Question 1

When the government intervenes in markets with externalities, it does so in order to

Accepted Answer

A)  increase production when negative externalities are present. 
B)  protect the interests of bystanders. 
C)  make certain all benefits are received by market participants. 
D)  reduce production when positive externalities are present. 
A)  increase production when negative externalities are present. 
B)  protect the interests of bystanders. 
C)  make certain all benefits are received by market participants. 
D)  reduce production when positive externalities are present.

Question 2

Table 10-3  
-Refer to Table 10-3. The market equilibrium quantity of output is

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 3

Figure 10-9  
-Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in

Accepted Answer

A)  Panel (a). 
B)  Panel (b). 
C)  Panel (c). 
D)  Both (b) and (c) are correct. 
A)  Panel (a). 
B)  Panel (b). 
C)  Panel (c). 
D)  Both (b) and (c) are correct.

Question 4

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Accepted Answer

A)  The groundwater pollution reduces the cost of large-scale pork production. 
B)  The economic impact of a large-scale pork production facility is localized in a small geographic area. 
C)  The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility. 
D)  Consumers will not reap the benefits of lower production cost from large-scale pork production. 
A)  The groundwater pollution reduces the cost of large-scale pork production. 
B)  The economic impact of a large-scale pork production facility is localized in a small geographic area. 
C)  The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility. 
D)  Consumers will not reap the benefits of lower production cost from large-scale pork production.

Question 5

Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

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

A positive externality arises when a person engages in an activity that has

Accepted Answer

A)  an adverse effect on a bystander who is not compensated by the person who causes the effect. 
B)  an adverse effect on a bystander who is compensated by the person who causes the effect. 
C)  a beneficial effect on a bystander who pays the person who causes the effect. 
D)  a beneficial effect on a bystander who does not pay the person who causes the effect. 
A)  an adverse effect on a bystander who is not compensated by the person who causes the effect. 
B)  an adverse effect on a bystander who is compensated by the person who causes the effect. 
C)  a beneficial effect on a bystander who pays the person who causes the effect. 
D)  a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 7

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Accepted Answer

A)  Impose a tax greater than the value of the technology spillover. 
B)  Not allow production of any product that causes a technology spillover. 
C)  Provide a subsidy equal to the value of the technology spillover. 
D)  Require producers to "clean up" any spillover that results from their production process. 
A)  Impose a tax greater than the value of the technology spillover. 
B)  Not allow production of any product that causes a technology spillover. 
C)  Provide a subsidy equal to the value of the technology spillover. 
D)  Require producers to "clean up" any spillover that results from their production process.

Question 8

Figure 10-1  
-Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Accepted Answer

A)  $1.90 and 38 units, respectively. 
B)  $1.80 and 35 units, respectively. 
C)  $1.60 and 42 units, respectively. 
D)  $1.35 and 58 units, respectively. 
A)  $1.90 and 38 units, respectively. 
B)  $1.80 and 35 units, respectively. 
C)  $1.60 and 42 units, respectively. 
D)  $1.35 and 58 units, respectively.

Question 9

A corrective tax places a price on the right to pollute.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is NOT an example of a negative externality?

Accepted Answer

A)  air pollution from a manufacturing plant. 
B)  disrupted sleep from a neighbor's loud music. 
C)  an illness caused by secondhand cigarette smoke. 
D)  a decrease in your property value from neglecting your lawn and garden. 
A)  air pollution from a manufacturing plant. 
B)  disrupted sleep from a neighbor's loud music. 
C)  an illness caused by secondhand cigarette smoke. 
D)  a decrease in your property value from neglecting your lawn and garden.

Question 11

Which of the following is an example of a positive externality?

Accepted Answer

A)  A college student buys a new car when she graduates. 
B)  The mayor of a small town plants flowers in the city park. 
C)  Local high school teachers have pizza delivered every Friday for lunch. 
D)  An avid fisherman buys new fishing gear for his next fishing trip. 
A)  A college student buys a new car when she graduates. 
B)  The mayor of a small town plants flowers in the city park. 
C)  Local high school teachers have pizza delivered every Friday for lunch. 
D)  An avid fisherman buys new fishing gear for his next fishing trip.

Question 12

Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action?

