrective taxes firms pay for pollution; with tradable pollution permits firms do not. 
D)  Corrective taxes internalize the pollution externality while tradable pollution permits do not. 
A)  Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control policy. 
B)  With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution. 
C)  With corrective taxes firms pay for pollution; with tradable pollution permits firms do not. 
D)  Corrective taxes internalize the pollution externality while tradable pollution permits do not.

Question 3

Figure 10-12  
-Refer to Figure 10-12. The graph, as drawn, could apply to the market for

Accepted Answer

A)  fire extinguishers. 
B)  immunizations such as flu shots. 
C)  education. 
D)  All of the above are correct. 
A)  fire extinguishers. 
B)  immunizations such as flu shots. 
C)  education. 
D)  All of the above are correct.

Question 4

Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?

Accepted Answer

A)  Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol. 
B)  Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders. 
C)  Corrective taxes provide incentives for the conservation of natural resources. 
D)  Corrective taxes do not affect deadweight loss. 
A)  Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol. 
B)  Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders. 
C)  Corrective taxes provide incentives for the conservation of natural resources. 
D)  Corrective taxes do not affect deadweight loss.

Question 5

Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000th gallon of gasoline entails the following:
• a private cost of $3.10;
• a social cost of $3.55;
• a value to consumers of $3.70.
-Refer to Scenario 10-1. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, QMARKET = 1,150. Then the equilibrium price of a gallon could be

Accepted Answer

A)  $2.80. 
B)  $3.00. 
C)  $3.30. 
D)  $3.80. 
A)  $2.80. 
B)  $3.00. 
C)  $3.30. 
D)  $3.80.

Question 6

Figure 10-15  
-Refer to Figure 10-15. Which graph illustrates a corrective tax?

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 7

If a market is characterized by a positive externality that is not the result of a technology spillover,

Accepted Answer

A)  the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater than the equilibrium price. 
B)  the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. 
C)  the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is greater than the equilibrium price. 
D)  the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. 
A)  the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater than the equilibrium price. 
B)  the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. 
C)  the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is greater than the equilibrium price. 
D)  the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is less than the equilibrium price.

Question 8

Figure 10-9
  
-Refer to Figure 10-9, Panel b) and Panel c). The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, the socially optimal quantity of antibiotics is represented by point

Accepted Answer

A)  Q2. 
B)  Q3. 
C)  Q4. 
D)  Q5. 
A)  Q2. 
B)  Q3. 
C)  Q4. 
D)  Q5.

Question 9

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics.   Multiple Choice - Section 02: Public Policies toward Externalities
-Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

Accepted Answer

A)  social optimum has been reached. 
B)  market equilibrium has been reached. 
C)  government must have imposed a corrective tax to guide the market to this outcome. 
D)  government must have offered a corrective subsidy to guide the market to this outcome. 
A)  social optimum has been reached. 
B)  market equilibrium has been reached. 
C)  government must have imposed a corrective tax to guide the market to this outcome. 
D)  government must have offered a corrective subsidy to guide the market to this outcome.

Question 10

If only a few people are affected by an externality, then it is likely that

Accepted Answer

A)  corrective taxes will provide the most efficient solution to the externality. 
B)  command-and-control regulation will provide the most efficient solution to the externality. 
C)  a private solution to the inefficiency will occur. 
D)  a private solution will be very difficult to negotiate. 
A)  corrective taxes will provide the most efficient solution to the externality. 
B)  command-and-control regulation will provide the most efficient solution to the externality. 
C)  a private solution to the inefficiency will occur. 
D)  a private solution will be very difficult to negotiate.

Question 11

Figure 10-12  
-Refer to Figure 10-12. An alternative label for the quantity   would be

Accepted Answer

A)    . 
B)    . 
C)    . 
D)    . 
A)    . 
B)    . 
C)    . 
D)    .

Question 12

Private markets fail to account for externalities because

Accepted Answer

A)  externalities don't occur in private markets. 
B)  sellers include costs associated with externalities in the price of their product. 
C)  decisionmakers in the market fail to include the costs of their behavior to third parties. 
D)  the government cannot easily estimate the optimal quantity of pollution. 
A)  externalities don't occur in private markets. 
B)  sellers include costs associated with externalities in the price of their product. 
C)  decisionmakers in the market fail to include the costs of their behavior to third parties. 
D)  the government cannot easily estimate the optimal quantity of pollution.

