Question 1

If education produces positive externalities and the government does not intervene in the market,we would expect

Accepted Answer

A)  the equilibrium price to be higher than the optimal price. 
B)  the equilibrium quantity to be lower than the optimal level. 
C)  the equilibrium quantity to be higher than the optimal level. 
D)  both a and b are correct

Question 2

Figure 10-8
 
-Refer to Figure 10-8.What is the equilibrium price in this market?

Accepted Answer

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

Question 3

When Lisa drives to work every morning,she drives on a congested highway.What Lisa does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway.In this case,the external cost of Lisa's highway trip

Accepted Answer

A)  increases the social cost above the private cost. 
B)  lowers the social cost below the private cost. 
C)  increases the social value above the private benefit. 
D)  decreases the social value below the private benefit.

Question 4

Table 10-4
 
-Refer to Table 10-4.The last unit of output for which private value exceeds social cost is the

Accepted Answer

A)  2nd unit. 
B)  3rd unit. 
C)  4th unit. 
D)  5th unit.

Question 5

If it is illegal for a biochemical manufacturer to release its waste into a nearby stream,then this is an example of

Accepted Answer

A)  a market-based policy. 
B)  a command-and-control policy. 
C)  tradable pollution permits. 
D)  transaction costs.

Question 6

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

Accepted Answer

A)  social cost minus social value 
B)  social value minus private cost 
C)  demand 
D)  private value plus external benefit

Question 7

Suppose that Bill wants to dine at a fancy restaurant,but the only available table is in the smoking section.Bill dislikes the smell of cigarette smoke.He notices that only one person,Peter,is smoking in the smoking section.Bill values the absence of smoke at $15.Peter values the ability to smoke in the restaurant at $10.In order for Bill to pay Peter not to smoke,he will need to tip the waiter $10 to facilitate the transaction.Which of the following represents an efficient solution?

Accepted Answer

A)  Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). 
B)  Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. 
C)  Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. 
D)  Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.

Question 8

Emma is a writer who works from her home.Emma lives next door to Clay,the drummer for a local band.Clay needs lots of practice to earn his share of the band's profit,which will amount to $250.Emma gets distracted by Clay's drumming but needs to get her writing done to earn $500 for her current article.If Emma needs to hire a lawyer to help her reach an agreement with Clay,then what price is Emma willing to pay the lawyer?

Accepted Answer

A)  less than $250 
B)  less than $450 
C)  less than $500 
D)  less than $750

Question 9

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

The answer of Using a supply and demand diagram,demonstrate how...

Question 10

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.Suppose the government wants to reduce pollution from 16 units to 8 units and auctions off 8 pollution permits to achieve this goal.Which of the following is a likely auction price of the permits?

Accepted Answer

A)  $69 
B)  $81 
C)  $83 
D)  $97

Question 11

According to the Coase theorem,whatever the initial distribution of rights,the interested parties can bargain to an efficient outcome.

Accepted Answer

A) True 
 B)False

Question 12

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages.If the government offers subsidies for MBAs,then which of the following statements is correct?

Accepted Answer

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

Question 13

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.

Question 14

Which of the following is an advantage of tradable pollution permits?

Accepted Answer

A)  Each firm is allowed to pollute exactly the same amount. 
B)  Revenue from the sale of permits is greater than revenue from a corrective tax. 
C)  The initial allocation of permits to firms does not affect the efficiency of the market. 
D)  Firms will engage in joint research efforts to reduce pollution.

Question 15

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

Question 16

Table 10-3
 
-Refer to Table 10-3.The social value of the 4ᵗʰ unit of output that is produced is

Accepted Answer

A)  $10. 
B)  $16. 
C)  $26. 
D)  $30.

Question 17

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Accepted Answer

A) True 
 B)False

Question 18

When an externality is present,the market equilibrium is

Accepted Answer

A)  efficient, and the equilibrium maximizes the total benefit to society as a whole. 
B)  efficient, but the equilibrium does not maximize the total benefit to society as a whole. 
C)  inefficient, but the equilibrium maximizes the total benefit to society as a whole. 
D)  inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Question 19

Regulations to reduce pollution

Accepted Answer

A)  cause pollution levels to drop below the regulated amount. 
B)  are a more costly solution to society than a corrective tax. 
C)  allow firms with the lowest cost to reduce pollution by more than those with highest costs. 
D)  are a better solution for the environment than a corrective tax.

Question 20

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 charged a fee of $84 per unit of pollution,how many units of pollution would the firms eliminate altogether?

Accepted Answer

A)  7 
B)  8 
C)  9 
D)  10

Exam 10: Externalities.

If education produces positive externalities and the government does not intervene in the market,we would expect

Figure 10-8 -Refer to Figure 10-8.What is the equilibrium price in this market?