Accepted Answer

A)  lower levels of nutrition, health care, and housing 
B)  a lower standard of living 
C)  slowing or reversing technological advancement 
D)  the elimination of all pollution 
A)  lower levels of nutrition, health care, and housing 
B)  a lower standard of living 
C)  slowing or reversing technological advancement 
D)  the elimination of all pollution

Question 13

The externality associated with technology spillovers

Accepted Answer

A)  cannot be internalized by government. 
B)  is a negative externality. 
C)  can be internalized, potentially, through taxation of firms that are responsible for technology spillovers. 
D)  can be internalized, potentially, through patent protection. 
A)  cannot be internalized by government. 
B)  is a negative externality. 
C)  can be internalized, potentially, through taxation of firms that are responsible for technology spillovers. 
D)  can be internalized, potentially, through patent protection.

Question 14

The Coase theorem states that

Accepted Answer

A)  under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present. 
B)  government intervention is always required to reach an efficient outcome when an externality is present. 
C)  government intervention cannot lead to an efficient outcome when an externality is present. 
D)  only negative externalities can be resolved using government intervention. 
A)  under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present. 
B)  government intervention is always required to reach an efficient outcome when an externality is present. 
C)  government intervention cannot lead to an efficient outcome when an externality is present. 
D)  only negative externalities can be resolved using government intervention.

Question 15

Education yields positive externalities. For example, a more educated population

Accepted Answer

A)  may increase the pace of technological advances, leading to higher productivity and wages for everyone. 
B)  leads to more informed voters, resulting in better government for everyone. 
C)  tends to result in lower crime rates. 
D)  All of the above are correct. 
A)  may increase the pace of technological advances, leading to higher productivity and wages for everyone. 
B)  leads to more informed voters, resulting in better government for everyone. 
C)  tends to result in lower crime rates. 
D)  All of the above are correct.

Question 16

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

Accepted Answer

A)  impose a tax on alcohol that is equal to the per-unit externality 
B)  offer a subsidy on alcohol that is equal to the per-unit externality 
C)  impose a regulation limiting the amount of alcohol that each consumer can purchase 
D)  nothing 
A)  impose a tax on alcohol that is equal to the per-unit externality 
B)  offer a subsidy on alcohol that is equal to the per-unit externality 
C)  impose a regulation limiting the amount of alcohol that each consumer can purchase 
D)  nothing

Question 17

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

Accepted Answer

A)  a subsidy. 
B)  a regulation. 
C)  a corrective tax. 
D)  an application of the Coase theorem. 
A)  a subsidy. 
B)  a regulation. 
C)  a corrective tax. 
D)  an application of the Coase theorem.

Question 18

Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000S1U1P1tS1S1P0S1U1P1hS1S1P0S1U1P1 S1S1P0gallon 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. Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?

Accepted Answer

A)  1,000 < QOPTIMUM < QMARKET 
B)  QOPTIMUM < 1,000 < QMARKET 
C)  QMARKET < 1,000 < QOPTIMUM 
D)  QOPTIMUM < QMARKET < 1,000 
A)  1,000 < QOPTIMUM < QMARKET 
B)  QOPTIMUM < 1,000 < QMARKET 
C)  QMARKET < 1,000 < QOPTIMUM 
D)  QOPTIMUM < QMARKET < 1,000

Question 19

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. What is the equilibrium quantity of output in the market?

Accepted Answer

A)  2 units 
B)  3 units 
C)  4 units 
D)  5 units 
A)  2 units 
B)  3 units 
C)  4 units 
D)  5 units

Question 20

A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome?

Accepted Answer

A)  The radio station puts up a shield, which it pays for. 
B)  The radio station puts up a shield, which the dentist pays for. 
C)  Neither the radio station nor the dentist purchase additional equipment. 
D)  The dentist gets a new drill; it does not matter who pays for it. 
A)  The radio station puts up a shield, which it pays for. 
B)  The radio station puts up a shield, which the dentist pays for. 
C)  Neither the radio station nor the dentist purchase additional equipment. 
D)  The dentist gets a new drill; it does not matter who pays for it.

Exam 10: Externalities

When the government intervenes in markets with externalities, it does so in order to

Table 10-3 -Refer to Table 10-3. The market equilibrium quantity of output is

Figure 10-9 -Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the market for antibiotics is shown in

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Suppose that beef producers create a negative externality. What is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

A positive externality arises when a person engages in an activity that has

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

A corrective tax places a price on the right to pollute.

Which of the following is NOT an example of a negative externality?

Which of the following is an example of a positive externality?

Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action?

The externality associated with technology spillovers

The Coase theorem states that

Education yields positive externalities. For example, a more educated population

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the policy would be considered

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. What is the equilibrium quantity of output in the market?

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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