Question 1

The advantage of using command and control to solve an externality problem is that:

Accepted Answer

A)  it is inflexible, and some problems require an inflexible approach. 
B)  it is a very flexible approach. 
C)  it solves the problem efficiently without the government requiring very much information. 
D)  it is usually the least costly approach. 
A)  it is inflexible, and some problems require an inflexible approach. 
B)  it is a very flexible approach. 
C)  it solves the problem efficiently without the government requiring very much information. 
D)  it is usually the least costly approach.

Question 2

Your neighbor has a tree that blocks your view of a distant hill. Your neighbor values the tree at $100. You value the tree's removal at $150. Tree removal costs $60. In this case, property rights are clear. Your neighbor owns the airspace extending above his house for some distance. Transaction costs in this case:

Accepted Answer

A)  would allow for a private solution to the external cost. 
B)  would prohibit a private solution to the external cost. 
C)  would be equal to zero. 
D)  are unknown. 
A)  would allow for a private solution to the external cost. 
B)  would prohibit a private solution to the external cost. 
C)  would be equal to zero. 
D)  are unknown.

Question 3

Everyone has the same cost of pollution abatement.

Accepted Answer

A) True 
 B)False

Question 4

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Accepted Answer

A) True 
 B)False

Question 5

Using a demand and supply diagram, demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Accepted Answer

The answer of Using a demand and supply diagram, demonstrate...

Question 6

When externalities are present in a market, social surplus is maximized.

Accepted Answer

A) True 
 B)False

Question 7

An external cost:

Accepted Answer

A)  causes markets to allocate resources efficiently. 
B)  affects producers but not consumers. 
C)  is a cost paid by people other than the producer or consumer trading in the market. 
D)  leads to economic efficiency only when private costs are greater than external costs. 
A)  causes markets to allocate resources efficiently. 
B)  affects producers but not consumers. 
C)  is a cost paid by people other than the producer or consumer trading in the market. 
D)  leads to economic efficiency only when private costs are greater than external costs.

Question 8

Make an argument that gun ownership creates external costs. How might the government address the external costs? Next, make an argument that gun ownership creates external benefits. How might the government address the external benefits?

Accepted Answer

Gun ownership may lead to external costs

Question 9

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

Accepted Answer

A)  low, and the product will be overproduced. 
B)  high, and the product will be underproduced. 
C)  high, and the product will be overproduced. 
D)  low, and the product will be underproduced. 
A)  low, and the product will be overproduced. 
B)  high, and the product will be underproduced. 
C)  high, and the product will be overproduced. 
D)  low, and the product will be underproduced.

Question 10

A(n) ______ is a tax on a good with external costs.

Accepted Answer

A)  specific tax 
B)  ad valorem tax 
C)  Orwellian tax 
D)  Pigouvian tax 
A)  specific tax 
B)  ad valorem tax 
C)  Orwellian tax 
D)  Pigouvian tax

Question 11

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

Accepted Answer

A) True 
 B)False

Question 12

An efficient equilibrium occurs whenever:

Accepted Answer

A)  social surplus is maximized. 
B)  quantity demanded equals quantity supplied. 
C)  there is a negative externality in the market. 
D)  there is a positive externality in the market. 
A)  social surplus is maximized. 
B)  quantity demanded equals quantity supplied. 
C)  there is a negative externality in the market. 
D)  there is a positive externality in the market.

Question 13

Use the following to answer questions: Figure: ABC Company  
-(Figure: ABC Company) Refer to the figure. The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the dollar amount of the external benefit created per can of the cleaner?

Accepted Answer

A)  $12 
B)  $6 
C)  $3 
D)  $15 
A)  $12 
B)  $6 
C)  $3 
D)  $15

Question 14

Use the following to answer questions: Figure: Dishwashing Detergent  
-(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, SC represents the:

Accepted Answer

A)  private cost of production plus the social cost of production. 
B)  social cost of production: the private cost plus the external cost. 
C)  social cost of production: the external cost less the private cost. 
D)  private cost of production. 
A)  private cost of production plus the social cost of production. 
B)  social cost of production: the private cost plus the external cost. 
C)  social cost of production: the external cost less the private cost. 
D)  private cost of production.

