Question 1

What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed?

Accepted Answer

A)  the Coase theorem 
B)  the laws of supply and demand 
C)  the law of comparative advantage 
D)  the law of externalities 
A)  the Coase theorem 
B)  the laws of supply and demand 
C)  the law of comparative advantage 
D)  the law of externalities A

Question 2

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Accepted Answer

A) True 
 B)False  False

Question 3

Assume the production of a good causes a negative externality. In the market equilibrium, the marginal consumer values the good at

Accepted Answer

A)  less than the social cost of producing it. 
B)  less than the private cost of producing it. 
C)  more than the social cost of producing it. 
D)  more than the private cost of producing it. 
A)  less than the social cost of producing it. 
B)  less than the private cost of producing it. 
C)  more than the social cost of producing it. 
D)  more than the private cost of producing it. A

Question 4

Table 10-2
The following table shows the private value, private cost, and social value for a market with a positive externality.  
-Refer to Table 10-2. What is the socially-optimal level of output in this market?

Accepted Answer

A)  3 units 
B)  4 units 
C)  5 units 
D)  6 units 
A)  3 units 
B)  4 units 
C)  5 units 
D)  6 units

Question 5

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Accepted Answer

A) True 
 B)False

Question 6

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 7

The gasoline tax

Accepted Answer

A)  is similar to most other taxes in that it causes deadweight losses. 
B)  produces the unfortunate side-effect of making the roads more dangerous. 
C)  can be viewed as a corrective tax aimed at multiple negative externalities associated with driving. 
D)  can be viewed as a command-and-control policy aimed at discouraging people from driving. 
A)  is similar to most other taxes in that it causes deadweight losses. 
B)  produces the unfortunate side-effect of making the roads more dangerous. 
C)  can be viewed as a corrective tax aimed at multiple negative externalities associated with driving. 
D)  can be viewed as a command-and-control policy aimed at discouraging people from driving.

Question 8

Figure 10-11  
-Refer to Figure 10-11. Which of the following statements is correct?

Accepted Answer

A)  The private value of the 420th unit of output is $15. 
B)  The social value of the 420th unit of output is $42. 
C)  The external benefit of the 420th unit of output is $27. 
D)  All of the above are correct. 
A)  The private value of the 420th unit of output is $15. 
B)  The social value of the 420th unit of output is $42. 
C)  The external benefit of the 420th unit of output is $27. 
D)  All of the above are correct.

Question 9

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

Accepted Answer

A)  20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. 
B)  100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. 
C)  50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. 
D)  20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. 
A)  20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. 
B)  100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. 
C)  50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. 
D)  20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Question 10

Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Accepted Answer

@#IMG-DLM& When a negative externality exists, the

Question 11

One reason that private solutions to externalities do not always work is that

Accepted Answer

A)  government intervention negates the benefits of positive externalities. 
B)  some people benefit from externalities. 
C)  interested parties incur costs in the bargaining process. 
D)  charities are not well organized. 
A)  government intervention negates the benefits of positive externalities. 
B)  some people benefit from externalities. 
C)  interested parties incur costs in the bargaining process. 
D)  charities are not well organized.

Question 12

Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Accepted Answer

A)  They are equal. 
B)  The equilibrium quantity is greater than the socially optimal quantity. 
C)  The equilibrium quantity is less than the socially optimal quantity. 
D)  There is not enough information to answer the question. 
A)  They are equal. 
B)  The equilibrium quantity is greater than the socially optimal quantity. 
C)  The equilibrium quantity is less than the socially optimal quantity. 
D)  There is not enough information to answer the question.

Question 13

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 14

Which of the following is an example of an externality?

Accepted Answer

A)  cigarette smoke that permeates an entire restaurant 
B)  a flu shot that prevents a student from transmitting the virus to her roommate 
C)  a beautiful flower garden outside of the local post office 
D)  All of the above are correct. 
A)  cigarette smoke that permeates an entire restaurant 
B)  a flu shot that prevents a student from transmitting the virus to her roommate 
C)  a beautiful flower garden outside of the local post office 
D)  All of the above are correct.

Question 15

Which of the following statements is correct?

Accepted Answer

A)  Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B)  Corrective taxes distort economic incentives. 
C)  Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D)  Both a and b are correct. 
A)  Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. 
B)  Corrective taxes distort economic incentives. 
C)  Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. 
D)  Both a and b are correct.

Question 16

Tradable pollution permits

Accepted Answer

A)  have prices that are set by the government. 
B)  will be more valuable to firms that can reduce pollution only at high costs. 
C)  are likely to create a higher level of total pollution. 
D)  are less desirable than corrective taxes in reducing pollution. 
A)  have prices that are set by the government. 
B)  will be more valuable to firms that can reduce pollution only at high costs. 
C)  are likely to create a higher level of total pollution. 
D)  are less desirable than corrective taxes in reducing pollution.

Question 17

Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is not a negative externality associated with driving cars?

Accepted Answer

A)  congestion 
B)  pollution 
C)  repairs 
D)  accidents 
A)  congestion 
B)  pollution 
C)  repairs 
D)  accidents

Question 19

A former senator remarked that "We cannot give anyone the option of polluting for a fee." Do most economists agree with this statement, or do they disagree with it?

Accepted Answer

Most econo

Question 20

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed?

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Assume the production of a good causes a negative externality. In the market equilibrium, the marginal consumer values the good at

Table 10-2 The following table shows the private value, private cost, and social value for a market with a positive externality. -Refer to Table 10-2. What is the socially-optimal level of output in this market?

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

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

The gasoline tax

Figure 10-11 -Refer to Figure 10-11. Which of the following statements is correct?

Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

One reason that private solutions to externalities do not always work is that

Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Private markets fail to account for externalities because

Which of the following is an example of an externality?

Which of the following statements is correct?

Tradable pollution permits

Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government.

Which of the following is not a negative externality associated with driving cars?

A former senator remarked that "We cannot give anyone the option of polluting for a fee." Do most economists agree with this statement, or do they disagree with it?

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

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

Six Debates Over Macroeconomic Policy

Filters