Question 13

Figure 10-16  
-Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium price of pollution is

Accepted Answer

A)  $50 
B)  $500 
C)  $1,000 
D)  $2,000 
A)  $50 
B)  $500 
C)  $1,000 
D)  $2,000

Question 14

Which of the following statements is correct?

Accepted Answer

A)  The use of pollution permits and corrective taxes reduces the cost of environmental protection. 
B)  Rich countries usually have cleaner environments than poor countries because a clean environment is like other normal goods in that it has a positive income elasticity. 
C)  Clean water and clean air are goods to which the law of demand applies. 
D)  All of the above are correct. 
A)  The use of pollution permits and corrective taxes reduces the cost of environmental protection. 
B)  Rich countries usually have cleaner environments than poor countries because a clean environment is like other normal goods in that it has a positive income elasticity. 
C)  Clean water and clean air are goods to which the law of demand applies. 
D)  All of the above are correct.

Question 15

When technology spillover occurs,

Accepted Answer

A)  it is the government's responsibility to own firms that are engaged in high-tech research. 
B)  a firm's research yields technological knowledge that can then be used by society as a whole. 
C)  those firms engaged in technology research should be taxed by the government. 
D)  firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product. 
A)  it is the government's responsibility to own firms that are engaged in high-tech research. 
B)  a firm's research yields technological knowledge that can then be used by society as a whole. 
C)  those firms engaged in technology research should be taxed by the government. 
D)  firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product.

Question 16

Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that

Accepted Answer

A)  flu shots provide a positive externality, and that flu shots should be subsidized. 
B)  if flu shots are not subsidized, then the number of people getting flu shots will be smaller than the socially optimal number. 
C)  the externality generated by flu shots is more like the externality generated by education than the externality generated by pollution. 
D)  All of the above are correct. 
A)  flu shots provide a positive externality, and that flu shots should be subsidized. 
B)  if flu shots are not subsidized, then the number of people getting flu shots will be smaller than the socially optimal number. 
C)  the externality generated by flu shots is more like the externality generated by education than the externality generated by pollution. 
D)  All of the above are correct.

Question 17

Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
•
-Refer to Scenario 10-4. What is the social value of the 500th fire extinguisher?

Accepted Answer

The social value is equal to t

Question 18

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

Accepted Answer

A)  tax university researchers 
B)  offer grants to university researchers 
C)  eliminate subsidized student loans 
D)  nothing 
A)  tax university researchers 
B)  offer grants to university researchers 
C)  eliminate subsidized student loans 
D)  nothing

Question 19

Figure 10-10  
-Refer to Figure 10-10. "The social cost of the last unit produced exceeds the value to buyers of the last unit produced by $3." This statement is correct at which quantity of output?

Accepted Answer

A)  120 units 
B)  140 units 
C)  160 units 
D)  The statement is true at all quantities of output. 
A)  120 units 
B)  140 units 
C)  160 units 
D)  The statement is true at all quantities of output.

Question 20

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

Accepted Answer

A)  subsidies to education 
B)  maximum levels of pollution that factories may emit 
C)  tradable pollution permits 
D)  None of the above is an example of a command-and-control policy. 
A)  subsidies to education 
B)  maximum levels of pollution that factories may emit 
C)  tradable pollution permits 
D)  None of the above is an example of a command-and-control policy.

Exam 10: Externalities

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

Which of the following is a difference between corrective taxes and tradable pollution permits?

Figure 10-12 -Refer to Figure 10-12. The graph, as drawn, could apply to the market for

Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?

Figure 10-15 -Refer to Figure 10-15. Which graph illustrates a corrective tax?

If a market is characterized by a positive externality that is not the result of a technology spillover,

Figure 10-9 -Refer to Figure 10-9, Panel b) and Panel c). The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, the socially optimal quantity of antibiotics is represented by point

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. Multiple Choice - Section 02: Public Policies toward Externalities -Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the

If only a few people are affected by an externality, then it is likely that

Figure 10-12 -Refer to Figure 10-12. An alternative label for the quantity would be

Private markets fail to account for externalities because

Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium price of pollution is

Which of the following statements is correct?

When technology spillover occurs,

Before the flu season begins, Jeremy gets a flu shot. As a result, Jeremy and several of his friends and relatives avoid the flu for the entire flu season. It would make sense to argue that

Figure 10-10 -Refer to Figure 10-10. "The social cost of the last unit produced exceeds the value to buyers of the last unit produced by $3." This statement is correct at which quantity of output?

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

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

Filters