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Exam 10: Externalities

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Question 151

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Which of the following is not a characteristic of pollution permits?

A) Prices are set by supply and demand.
B) Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.
C) Real-world markets for pollution permits include sulfur dioxide and carbon.
D) Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive.

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

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Question 152

Multiple Choice

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Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is correct?

A) If Dick's benefit exceeds Jane's cost, government intervention is necessary.
B) Dick will pay to keep his dog if his benefit exceeds Jane's cost.
C) If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog.
D) If Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial.

E) A) and B)
F) All of the above

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Question 153

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Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?

If only a few people are affected by an externality, then it is likely that

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?

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

If education produces positive externalities, we would expect

Figure 10-4 -Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be

Which of the following policies is not an example of a command-and-control policy?

​Figure 10-20. ​ -​Refer to Figure 10-20. This market is characterized by a negative externality.

Figure 10-19 -Refer to Figure 10-19. How many units of the good are produced in a market equilibrium?

The concept of external benefit is associated with a negative externality, but not with a positive externality.

Which of the following statements is correct?

Table 10-3 -Refer to Table 10-3. What amount of subsidy per unit of output would move the market from the equilibrium level of output to the socially optimal level of output?

Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000^th gallon of gasoline entails the following: • a private cost of $3.10; • a social cost of $3.55; • a value to consumers of $3.70. -Refer to Scenario 10-1. The production of the 1,000^th gallon of gasoline entails an

Figure 10-19 -Refer to Figure 10-19. Note that the lines labeled "Demand" and "Social Value"are parallel. Also, the slopes of the lines on the graph reflect the following facts: (1) Private value and social value decrease by $1.00 with each additional unit of the good that is consumed, and (2) private cost increases by $1.40 with each additional unit of the good that is produced. Thus, when the 59th unit of the good is produced and consumed, social well-being increases by

Corrective taxes cause deadweight losses, reducing economic efficiency.

​Josiah installed a metal sculpture in his front yard. A negative externality arises if the sculpture

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

When correcting for an externality, command-and-control policies are always preferable to market-based policies.