Question 1

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Accepted Answer

A) True 
 B)False

Question 2

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Accepted Answer

A)   Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities.
B)   Externalities result in prices that are too high for many consumers to pay.
C)   Markets fail to produce the maximum total benefit to society when positive or negative externalities are present.
D)   Markets produce too little of a good when positive or negative externalities are present.E) B) and C)
F) A) and C)

Question 3

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Accepted Answer

A)   Impose a tax greater than the value of the technology spillover.
B)   Not allow production of any product that causes a technology spillover.
C)   Provide a subsidy equal to the value of the technology spillover.
D)   Require producers to "clean up" any spillover that results from their production process.E) C) and D)
F) A) and D)

Question 4

Figure 10-16 
-Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is

Accepted Answer

A)   50
B)   100
C)   1,000
D)   2,000E) All of the above
F) A) and C)

Question 5

When one firm sells its pollution permit to another firm,

Accepted Answer

A)   both firms benefit.
B)   the total amount of pollution remains the same.
C)   the total amount of pollution decreases.
D)   Both a and b are correct.E) A) and D)
F) B) and C)

Question 6

A corrective tax

Accepted Answer

A)   allocates pollution to those factories that face the highest cost of reducing it.
B)   is a form of regulation.
C)   works well for all types of externalities.
D)   is inferior to regulatory policy according to most economists.E) None of the above
F) All of the above

Question 7

Figure 10-8 
-Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?

Accepted Answer

A)   8 units
B)   Between 8 and 10 units
C)   10 units
D)   More than 10 unitsE) A) and C)
F) All of the above

Question 8

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 socially optimal quantity of antibiotics is represented by point

Accepted Answer

A)   Q2.
B)   Q3.
C)   Q4.
D)   Q5.E) None of the above
F) B) and D)

Question 9

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Accepted Answer

A) True 
 B)False

Question 10

Figure 10-5 
-Refer to Figure 10-5. Which price and quantity combination represents the social optimum?

Accepted Answer

A)   P0 and Q1.
B)   P2 and Q1.
C)   P1 and Q0.
D)   P2 and Q0.E) B) and D)
F) A) and B)

Question 11

The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

Accepted Answer

A)   even if private parties experience substantial costs of bargaining.
B)   even if the initial distribution of legal rights is skewed in favor of some private parties over others.
C)   only when there is a large number of private parties that engage in bargaining.
D)   All of the above are correct.E) A) and B)
F) All of the above

Question 12

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? (i)  corrective taxes
(ii)  tradable pollution permits
(iii)  amendments to the Clean Air Act

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Figure 10-16 
-Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Accepted Answer

A)   25
B)   50
C)   75
D)   100E) None of the above
F) B) and C)

Question 15

Which of the following statements is correct about a market in which pollution is emitted?

Accepted Answer

A)   Both corrective taxes and pollution permits internalize the externality of pollution.
B)   Corrective taxes internalize the externality of pollution, but pollution permits do not internalize that externality.
C)   Corrective taxes fail to internalize the externality of pollution, but corrective taxes internalize that externality.
D)   Neither corrective taxes nor pollution permits internalize the externality of pollution.E) B) and C)
F) A) and C)

Question 16

Figure 10-10 
-Refer to Figure 10-10. Which of the following statements is correct?

Accepted Answer

A)   The private cost of producing the 120th unit of output is $12.
B)   The social cost of producing the 120th unit of output is $22.
C)   The external cost of producing the 120th unit of output is $2.
D)   All of the above are correct.E) B) and C)
F) C) and D)

Question 17

Education yields positive externalities. For example, a more educated population

Accepted Answer

A)   may increase the pace of technological advances, leading to higher productivity and wages for everyone.
B)   leads to more informed voters, resulting in better government for everyone.
C)   tends to result in lower crime rates.
D)   All of the above are correct.E) A) and B)
F) B) and C)

Question 18

Which of the following is the most effective way to internalize a technology spillover?

Accepted Answer

A)   taxes
B)   patents
C)   government regulations
D)   free marketsE) A) and B)
F) B) and D)

Question 19

Figure 10-11 
-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) A) and C)
F) B) and C)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

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 socially optimal quantity of antibiotics is represented by point

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When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

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Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. The equilibrium number of permits is

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The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

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Which of the following is the most effective way to internalize a technology spillover?

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

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Which of the following statements is correct about a market in which pollution is emitted?

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Figure 10-10 -Refer to Figure 10-10. Which of the following statements is correct?

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A corrective tax

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

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Figure 10-5 -Refer to Figure 10-5. Which price and quantity combination represents the social optimum?

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Figure 10-16 -Refer to Figure 10-16. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Correct AnswerverifiedShow Answer

Education yields positive externalities. For example, a more educated population

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

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Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? (i) corrective taxes (ii) tradable pollution permits (iii) amendments to the Clean Air Act

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Figure 10-8 -Refer to Figure 10-8. What is the socially-optimal quantity of output in this market?

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When one firm sells its pollution permit to another firm,

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The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources efficiently

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In what sense do externalities cause the "invisible hand" of the marketplace to fail?

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When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

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