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Exam 10: Externalities- When the Price Is Not Right

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Question 121

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According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

A) A railroad train that runs the entire East Coast regularly emits both pollution and loud noises for people living near the tracks.
B) People who get flu shots actually end up decreasing the spread of the virus.
C) Your neighbor's dog routinely gets out of his yard and does his "business" in your yard.
D) A company recently turned an abandoned factory at the end of your street into a paper mill that now stinks up the entire town.

E) A) and C)
F) A) and D)

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Question 122

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When patients or farmers choose whether to use more antibiotics, they compare:

A) their private benefits with the social cost.
B) their private benefits with the market price.
C) the social benefits with the social cost.
D) the social benefits with the market price.

E) A) and B)
F) A) and C)

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Question 123

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Use the following to answer questions: Figure: External Cost 1 -(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the efficient price and quantity of paper?

The Coase theorem suggests that efficient solutions to external costs and benefits can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

A free market with externalities ______ social surplus.

Use the following to answer questions: Figure: Market for Vaccines -(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n) :

A viable government solution to an external cost is a:

The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which statement is correct?

Use the following to answer questions: Table: Costs of Antibiotics $\begin{array} { c c c c c } \hline \begin{array} { c } \text { Quantity of } \\\text { Antibiotics }\end{array} & \begin{array} { c } \text { Marginal Benefit } \\\text { to Buyers }\end{array} & \begin{array} { c } \text { Marginal Cost } \\\text { to Sellers }\end{array} & \begin{array} { c } \text { External } \\\text { Cost }\end{array} & \begin{array} { c } \text { Marginal Social } \\\text { Cost }\end{array} \\\hline 1 & \$ 25 & \$ 5 & \$ 10 & ? \\2 & \$ 20 & \$ 10 & \$ 10 & ? \\3 & \$ 15 & \$ 15 & \$ 10 & ? \\4 & \$ 10 & \$ 20 & \$ 10 & ? \\5 & \$ 5 & \$ 25 & \$ 10 & ? \\\hline\end{array}$ -(Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is ________ and the efficient equilibrium quantity is ________.

Figure: Positive Externality The figure shows the market for a good that when consumed causes an external benefit. Suppose the government decides to begin issuing a subsidy to the consumers of the good. Using the information provided in the figure, answer the following questions. a. What is the initial market quantity in this market? b. What is the social benefit of the product? c. When the consumers of the product are subsidized, what is the dollar amount of deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the subsidy has been allocated?

Tradable allowances for pollution:

If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would:

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Deadweight loss results when a good generates external benefits.

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Use the following to answer questions: Table: Pollution Abatement $\begin{array} { c c c } \hline \text { Firm } & \begin{array} { l } \text { Pollution Level } \\\text { (tons of } \mathrm { SO } _ { 2 } \text { ) }\end{array} & \begin{array} { l } \text { Cost of Removing One } \\\text { Ton of Pollution }\end{array} \\\hline \mathrm { A } & 30 & \$ 100 \\\mathrm {~B} & 30 & \$ 500 \\\hline\end{array}$ -(Table: Pollution Abatement) Refer to the table. If the government requires each firm in the table to reduce pollution by 2 tons, what is the total cost of reducing 4 tons of pollution?

In the case of an external benefit, the social value curve lies ______ the demand curve.

To ensure an efficient equilibrium outcome when external costs are present in the market, the government could: I. implement a tax equal to the level of the external cost. II. create a system of tradable allowances to reduce output to the efficient quantity. III. institute command and control policies to reduce output to the efficient quantity.

As bees make honey, they pollinate fruits and vegetables, which is an important benefit to farmers. Since pollination is an external benefit of honey production, what are the incentives for beekeepers to maintain efficient production of honey?