Question 1

The tax on gasoline causes deadweight losses, as is the case with all taxes.

Accepted Answer

A) True 
 B)False

Question 2

Scenario 10-3   Suppose the equation for the demand curve in a market is
where is the quantity demanded and is the price.       Also, suppose the equation for the supply curve in the same market is ,
where is the quantity supplied.  
-Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the social cost of producing 30 units of the good?

Accepted Answer

The social cost of p

Question 3

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 4

Which of the following would not be considered a negative externality?

Accepted Answer

A)  Smelter, Inc. creates steel and pollution. 
B)  Your friend buys a new puppy that barks every night. 
C)  You have an adverse reaction to a medication your doctor prescribed for you. 
D)  Your neighbor plays loud music that you dislike through stereo speakers set up on his deck. 
A)  Smelter, Inc. creates steel and pollution. 
B)  Your friend buys a new puppy that barks every night. 
C)  You have an adverse reaction to a medication your doctor prescribed for you. 
D)  Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.

Question 5

Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a $9-per-shot subsidy to producers. 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 6

The Coase theorem states that

Accepted Answer

A)  taxes are an efficient way for governments to remedy negative externalities. 
B)  subsidies are an efficient way for governments to remedy positive externalities. 
C)  industrial policies encourage technology spillovers. 
D)  in the absence of transaction costs, private parties can solve the problem of externalities on their own. 
A)  taxes are an efficient way for governments to remedy negative externalities. 
B)  subsidies are an efficient way for governments to remedy positive externalities. 
C)  industrial policies encourage technology spillovers. 
D)  in the absence of transaction costs, private parties can solve the problem of externalities on their own.

Question 7

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

Accepted Answer

A)  the value of electricity to consumers equals the private cost of producing electricity. 
B)  the value of electricity to consumers equals the social cost of producing electricity. 
C)  the cost of the externality is maximized. 
D)  the transaction costs of private bargaining are minimized. 
A)  the value of electricity to consumers equals the private cost of producing electricity. 
B)  the value of electricity to consumers equals the social cost of producing electricity. 
C)  the cost of the externality is maximized. 
D)  the transaction costs of private bargaining are minimized.

Question 8

Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

Accepted Answer

The production of go

Question 9

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 equilibrium quantity 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 10

Which of the following statements is correct about a market in which pollution is emitted?

Accepted Answer

A)  Both corrective taxes and pollution permits internalize the externality of pollution. 
B)  Corrective taxes internalize the externality of pollution, but pollution permits do not internalize that externality. 
C)  Corrective taxes fail to internalize the externality of pollution, but corrective taxes internalize that externality. 
D)  Neither corrective taxes nor pollution permits internalize the externality of pollution. 
A)  Both corrective taxes and pollution permits internalize the externality of pollution. 
B)  Corrective taxes internalize the externality of pollution, but pollution permits do not internalize that externality. 
C)  Corrective taxes fail to internalize the externality of pollution, but corrective taxes internalize that externality. 
D)  Neither corrective taxes nor pollution permits internalize the externality of pollution.

Question 11

Economists Edward Glaeser and Matthew Kahn studied carbon emissions in different parts of the United States. On the basis of what they found, they concluded that environmentalists should be in favor of

Accepted Answer

A)  lower taxes on carbon-based fuels such as gasoline. 
B)  more and taller skyscrapers. 
C)  policies that encourage people to move from large cities to suburban areas. 
D)  policies that encourage people to move from suburban areas to rural areas. 
A)  lower taxes on carbon-based fuels such as gasoline. 
B)  more and taller skyscrapers. 
C)  policies that encourage people to move from large cities to suburban areas. 
D)  policies that encourage people to move from suburban areas to rural areas.

Question 12

In some cases, tradable pollution permits may be better than a corrective tax because

Accepted Answer

A)  pollution permits allow for a market solution while a corrective tax does not. 
B)  pollution permits generate more revenue for the government than a corrective tax. 
C)  pollution permits are never preferred over a corrective tax. 
D)  the government can set a maximum level of pollution using permits. 
A)  pollution permits allow for a market solution while a corrective tax does not. 
B)  pollution permits generate more revenue for the government than a corrective tax. 
C)  pollution permits are never preferred over a corrective tax. 
D)  the government can set a maximum level of pollution using permits.

Question 13

Technology spillover occurs when

Accepted Answer

A)  a firm passes the high costs of technical research on to society through higher prices. 
B)  a firm's research yields technical knowledge that is used by society as a whole. 
C)  the government subsidizes firms engaged in high-tech research. 
D)  copyright laws prohibit firms from profiting from the research of others. 
A)  a firm passes the high costs of technical research on to society through higher prices. 
B)  a firm's research yields technical knowledge that is used by society as a whole. 
C)  the government subsidizes firms engaged in high-tech research. 
D)  copyright laws prohibit firms from profiting from the research of others.

Question 14

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50S1U1P1tS1S1P0S1U1P1hS1S1P0S1U1P1 S1S1P0restored historic building entails the following:
-a private cost of $800,000;
-a private value of $650,000;
-a social value of $800,000.
-Refer to Scenario 10-2. Is there an externality associated with this market? If your answer is "Yes," is the externality positive or negative?

Accepted Answer

There is a positive

Question 15

Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500S1U1P1tS1S1P0S1U1P1hS1S1P0S1U1P1 S1S1P0fire 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. In order to reach the social optimum, should fire extinguishers be taxed or subsidized? What is the appropriate amount of the tax or subsidy on each fire extinguisher?

Accepted Answer

Each fire extinguish

Question 16

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

Accepted Answer

A)  $3,000; $1,500 
B)  $4,500; $3,500 
C)  $4,500; $4,000 
D)  $4,500; $2,500 
A)  $3,000; $1,500 
B)  $4,500; $3,500 
C)  $4,500; $4,000 
D)  $4,500; $2,500

Question 17

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Accepted Answer

A) True 
 B)False

Question 18

Markets are often inefficient when negative externalities are present because

Accepted Answer

A)  private costs exceed social costs at the private market solution. 
B)  externalities cannot be corrected without government regulation. 
C)  social costs exceed private costs at the private market solution. 
D)  production externalities lead to consumption externalities. 
A)  private costs exceed social costs at the private market solution. 
B)  externalities cannot be corrected without government regulation. 
C)  social costs exceed private costs at the private market solution. 
D)  production externalities lead to consumption externalities.

Question 19

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. In order to reach the social optimum, the government could

Accepted Answer

A)  impose a tax of $2 per unit on plastics. 
B)  impose a tax of $6 per unit on plastics. 
C)  impose a tax of $8 per unit on plastics. 
D)  offer a subsidy of $6 per unit on plastics. 
A)  impose a tax of $2 per unit on plastics. 
B)  impose a tax of $6 per unit on plastics. 
C)  impose a tax of $8 per unit on plastics. 
D)  offer a subsidy of $6 per unit on plastics.

Question 20

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.

Exam 10: Externalities

The tax on gasoline causes deadweight losses, as is the case with all taxes.

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

Which of the following would not be considered a negative externality?

Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a $9-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

The Coase theorem states that

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

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 equilibrium quantity of output in this market?

Which of the following statements is correct about a market in which pollution is emitted?

Economists Edward Glaeser and Matthew Kahn studied carbon emissions in different parts of the United States. On the basis of what they found, they concluded that environmentalists should be in favor of

In some cases, tradable pollution permits may be better than a corrective tax because

Technology spillover occurs when

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Markets are often inefficient when negative externalities are present because

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. In order to reach the social optimum, the government could

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

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

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