Question 1

By allowing an income-tax deduction for charitable contributions, the government

Accepted Answer

A)  encourages a private solution to a particular positive-externality problem. 
B)  discourages a private solution to a particular positive-externality problem. 
C)  encourages a private solution to a particular negative-externality problem. 
D)  discourages a private solution to a particular negative-externality problem. 
A)  encourages a private solution to a particular positive-externality problem. 
B)  discourages a private solution to a particular positive-externality problem. 
C)  encourages a private solution to a particular negative-externality problem. 
D)  discourages a private solution to a particular negative-externality problem.

Question 2

Technology spillover is one type of

Accepted Answer

A)  negative externality. 
B)  positive externality. 
C)  subsidy. 
D)  producer surplus. 
A)  negative externality. 
B)  positive externality. 
C)  subsidy. 
D)  producer surplus.

Question 3

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

Accepted Answer

A)  The impact of William's activity on the bystander is adverse, and William compensates the bystander accordingly. 
B)  The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander. 
C)  The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly. 
D)  Externalities arise in all of the above cases. 
A)  The impact of William's activity on the bystander is adverse, and William compensates the bystander accordingly. 
B)  The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander. 
C)  The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly. 
D)  Externalities arise in all of the above cases.

Question 4

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 5

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 6

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.

Question 7

Table 10-5
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 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?

Accepted Answer

A)  $67 
B)  $68 
C)  $81 
D)  $83 
A)  $67 
B)  $68 
C)  $81 
D)  $83

Question 8

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following policies is not an example of a command-and-control policy?

Accepted Answer

A)  subsidies 
B)  Pigovian taxes 
C)  tradable pollution permits 
D)  None of the above is an example of a command-and-control policy. 
A)  subsidies 
B)  Pigovian taxes 
C)  tradable pollution permits 
D)  None of the above is an example of a command-and-control policy.

Question 10

Figure 10-4  
-Refer to Figure 10-4. This market

Accepted Answer

A)  has no need for government intervention. 
B)  would benefit from a tax on the product. 
C)  would benefit from a subsidy for the product. 
D)  would maximize total well-being at Q3. 
A)  has no need for government intervention. 
B)  would benefit from a tax on the product. 
C)  would benefit from a subsidy for the product. 
D)  would maximize total well-being at Q3.

Question 11

Externalities can be corrected by each of the following except

Accepted Answer

A)  self-interest. 
B)  moral codes and social sanctions. 
C)  charity. 
D)  normal market adjustments. 
A)  self-interest. 
B)  moral codes and social sanctions. 
C)  charity. 
D)  normal market adjustments.

Question 12

Transaction costs

Accepted Answer

A)  can keep private parties from solving externality problems. 
B)  are incurred in the production process due to externalities. 
C)  increase when taxes are imposed to correct negative externalities. 
D)  are eliminated when the government intervenes in a market with externalities. 
A)  can keep private parties from solving externality problems. 
B)  are incurred in the production process due to externalities. 
C)  increase when taxes are imposed to correct negative externalities. 
D)  are eliminated when the government intervenes in a market with externalities.

Question 13

Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?

Accepted Answer

A)  social cost 
B)  opportunity cost of technology 
C)  internalization of an externality 
D)  technology spillover 
A)  social cost 
B)  opportunity cost of technology 
C)  internalization of an externality 
D)  technology spillover

Question 14

Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement?

Accepted Answer

A)  an amount less than $100 
B)  an amount between $100 and $250 
C)  an amount between $250 and $350 
D)  Any amount could result in both parties benefiting from the agreement. 
A)  an amount less than $100 
B)  an amount between $100 and $250 
C)  an amount between $250 and $350 
D)  Any amount could result in both parties benefiting from the agreement.

Question 15

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. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research 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 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. The government will sell 40 pollution permits for $75 each. 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. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement,

Accepted Answer

A)  Firm B will spend $3,500. 
B)  Firm A will spend $4,000. 
C)  Firm A will spend $4,500. 
D)  Firm B will spend $3,000. 
A)  Firm B will spend $3,500. 
B)  Firm A will spend $4,000. 
C)  Firm A will spend $4,500. 
D)  Firm B will spend $3,000.

Question 17

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command- and-control policy or is it a market-based policy?

Accepted Answer

A Pigovian

Question 18

Suppose a new market for tradable pollution permits is created. As long as there is a free market for the pollution rights, the final allocation will be , regardless of the initial allocation of permits.

Accepted Answer

The answer of Suppose a new market for tradable pollution...

Question 19

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 20

A negative externality will cause a private market to produce

Accepted Answer

A)  less than is socially desirable. 
B)  more than is socially desirable. 
C)  exactly the quantity that is socially desirable. 
D)  less than the same market would produce in the presence of a positive externality. 
A)  less than is socially desirable. 
B)  more than is socially desirable. 
C)  exactly the quantity that is socially desirable. 
D)  less than the same market would produce in the presence of a positive externality.

Exam 10: Externalities

By allowing an income-tax deduction for charitable contributions, the government

Technology spillover is one type of

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

The Coase theorem suggests that private solutions to an externality problem

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

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

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Which of the following policies is not an example of a command-and-control policy?

Figure 10-4 -Refer to Figure 10-4. This market

Externalities can be corrected by each of the following except

Transaction costs

Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command- and-control policy or is it a market-based policy?

Suppose a new market for tradable pollution permits is created. As long as there is a free market for the pollution rights, the final allocation will be , regardless of the initial allocation of permits.

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

A negative externality will cause a private market to produce

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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