Question 1

Government solutions to externality problems include:
I. Pigouvian taxes.
II. tradable allowances.
III. command and control.

Accepted Answer

A)  I only 
B)  I and III only 
C)  II and III only 
D)  I, II, and III 
A)  I only 
B)  I and III only 
C)  II and III only 
D)  I, II, and III

Question 2

Explain in your own words: 1) What is an externality? and 2) What is the difference between a positive and negative externality. Provide examples.

Accepted Answer

Externalities are side effects of a prod

Question 3

In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output.

Accepted Answer

A) True 
 B)False

Question 4

A viable government solution to an external benefit is a:

Accepted Answer

A)  tax on the party producing the cost. 
B)  subsidy to the party producing the cost. 
C)  tax on the party incurring the cost. 
D)  subsidy to the party incurring the cost. 
A)  tax on the party producing the cost. 
B)  subsidy to the party producing the cost. 
C)  tax on the party incurring the cost. 
D)  subsidy to the party incurring the cost.

Question 5

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 efficient quantity in this market?

Accepted Answer

A)  1,600 
B)  400 
C)  2,000 
D)  3,600 
A)  1,600 
B)  400 
C)  2,000 
D)  3,600

Question 6

Which of the following statements is TRUE?
I. A Pigouvian subsidy reduces the market price to encourage consumption and correct for the underproduction of a good.
II. A Pigouvian tax increases the market price to discourage consumption and correct for the overproduction of a good.
III. Negative externalities create deadweight losses, but positive externalities do not.

Accepted Answer

A)  III only 
B)  I, II, and III 
C)  I and II only 
D)  I only 
A)  III only 
B)  I, II, and III 
C)  I and II only 
D)  I only

Question 7

For an efficient equilibrium, the Coase theorem does NOT require that:

Accepted Answer

A)  transaction costs are low. 
B)  the government sets a Pigouvian tax equal to the external cost. 
C)  property rights are clearly defined. 
D)  private bargains are possible. 
A)  transaction costs are low. 
B)  the government sets a Pigouvian tax equal to the external cost. 
C)  property rights are clearly defined. 
D)  private bargains are possible.

Question 8

The Coase theorem suggests that private bargains will ensure the efficiency of markets even when externalities exist:

Accepted Answer

A)  but only in the presence of government regulation. 
B)  if consumers have more information regarding the externality than suppliers. 
C)  if transaction costs are low and property rights are well defined. 
D)  if the cost of the negotiations are less than the price of the good. 
A)  but only in the presence of government regulation. 
B)  if consumers have more information regarding the externality than suppliers. 
C)  if transaction costs are low and property rights are well defined. 
D)  if the cost of the negotiations are less than the price of the good.

Question 9

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 10

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. If the users of the cleaner were given a subsidy to compensate them for the benefit they are creating for the ecological system, how much deadweight loss is removed from this market?

Accepted Answer

A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200 
A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200

Question 11

Products that create external benefits are:

Accepted Answer

A)  overconsumed because the private benefits exceed the private costs. 
B)  underconsumed because consumers only consider the private benefits of consumption. 
C)  neither overconsumed nor underconsumed because the marginal benefits equal the marginal costs. 
D)  underconsumed because the social costs exceed the social benefits. 
A)  overconsumed because the private benefits exceed the private costs. 
B)  underconsumed because consumers only consider the private benefits of consumption. 
C)  neither overconsumed nor underconsumed because the marginal benefits equal the marginal costs. 
D)  underconsumed because the social costs exceed the social benefits.

Question 12

The command and control method to solving an external cost problem usually involves:

Accepted Answer

A)  the imposition of taxes on the consumption of the item that is causing the external cost. 
B)  the institution of a subsidy on the consumption of the item that is causing the external cost. 
C)  the issuance of a regulation on the production, operation, or use of the item that is causing an external cost. 
D)  a price ceiling on the item that is causing an external cost. 
A)  the imposition of taxes on the consumption of the item that is causing the external cost. 
B)  the institution of a subsidy on the consumption of the item that is causing the external cost. 
C)  the issuance of a regulation on the production, operation, or use of the item that is causing an external cost. 
D)  a price ceiling on the item that is causing an external cost.