Question 15

Command and control policies ensure economic efficiency.

Accepted Answer

A) True 
 B)False

Question 16

Why is the market for honey efficient despite the potential problem of pollination externalities?

Accepted Answer

A)  The government offers a Pigouvian subsidy for the production of honey. 
B)  The government imposes a Pigouvian tax on the production of honey. 
C)  The quantity of honey that can be produced each year is capped. 
D)  Beekeepers are paid for the pollination services their bees provide, thus internalizing the externality. 
A)  The government offers a Pigouvian subsidy for the production of honey. 
B)  The government imposes a Pigouvian tax on the production of honey. 
C)  The quantity of honey that can be produced each year is capped. 
D)  Beekeepers are paid for the pollination services their bees provide, thus internalizing the externality.

Question 17

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

Accepted Answer

A)  taxing sardine tins at a rate of $1 per tin. 
B)  subsidizing sardine tins at a rate of $1 per tin. 
C)  capping total sardine consumption at 1000 tins per day. 
D)  banning sardines. 
A)  taxing sardine tins at a rate of $1 per tin. 
B)  subsidizing sardine tins at a rate of $1 per tin. 
C)  capping total sardine consumption at 1000 tins per day. 
D)  banning sardines.

Question 18

The market for aquarium cleaners can be defined by the following set of equations:
Qd = 40 - 3P
Qs = -20 + 3P
P is the price of aquarium cleaners in dollars, and Q is quantity in thousands. After their use, aquarium cleaners get washed down the drain, and these cleansers increase the mineral content in streams and rivers, thus increasing the fish population. The government estimates that the external benefit related to the use of each container of aquarium cleaner is $3 and is considering a subsidy of $3 per container of the aquarium cleaner. Using this information, answer the following questions.
a. What are the market price and market quantity in the aquarium cleaner market?
b. What is the social benefit of each container of aquarium cleaner?
c. If consumers are offered a subsidy of $3, this would cause the demand curve to shift to the right, and the new equation for the demand curve would be Qd = 40 - 3(P - 3). What is the efficient quantity traded in this market as a result of this subsidy?
d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the subsidy).
e. What is the dollar amount of the deadweight loss that has been removed from this market as a result of the subsidy?

Accepted Answer

a. 40 - 3P = -20 + 3P
60 = 6P
P = 10 for

Question 19

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity.

Accepted Answer

A) True 
 B)False

Question 20

Which method achieves the lowest per-gallon cost of reducing water consumption?

Accepted Answer

A)  low-flow toilets as mandated by the government 
B)  lawn watering restrictions for odd or even days only 
C)  shower heads with restricted water flow 
D)  a tax on water consumption 
A)  low-flow toilets as mandated by the government 
B)  lawn watering restrictions for odd or even days only 
C)  shower heads with restricted water flow 
D)  a tax on water consumption

Exam 10: Externalities- When the Price Is Not Right

The advantage of using command and control to solve an externality problem is that:

Everyone has the same cost of pollution abatement.

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Using a demand and supply diagram, demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

When externalities are present in a market, social surplus is maximized.

An external cost:

Make an argument that gun ownership creates external costs. How might the government address the external costs? Next, make an argument that gun ownership creates external benefits. How might the government address the external benefits?

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

A(n) ______ is a tax on a good with external costs.

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

An efficient equilibrium occurs whenever:

Use the following to answer questions: Figure: Dishwashing Detergent -(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, SC represents the:

Command and control policies ensure economic efficiency.

Why is the market for honey efficient despite the potential problem of pollination externalities?

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity.

Which method achieves the lowest per-gallon cost of reducing water consumption?

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters