Question 1

If the social value of producing robots is greater than the private value of producing robots,the private market produces too few robots.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Figure 10-10 
-Refer to Figure 10-10.Which of the following is not necessary in order for the corrective tax and pollution permit to have equivalent effects?

Accepted Answer

A)  PB must be equivalent to the corrective tax. 
B)  QA must be equivalent to the amount of pollution allowed to the pollution permit holders. 
C)  The equilibrium price and quantity of pollution must be the same in both graphs. 
D)  The amount of pollution emitted by each firm must be the same.

Question 4

Private contracts between parties with mutual interests

Accepted Answer

A)  will reduce the well-being of society. 
B)  will lead to market outcomes in which the public interest is sacrificed for personal gain. 
C)  can solve some inefficiencies associated with positive externalities. 
D)  will create negative externalities.

Question 5

Technology spillover occurs when

Accepted Answer

A)  a firm passes the high costs of technical research on to society through higher prices. 
B)  a firm's research yields technical knowledge that is used by society as a whole. 
C)  the government subsidizes firms engaged in high-tech research. 
D)  copyright laws prohibit firms from profiting from the research of others.

Question 6

The supply curve for a product reflects the

Accepted Answer

A)  willingness to pay of the marginal buyer. 
B)  quantity buyers will ultimately purchase of the product. 
C)  cost to sellers of producing the product. 
D)  seller's profit from producing the product.

Question 7

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.

Question 8

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots 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 9

Figure 10-4 
-Refer to Figure 10-4.If all external costs were internalized,then the market's equilibrium output would be

Accepted Answer

A)  Q1. 
B)  Q2. 
C)  Q3. 
D)  Q4.

Question 10

In the case of a technology spillover,internalizing a positive externality through a government subsidy will cause the industry's supply curve to

Accepted Answer

A)  shift up by an amount equal to the subsidy. 
B)  shift down by an amount less than the subsidy. 
C)  shift down by an amount equal to the subsidy. 
D)  shift down by an amount greater than the subsidy.

Question 11

In a market economy,government intervention

Accepted Answer

A)  will always improve market outcomes. 
B)  reduces efficiency in the presence of externalities. 
C)  may improve market outcomes in the presence of externalities. 
D)  is necessary to control individual greed.

Question 12

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government impose a $5 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

Accepted Answer

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

Question 13

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 there are no government 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 14

Figure 10-3 
-Refer to Figure 10-3.The difference between the social cost curve and the supply curve reflects the

Accepted Answer

A)  profit margin of each concert. 
B)  cost of spillover effects from the concert (e.g. ,noise and traffic). 
C)  value of concerts to society as a whole. 
D)  amount by which the city should subsidize the concert organizers.

Question 15

Figure 10-9   
-Refer to Figure 10-9,Panel (b)and Panel (c).Which of the following is correct?

Accepted Answer

A)  A tax would move the market in Panel (b)and the market in Panel (c)closer to the socially optimal outcome. 
B)  A subsidy would move the market in Panel (b)and the market in Panel (c)closer to the socially optimal outcome. 
C)  A tax would move the market in Panel (b)closer to the socially optimal outcome,but a subsidy would move the market in Panel (c)closer to the socially optimal outcome. 
D)  A subsidy would move the market in Panel (b)closer to the socially optimal outcome,but a tax would move the market in Panel (c)closer to the socially optimal outcome.

Question 16

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.

Question 17

An externality is the impact of

Accepted Answer

A)  society's decisions on the well-being of society. 
B)  a person's actions on that person's well-being. 
C)  one person's actions on the well-being of a bystander. 
D)  society's decisions on the poorest person in the society.

Question 18

A negative externality

Accepted Answer

A)  is an adverse impact on a bystander. 
B)  causes the product in a market to be under-produced. 
C)  is an adverse impact on market participants. 
D)  is present in markets where the good or service does not have any impact on bystanders.

Question 19

Suppose that cigarette smokers create a negative externality.Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?

Accepted Answer

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

Question 20

John lives in an apartment building and gets a $500 benefit from playing his stereo.Mary,who lives next door to John and often loses sleep due to the loud music coming from John's stereo,bears a $700 cost from the noise.Mary would like to offer John 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 John and Mary would benefit from the agreement?

Accepted Answer

A)  An amount less than $200. 
B)  An amount between $200 and $500. 
C)  An amount between $500 and $700. 
D)  Any amount could result in both parties benefitting from the agreement.

Exam 10: Externalities