Question 1

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 2

Figure 10-11  
-Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

Accepted Answer

A)  $5,880. 
B)  $9,480. 
C)  $13,230. 
D)  $15,360. 
A)  $5,880. 
B)  $9,480. 
C)  $13,230. 
D)  $15,360.

Question 3

Externalities tend to cause markets to be

Accepted Answer

A)  inefficient. 
B)  unequal. 
C)  unnecessary. 
D)  overwhelmed. 
A)  inefficient. 
B)  unequal. 
C)  unnecessary. 
D)  overwhelmed.

Question 4

In which of the following cases is the Coase theorem most likely to solve the externality?

Accepted Answer

A)  Ed is allergic to his roommate's cat. 
B)  Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. 
C)  Polluted water runoff from farms is making residents of a nearby town sick. 
D)  Industrialization around the world is causing global warming. 
A)  Ed is allergic to his roommate's cat. 
B)  Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. 
C)  Polluted water runoff from farms is making residents of a nearby town sick. 
D)  Industrialization around the world is causing global warming.

Question 5

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? i) corrective taxes
Ii) tradable pollution permits
Iii) amendments to the Clean Air Act

Accepted Answer

A)  i) only 
B)  both i) and ii) 
C)  iii) only 
D)  both ii) and iii) 
A)  i) only 
B)  both i) and ii) 
C)  iii) only 
D)  both ii) and iii)

Question 6

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Accepted Answer

A)  externalize the positive externality. 
B)  externalize the negative externality. 
C)  internalize the positive externality. 
D)  internalize the negative externality. 
A)  externalize the positive externality. 
B)  externalize the negative externality. 
C)  internalize the positive externality. 
D)  internalize the negative externality.

Question 7

Does the phenomenon of externalities strengthen the argument that we should rely upon the "invisible hand" of the marketplace, or does it weaken that argument?

Accepted Answer

The phenomenon of ex

Question 8

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

Accepted Answer

A)  an opportunity cost. 
B)  an implicit cost. 
C)  a sunk cost. 
D)  a transaction cost. 
A)  an opportunity cost. 
B)  an implicit cost. 
C)  a sunk cost. 
D)  a transaction cost.

Question 9

In a market economy, government intervention

Accepted Answer

A)  will always improve market outcomes. 
B)  reduces efficiency in the presence of externalities. 
C)  may improve market outcomes in the presence of externalities. 
D)  is necessary to control individual greed. 
A)  will always improve market outcomes. 
B)  reduces efficiency in the presence of externalities. 
C)  may improve market outcomes in the presence of externalities. 
D)  is necessary to control individual greed.

Question 10

Figure 10-6  
-Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?

Accepted Answer

A)  Q 
B)  Q' 
C)  Either Q or Q'. It is necessary to know whether the externality is positive or negative to determine the socially-optimal quantity. 
D)  Some quantity between Q and Q'. The socially-optimal quantity depends on the negotiating skills of the interested parties. 
A)  Q 
B)  Q' 
C)  Either Q or Q'. It is necessary to know whether the externality is positive or negative to determine the socially-optimal quantity. 
D)  Some quantity between Q and Q'. The socially-optimal quantity depends on the negotiating skills of the interested parties.

Question 11

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover, it should

Accepted Answer

A)  impose a corrective tax on any firm producing a technology spillover. 
B)  offer tax credits to consumers who are adversely affected by the new technology. 
C)  subsidize producers by an amount equal to the value of the technology spillover. 
D)  provide research grants to those firms not currently engaging in research to increase competition in the industry. 
A)  impose a corrective tax on any firm producing a technology spillover. 
B)  offer tax credits to consumers who are adversely affected by the new technology. 
C)  subsidize producers by an amount equal to the value of the technology spillover. 
D)  provide research grants to those firms not currently engaging in research to increase competition in the industry.

Question 12

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. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Accepted Answer

A)  $2 
B)  $3 
C)  $9 
D)  $10 
A)  $2 
B)  $3 
C)  $9 
D)  $10

Question 13

Which of the following statements is not correct?

Accepted Answer

A)  Private markets tend to over-produce products with negative externalities. 
B)  Private markets tend to under-produce products with positive externalities. 
C)  Private parties can bargain to efficient outcomes even in the presence of externalities. 
D)  Private parties are usually more successful in achieving efficient outcomes than government policies. 
A)  Private markets tend to over-produce products with negative externalities. 
B)  Private markets tend to under-produce products with positive externalities. 
C)  Private parties can bargain to efficient outcomes even in the presence of externalities. 
D)  Private parties are usually more successful in achieving efficient outcomes than government policies.

Question 14

The Coase theorem asserts that, in the presence of externalities,

Accepted Answer

A)  private economic actors sometimes can reach a bargain that produces an efficient outcome. 
B)  private economic actors always can reach a bargain that makes everyone better off. 
C)  private solutions cannot be very effective. 
D)  corrective taxes cannot be very effective. 
A)  private economic actors sometimes can reach a bargain that produces an efficient outcome. 
B)  private economic actors always can reach a bargain that makes everyone better off. 
C)  private solutions cannot be very effective. 
D)  corrective taxes cannot be very effective.

Question 15

Figure 10-9
  
-Refer to Figure 10-9, Panel b) and Panel c). The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, a government policy that internalized the externality would move the quantity of smokestack scrubbers installed from point

Accepted Answer

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

Question 16

The best remedy for market failure is often

Accepted Answer

A)  a market-based solution. 
B)  shutdown of the market. 
C)  no government intervention. 
D)  externalizing the externalities. 
A)  a market-based solution. 
B)  shutdown of the market. 
C)  no government intervention. 
D)  externalizing the externalities.

Question 17

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

Accepted Answer

A) True 
 B)False

Question 18

The Environmental Protection Agency EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy?

Accepted Answer

The requirement that

Question 19

Figure 10-12  
-Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?

Accepted Answer

A)  social cost 
B)  social value 
C)  private cost 
D)  private value 
A)  social cost 
B)  social value 
C)  private cost 
D)  private value

Question 20

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

Accepted Answer

A)  a negative externality requires a subsidy to move the market equilibrium closer to the social optimum. 
B)  the social cost of education exceeds the private cost of education. 
C)  the social value of education exceeds the private value of education. 
D)  the market-equilibrium quantity of education exceeds the optimal quantity of education. 
A)  a negative externality requires a subsidy to move the market equilibrium closer to the social optimum. 
B)  the social cost of education exceeds the private cost of education. 
C)  the social value of education exceeds the private value of education. 
D)  the market-equilibrium quantity of education exceeds the optimal quantity of education.

Exam 10: 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

Figure 10-11 -Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

Externalities tend to cause markets to be

In which of the following cases is the Coase theorem most likely to solve the externality?

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? i) corrective taxes Ii) tradable pollution permits Iii) amendments to the Clean Air Act

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Does the phenomenon of externalities strengthen the argument that we should rely upon the "invisible hand" of the marketplace, or does it weaken that argument?

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

In a market economy, government intervention

Figure 10-6 -Refer to Figure 10-6. Which quantity represents the socially-optimal quantity of output in this market?

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover, it should

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. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Which of the following statements is not correct?

The Coase theorem asserts that, in the presence of externalities,

The best remedy for market failure is often

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

The Environmental Protection Agency EPA) requires that firms in a certain industry adopt a particular technology to reduce the emission of pollutants. Is this requirement a command- and-control policy or is it a market-based policy?

Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?

Education is heavily subsidized through public schools and government scholarships. This subsidization of education reflects the fact that

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

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