Question 1

According to the Coase theorem,private parties can solve the problem of externalities if

Accepted Answer

A)  the cost of bargaining is small. 
B)  the initial distribution of legal rights favors the person being adversely affected by the externality. 
C)  the number of parties involved is sufficiently large. 
D)  All of the above are correct.

Question 2

Which of the following is an example of an externality?

Accepted Answer

A)  cigarette smoke that permeates an entire restaurant 
B)  a flu shot that prevents a student from transmitting the virus to her roommate 
C)  a beautiful flower garden outside of the local post office 
D)  All of the above are correct.

Question 3

Figure 10-9   
-Refer to Figure 10-9,Panel (c).The market equilibrium price is

Accepted Answer

A)  P4a. 
B)  P4b. 
C)  P5. 
D)  P4a - P4b.

Question 4

Figure 10-4 
-Refer to Figure 10-4.At Q3

Accepted Answer

A)  the marginal consumer values this product less than the social cost of producing it. 
B)  every consumer values this product less than the social cost of producing it. 
C)  the cost to society is equal to the value to society. 
D)  the marginal consumer values this product more than the private cost.

Question 5

The proposition that if private parties can bargain without cost over the allocation of resources,they can solve the problem of externalities on their own,is called

Accepted Answer

A)  the Pigouvian theorem. 
B)  a corrective tax. 
C)  the externality theorem. 
D)  the Coase theorem.

Question 6

Economists believe that the optimal level of pollution is zero.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following helped reduce sulfur dioxide emissions,a leading cause of acid rain?

Accepted Answer

A)  (i)only 
B)  both (i)and (ii) 
C)  (iii)only 
D)  both (ii)and (iii)

Question 8

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway.This is an example of a negative externality.

Accepted Answer

A) True 
 B)False

Question 9

Figure 10-11 
-Refer to Figure 10-11.This graph shows the market for pollution when permits are issued to firms and traded in the marketplace.The equilibrium price of pollution is

Accepted Answer

A)  $50 
B)  $500 
C)  $1,000 
D)  $2,000

Question 10

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 11

Suppose that electricity producers create a negative externality equal to $5 per unit.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be 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.

Question 12

Figure 10-9   
-Refer to Figure 10-9,Panel (c).The market equilibrium quantity is

Accepted Answer

A)  Q4,which is the socially optimal quantity. 
B)  Q5,which is the socially optimal quantity. 
C)  Q4,and the socially optimal quantity is Q5. 
D)  Q5,and the socially optimal quantity is Q4.

Question 13

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.

Question 14

Tradable pollution permits

Accepted Answer

A)  have prices that are set by the government. 
B)  will be more valuable to firms that can reduce pollution only at high costs. 
C)  are likely to create a higher level of total pollution. 
D)  are less desirable than corrective taxes in reducing pollution.

Question 15

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.

Question 16

Suppose that planting trees creates a positive externality equal to $25 per tree.Further suppose that the local government offers a $25 per-tree subsidy to planters.What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?

Accepted Answer

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

Question 17

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards.This decision provides an example of

Accepted Answer

A)  a direct regulation of an externality. 
B)  corrective taxes. 
C)  a Coase theorem solution to an externality. 
D)  the misuse of a subsidy.

Question 18

Negative externalities occur when one person's actions

Accepted Answer

A)  cause another person to lose money in a stock market transaction. 
B)  cause his or her employer to lose business. 
C)  reveal his or her preference for foreign-produced goods. 
D)  adversely affect the well-being of a bystander who is not party to the action.

Question 19

If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill,the policy would be considered

Accepted Answer

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

Question 20

Which of the following illustrates the concept of a negative externality?

Accepted Answer

A)  A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. 
B)  A flood wipes out a farmer's corn crop. 
C)  A college student plays loud music on his new stereo system at 2:00a.m. 
D)  A janitor eats a hamburger during his lunch break.

Exam 10: Externalities

According to the Coase theorem,private parties can solve the problem of externalities if

Which of the following is an example of an externality?

Figure 10-9 -Refer to Figure 10-9,Panel (c) .The market equilibrium price is

Figure 10-4 -Refer to Figure 10-4.At Q₃

The proposition that if private parties can bargain without cost over the allocation of resources,they can solve the problem of externalities on their own,is called

Economists believe that the optimal level of pollution is zero.

Which of the following helped reduce sulfur dioxide emissions,a leading cause of acid rain?

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway.This is an example of a negative externality.

Figure 10-11 -Refer to Figure 10-11.This graph shows the market for pollution when permits are issued to firms and traded in the marketplace.The equilibrium price of pollution is

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?

Suppose that electricity producers create a negative externality equal to $5 per unit.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Figure 10-9 -Refer to Figure 10-9,Panel (c) .The market equilibrium quantity is

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

Tradable pollution 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

Suppose that planting trees creates a positive externality equal to $25 per tree.Further suppose that the local government offers a $25 per-tree subsidy to planters.What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards.This decision provides an example of

Negative externalities occur when one person's actions

If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill,the policy would be considered

Which of the following illustrates the concept of a negative externality?

Exam 10: Externalities

According to the Coase theorem,private parties can solve the problem of externalities if

Which of the following is an example of an externality?

Figure 10-9 -Refer to Figure 10-9,Panel (c) .The market equilibrium price is

Figure 10-4 -Refer to Figure 10-4.At Q3

The proposition that if private parties can bargain without cost over the allocation of resources,they can solve the problem of externalities on their own,is called

Economists believe that the optimal level of pollution is zero.

Which of the following helped reduce sulfur dioxide emissions,a leading cause of acid rain?

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway.This is an example of a negative externality.

Figure 10-11 -Refer to Figure 10-11.This graph shows the market for pollution when permits are issued to firms and traded in the marketplace.The equilibrium price of pollution is

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?

Suppose that electricity producers create a negative externality equal to $5 per unit.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Figure 10-9 -Refer to Figure 10-9,Panel (c) .The market equilibrium quantity is

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

Tradable pollution 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

Suppose that planting trees creates a positive externality equal to $25 per tree.Further suppose that the local government offers a $25 per-tree subsidy to planters.What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards.This decision provides an example of

Negative externalities occur when one person's actions

If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill,the policy would be considered

Which of the following illustrates the concept of a negative externality?

Figure 10-4 -Refer to Figure 10-4.At Q₃