Question 1

Figure 10-5  
-Refer to Figure 10-5. Which price and quantity combination represents the social optimum?

Accepted Answer

A)  P0 and Q1. 
B)  P2 and Q1. 
C)  P1 and Q0. 
D)  P2 and Q0. 
A)  P0 and Q1. 
B)  P2 and Q1. 
C)  P1 and Q0. 
D)  P2 and Q0.

Question 2

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Accepted Answer

A)  the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked. 
B)  the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked. 
C)  the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. 
D)  There is not enough information to answer the question. 
A)  the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked. 
B)  the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked. 
C)  the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. 
D)  There is not enough information to answer the question.

Question 3

Table 10-4  
-Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to the socially optimal equilibrium?

Accepted Answer

A)  a tax of $4 per unit of output 
B)  a subsidy of $4 per unit of output 
C)  a tax of $6 per unit of output 
D)  a subsidy of $6 per unit of output 
A)  a tax of $4 per unit of output 
B)  a subsidy of $4 per unit of output 
C)  a tax of $6 per unit of output 
D)  a subsidy of $6 per unit of output

Question 4

Figure 10-11  
-Refer to Figure 10-11. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to

Accepted Answer

A)  $3,850. 
B)  $4,320. 
C)  $4,980. 
D)  $5,530. 
A)  $3,850. 
B)  $4,320. 
C)  $4,980. 
D)  $5,530.

Question 5

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

Accepted Answer

A)  The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B)  The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C)  The farmer will incur $1,500 in damages to his crops. 
D)  The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. 
A)  The railroad will continue to operate but will pay the farmer $1,500 in damages. 
B)  The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. 
C)  The farmer will incur $1,500 in damages to his crops. 
D)  The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

Question 6

The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

Accepted Answer

A)  even if private parties experience substantial costs of bargaining. 
B)  even if the initial distribution of legal rights is skewed in favor of some private parties over others. 
C)  only when there is a large number of private parties that engage in bargaining. 
D)  All of the above are correct. 
A)  even if private parties experience substantial costs of bargaining. 
B)  even if the initial distribution of legal rights is skewed in favor of some private parties over others. 
C)  only when there is a large number of private parties that engage in bargaining. 
D)  All of the above are correct.

Question 7

Reaching an efficient bargain is difficult when the

Accepted Answer

A)  externality is large. 
B)  number of interested parties is large. 
C)  externality is negative. 
D)  government becomes involved. 
A)  externality is large. 
B)  number of interested parties is large. 
C)  externality is negative. 
D)  government becomes involved.

Question 8

Figure 10-8  
-Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?

Accepted Answer

A)  8 units 
B)  Between 8 and 10 units 
C)  10 units 
D)  More than 10 units 
A)  8 units 
B)  Between 8 and 10 units 
C)  10 units 
D)  More than 10 units

Question 9

The tax on gasoline

Accepted Answer

A)  reduces efficiency by causing large deadweight losses. 
B)  reduces efficiency by decreasing consumer surplus and producer surplus. 
C)  enhances efficiency by serving as a corrective device in a market with positive externalities. 
D)  enhances efficiency by serving as a corrective device in a market with negative externalities. 
A)  reduces efficiency by causing large deadweight losses. 
B)  reduces efficiency by decreasing consumer surplus and producer surplus. 
C)  enhances efficiency by serving as a corrective device in a market with positive externalities. 
D)  enhances efficiency by serving as a corrective device in a market with negative externalities.

Question 10

Figure 10-12  
-Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?

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 11

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

Accepted Answer

A)  $760. 
B)  $1,080. 
C)  $1,440. 
D)  $1,920. 
A)  $760. 
B)  $1,080. 
C)  $1,440. 
D)  $1,920.

Question 12

Corrective taxes cause deadweight losses, reducing economic efficiency.

Accepted Answer

A) True 
 B)False

Question 13

Patent protection is one way to deal with technology spillovers.

Accepted Answer

A) True 
 B)False

Question 14

When a negative externality exists in a market, the cost to producers

Accepted Answer

A)  is greater than the cost to society. 
B)  will be the same as the cost to society. 
C)  will be less than the cost to society. 
D)  will differ from the cost to society, regardless of whether an externality is present. 
A)  is greater than the cost to society. 
B)  will be the same as the cost to society. 
C)  will be less than the cost to society. 
D)  will differ from the cost to society, regardless of whether an externality is present.

Question 15

Figure 10-15  
-Refer to Figure 10-15. The supply of pollution permits is

Accepted Answer

A)  elastic and represented by line A. 
B)  inelastic and represented by line A. 
C)  elastic and represented by line F 
D)  inelastic and represented by line F. 
A)  elastic and represented by line A. 
B)  inelastic and represented by line A. 
C)  elastic and represented by line F 
D)  inelastic and represented by line F.

Question 16

A patent is used to

Accepted Answer

A)  disseminate information. 
B)  offset the negative effects of taxes. 
C)  protect inventors for as long as they live. 
D)  assign property rights. 
A)  disseminate information. 
B)  offset the negative effects of taxes. 
C)  protect inventors for as long as they live. 
D)  assign property rights.

Question 17

Figure 10-9  
-Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, the external cost of antibiotic overuse is represented by

Accepted Answer

A)  Q3 - Q2. 
B)  Q5 - Q4. 
C)  P3a - P3b. 
D)  P4a - P4b. 
A)  Q3 - Q2. 
B)  Q5 - Q4. 
C)  P3a - P3b. 
D)  P4a - P4b.

Question 18

When the government uses a command-and-control policy to solve an externality, it

Accepted Answer

A)  is usually the most effective policy option available. 
B)  creates policies that directly regulate behavior. 
C)  usually involves taxing the consumption of a commodity. 
D)  typically refers to the Coase theorem to structure the policy. 
A)  is usually the most effective policy option available. 
B)  creates policies that directly regulate behavior. 
C)  usually involves taxing the consumption of a commodity. 
D)  typically refers to the Coase theorem to structure the policy.

Question 19

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 20

The difference between a corrective tax and a tradable pollution permit is that

Accepted Answer

A)  a corrective tax sets the price of pollution and a permit sets the quantity of pollution. 
B)  a corrective tax creates a more efficient outcome than a permit. 
C)  a corrective tax sets the quantity of pollution and a permit sets the price of pollution. 
D)  a permit creates a more efficient outcome than a corrective tax. 
A)  a corrective tax sets the price of pollution and a permit sets the quantity of pollution. 
B)  a corrective tax creates a more efficient outcome than a permit. 
C)  a corrective tax sets the quantity of pollution and a permit sets the price of pollution. 
D)  a permit creates a more efficient outcome than a corrective tax.

Exam 10: Externalities

Figure 10-5 -Refer to Figure 10-5. Which price and quantity combination represents the social optimum?

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Table 10-4 -Refer to Table 10-4. Which of the following policies would move the market from the market equilibrium to the socially optimal equilibrium?

Figure 10-11 -Refer to Figure 10-11. Taking only private value and private cost into account, total surplus at the market equilibrium amounts to

The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

Reaching an efficient bargain is difficult when the

Figure 10-8 -Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?

The tax on gasoline

Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 2?

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

Corrective taxes cause deadweight losses, reducing economic efficiency.

Patent protection is one way to deal with technology spillovers.

When a negative externality exists in a market, the cost to producers

Figure 10-15 -Refer to Figure 10-15. The supply of pollution permits is

A patent is used to

Figure 10-9 -Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, the external cost of antibiotic overuse is represented by

When the government uses a command-and-control policy to solve an externality, it

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

The difference between a corrective tax and a tradable pollution permit is 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 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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