Question 13

Use the following to answer questions: Figure: Market for Bathroom Cleaner  
-(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market?

Accepted Answer

A)  100 
B)  85 
C)  15 
D)  9 
A)  100 
B)  85 
C)  15 
D)  9

Question 14

Which statement about vaccines is correct?

Accepted Answer

A)  Vaccines benefit only people who are vaccinated. 
B)  Everyone should be vaccinated in order to prevent the spreading of disease-causing viruses. 
C)  Vaccines benefit people who are vaccinated but cannot prevent disease on those people who are not vaccinated. 
D)  Vaccines not only benefit people who are vaccinated but also inhibit spreading disease-causing viruses. 
A)  Vaccines benefit only people who are vaccinated. 
B)  Everyone should be vaccinated in order to prevent the spreading of disease-causing viruses. 
C)  Vaccines benefit people who are vaccinated but cannot prevent disease on those people who are not vaccinated. 
D)  Vaccines not only benefit people who are vaccinated but also inhibit spreading disease-causing viruses.

Question 15

If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will:

Accepted Answer

A)  emit a lower level of sulfur dioxide than is socially efficient. 
B)  emit a higher level of sulfur dioxide than is socially efficient. 
C)  emit an acceptable level of sulfur dioxide 
D)  not emit any sulfur dioxide in an attempt to avoid paying the entire cost. 
A)  emit a lower level of sulfur dioxide than is socially efficient. 
B)  emit a higher level of sulfur dioxide than is socially efficient. 
C)  emit an acceptable level of sulfur dioxide 
D)  not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

Question 16

External costs cause deadweight losses, whereas external benefits do not.

Accepted Answer

A) True 
 B)False

Question 17

If the social cost of an activity equals the private cost, what kind of externality exists?

Accepted Answer

A)  an external cost 
B)  an external benefit 
C)  There is no externality. 
D)  This cannot be determined by the information given. 
A)  an external cost 
B)  an external benefit 
C)  There is no externality. 
D)  This cannot be determined by the information given.

Question 18

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Accepted Answer

A)  the government does not involve itself in the process. 
B)  the market is sufficiently competitive. 
C)  the number of market participants is large. 
D)  transaction costs are low and property rights are clearly defined. 
A)  the government does not involve itself in the process. 
B)  the market is sufficiently competitive. 
C)  the number of market participants is large. 
D)  transaction costs are low and property rights are clearly defined.

Question 19

Which is an example involving an external benefit?

Accepted Answer

A)  the pollution of a stream 
B)  a person littering a public highway 
C)  air pollution 
D)  a nice garden in front of someone's house 
A)  the pollution of a stream 
B)  a person littering a public highway 
C)  air pollution 
D)  a nice garden in front of someone's house

Question 20

The problem with using command and control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

Accepted Answer

A)  consumers may be reluctant to follow. 
B)  the situation may be difficult for the government to control. 
C)  the goal itself may not necessarily be the socially optimal outcome. 
D)  the government may not have enough information to choose the least costly methods. 
A)  consumers may be reluctant to follow. 
B)  the situation may be difficult for the government to control. 
C)  the goal itself may not necessarily be the socially optimal outcome. 
D)  the government may not have enough information to choose the least costly methods.

Exam 10: Externalities- When the Price Is Not Right

Government solutions to externality problems include: I. Pigouvian taxes. II. tradable allowances. III. command and control.

Explain in your own words: 1) What is an externality? and 2) What is the difference between a positive and negative externality. Provide examples.

In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output.

A viable government solution to an external benefit is a:

For an efficient equilibrium, the Coase theorem does NOT require that:

The Coase theorem suggests that private bargains will ensure the efficiency of markets even when externalities exist:

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Products that create external benefits are:

The command and control method to solving an external cost problem usually involves:

Which statement about vaccines is correct?

If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will:

External costs cause deadweight losses, whereas external benefits do not.

If the social cost of an activity equals the private cost, what kind of externality exists?

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Which is an example involving an external benefit?

The problem with using command and control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

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