Question 1

When externalities cause markets to be inefficient,

Accepted Answer

A)  government action is always needed to solve the problem.
B)  private solutions can be developed to solve the problem.
C)  given enough time, externalities can be solved through normal market adjustments.
D)  there is no way to eliminate the problem of externalities in a market.E) A) and B)
F) B) and D)

Question 2

Figure 10-11 
-Refer to Figure 10-11. Which of the following magnitudes is constant over all units of output?

Accepted Answer

A)  the private value of the last unit of output that was produced and sold
B)  the social value of the last unit of output that was produced and sold
C)  the external benefit of the last unit of output that was produced and sold
D)  the private cost of the last unit of output that was produced and soldE) A) and B)
F) A) and C)

Question 3

Suppose the government issues a limited number of pollution permits in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution?

Accepted Answer

With pollution permi...

Question 4

Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> When a positive externality exists, the...

Question 5

Figure 10-12 
-Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity  represents

Accepted Answer

A)  an inefficiency.
B)  the extent of the negative externality that pertains to the market for education.
C)  the amount of the tax that would be required to correct the negative externality that pertains to the market for education.
D)  the amount of the subsidy that would be required to correct the positive externality that pertains to the market for education.E) B) and C)
F) None of the above

Question 6

Figure 10-11 
-Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

Accepted Answer

A)  $5,880.
B)  $9,480.
C)  $13,230.
D)  $15,360.E) B) and D)
F) A) and B)

Question 7

When a market is characterized by an externality, the government

Accepted Answer

A)  can correct the market failure only in the case of positive externalities.
B)  can correct the market failure only in the case of negative externalities.
C)  can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality.
D)  cannot correct for externalities due to the existence of patents.E) None of the above
F) A) and C)

Question 8

Figure 10-11 th unit is equal to the cost incurred by the seller of the 240th unit. B) 240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller of the 240th unit. C) 420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the seller of the 420th unit. D) 420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 10-11. The socially optimal quantity of output is

Accepted Answer

A)  240 units, since the value to the buyer of the 240th unit is equal to the cost incurred by the seller of the 240th unit.
B)  240 units, since the value to society of the 240th unit is equal to the cost incurred by the seller of the 240th unit.
C)  420 units, since the value to the buyer of the 420th unit is equal to the cost incurred by the seller of the 420th unit.
D)  420 units, since the value to society of the 420th unit is equal to the cost incurred by the seller of the 420th unit.E) All of the above
F) C) and D)

Question 9

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

Accepted Answer

A)  the value of electricity to consumers equals the private cost of producing electricity.
B)  the value of electricity to consumers equals the social cost of producing electricity.
C)  the cost of the externality is maximized.
D)  the transaction costs of private bargaining are minimized.E) None of the above
F) B) and C)

Question 10

Government intervention that aims to promote technology-enhancing industries is called

Accepted Answer

A)  assisted technology.
B)  intervention policy.
C)  industrial technology assistance.
D)  industrial policy.E) A) and C)
F) All of the above

Question 11

Figure 10-10 
-Refer to Figure 10-10. The graph represents a market in which

Accepted Answer

A)  there is no externality.
B)  there is a positive externality.
C)  there is a negative externality.
D)  The answer cannot be determined from inspection of the graph.E) B) and D)
F) All of the above

Question 12

Corrective taxes are typically advocated to correct for the effects of

Accepted Answer

A)  positive externalities.
B)  negative externalities.
C)  patents.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 13

Reaching an efficient bargain is difficult when the

Accepted Answer

A)  externality is large.
B)  number of interested parties is large.
C)  externality is negative.
D)  government becomes involved.E) B) and C)
F) A) and D)

Question 14

What economic argument suggests that if transactions costs are sufficiently low, the post-bargaining equilibrium is economically efficient regardless of how property rights are distributed?

Accepted Answer

A)  the Coase theorem
B)  the laws of supply and demand
C)  the law of comparative advantage
D)  the law of externalitiesE) A) and D)
F) B) and C)

Question 15

In markets, the invisible hand allocates resources efficiently

Accepted Answer

A)  in all cases.
B)  when the buyers and sellers are the only interested parties.
C)  when there are positive externalities, but not when there are negative externalities.
D)  when there are negative externalities, but not when there are positive externalities.E) None of the above
F) All of the above

Question 16

A negative externality arises when a person engages in an activity that has

Accepted Answer

A)  an adverse effect on a bystander who is not compensated by the person who causes the effect.
B)  an adverse effect on a bystander who is compensated by the person who causes the effect.
C)  a beneficial effect on a bystander who pays the person who causes the effect.
D)  a beneficial effect on a bystander who does not pay the person who causes the effect.E) All of the above
F) B) and C)

Question 17

Which of the following require firms to pay to pollute?
(i) corrective taxes
(ii) tradable pollution permits
(iii) pollution regulations

Accepted Answer

A)  (i)  only
B)  both (i)  and (ii) 
C)  (iii)  only
D)  both (ii)  and (iii) E) All of the above
F) A) and B)

Question 18

A cost imposed on someone who is neither the consumer nor the producer is called a

Accepted Answer

A)  corrective tax.
B)  command and control policy.
C)  positive externality.
D)  negative externality.E) A) and B)
F) A) and C)

Question 19

Which of the following statements is not correct?

Accepted Answer

A)  Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level.
B)  Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution.
C)  Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution.
D)  Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.E) All of the above
F) A) and D)

Question 20

A negative externality

Accepted Answer

A)  is a cost to a bystander.
B)  is a cost to the buyer.
C)  is a cost to the seller.
D)  exists with all market transactions.E) B) and D)
F) A) and C)

Exam 10: Externalities

When externalities cause markets to be inefficient,

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Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

Correct Answerverified When a positive externality exists, the...View AnswerShow Answer

Figure 10-12 -Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity represents

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Corrective taxes are typically advocated to correct for the effects of

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Reaching an efficient bargain is difficult when the

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Government intervention that aims to promote technology-enhancing industries is called

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Figure 10-10 -Refer to Figure 10-10. The graph represents a market in which

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In markets, the invisible hand allocates resources efficiently

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A negative externality arises when a person engages in an activity that has

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Figure 10-11 -Refer to Figure 10-11. Taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is

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Which of the following statements is not correct?

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Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where

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Figure 10-11 -Refer to Figure 10-11. The socially optimal quantity of output is

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A cost imposed on someone who is neither the consumer nor the producer is called a

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Figure 10-11 -Refer to Figure 10-11. Which of the following magnitudes is constant over all units of output?

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What economic argument suggests that if transactions costs are sufficiently low, the post-bargaining equilibrium is economically efficient regardless of how property rights are distributed?

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Which of the following require firms to pay to pollute? (i) corrective taxes (ii) tradable pollution permits (iii) pollution regulations

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Suppose the government issues a limited number of pollution permits in order to limit the quantity of pollution. Under this policy, does the demand curve for pollution rights determine the quantity of pollution, or does it determine the price of pollution?

Correct AnswerverifiedWith pollution permi...View AnswerShow Answer

When a market is characterized by an externality, the government

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A negative externality

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When a positive externality exists, the...
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With pollution permi...
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