Question 1

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

Accepted Answer

A)  corrective tax. 
B)  subsidy. 
C)  regulation. 
D)  market-based policy. 
A)  corrective tax. 
B)  subsidy. 
C)  regulation. 
D)  market-based policy.

Question 2

Private solutions to externalities are MOST likely to occur when there are:

Accepted Answer

A)  well-defined property rights and low transaction costs. 
B)  communal property rights and large numbers of sellers. 
C)  private property rights and high transaction costs. 
D)  communal property rights and large numbers of buyers and sellers with equal bargaining power. 
A)  well-defined property rights and low transaction costs. 
B)  communal property rights and large numbers of sellers. 
C)  private property rights and high transaction costs. 
D)  communal property rights and large numbers of buyers and sellers with equal bargaining power.

Question 3

Which of the following statements are TRUE?
I. Market prices do not correctly signal the true costs and benefits to society when external costs are present.
II. Market prices do not correctly signal the true costs and benefits to society when external benefits are present.
III. Taxes and subsidies can adjust prices so that they do send the correct signals.

Accepted Answer

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

Question 4

A free market void of externalities ______ social surplus.

Accepted Answer

A)  maximizes 
B)  does not maximize 
C)  sometimes maximizes 
D)  precludes 
A)  maximizes 
B)  does not maximize 
C)  sometimes maximizes 
D)  precludes

Question 5

Think of a market example that generates external costs. Is the market efficient under the current conditions? How could the government help the market to reach economic efficiency?

Accepted Answer

Answers will vary, but one example may b

Question 6

Tradable allowances are ______ to Pigouvian taxes when the position of the supply curve is ______, making it difficult to know the exact size of the tax.

Accepted Answer

A)  superior; unknown 
B)  superior; known 
C)  inferior; unknown 
D)  inferior; known 
A)  superior; unknown 
B)  superior; known 
C)  inferior; unknown 
D)  inferior; known

Question 7

A tax on an externally costly activity is ______ command and control regulation that seeks to limit the activity.

Accepted Answer

A)  more efficient than 
B)  less efficient than 
C)  equally efficient as 
D)  sometimes more and sometimes less efficient than 
A)  more efficient than 
B)  less efficient than 
C)  equally efficient as 
D)  sometimes more and sometimes less efficient than

Question 8

In a competitive market, a free market approach is always best when no externalities are present.

Accepted Answer

A) True 
 B)False

Question 9

External benefits lead to inefficient market outcomes.

Accepted Answer

A) True 
 B)False

Question 10

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Accepted Answer

A) True 
 B)False

Question 11

A transaction cost is:

Accepted Answer

A)  a cost paid by the consumer or the producer. 
B)  a cost paid by people other than the consumer or the producer trading in the market. 
C)  the cost to everyone. 
D)  the cost of reaching an agreement. 
A)  a cost paid by the consumer or the producer. 
B)  a cost paid by people other than the consumer or the producer trading in the market. 
C)  the cost to everyone. 
D)  the cost of reaching an agreement.

Question 12

Table: Sulfur Dioxide $$\begin{array} { l c c } 
\hline \text { Industry } & \text { Sulfur Dioxide Emissions (tons) } & \text { Cost of Reducing l Ton of Sulfur D } \
\hline \text { Industry X } & 100 & \$ 100 \
\text { Industry Y } & 120 & \$ 300 \
\hline
\end{array}$$ 
The table sets forth the sulfur dioxide emissions along with the costs of reducing sulfur dioxide emissions for two industries. Suppose the government gives each industry 100 tradable allowances; each allowance allows for 1 ton of sulfur dioxide emissions. Explain how the industries will trade the allowances and the range of prices that the allowances will trade for. What is the final allocation of allowances between the industries? How many tons of sulfur dioxide are removed from the air and at what cost?

Accepted Answer

Industry Y will pay between $100 and $30

Question 13

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

Accepted Answer

A)  higher than the marginal cost to antibiotic sellers. 
B)  less than the marginal cost to antibiotic sellers. 
C)  higher than the marginal benefit to the antibiotic buyers. 
D)  less than the marginal benefit to the antibiotic buyers. 
A)  higher than the marginal cost to antibiotic sellers. 
B)  less than the marginal cost to antibiotic sellers. 
C)  higher than the marginal benefit to the antibiotic buyers. 
D)  less than the marginal benefit to the antibiotic buyers.

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. According to this figure, which statement is TRUE?

Accepted Answer

A)  The maximum willingness to pay for the 6th unit equals the private cost. 
B)  The social cost of the 9th unit is $9 while the value to consumers is $9, eliminating the gains from trade. 
C)  The maximum willingness to pay for the 12th unit equals $18, or the private cost plus the social cost. 
D)  The social cost of the 9th unit is $15 while the value to consumers is $9, creating a deadweight loss equal to $6. 
A)  The maximum willingness to pay for the 6th unit equals the private cost. 
B)  The social cost of the 9th unit is $9 while the value to consumers is $9, eliminating the gains from trade. 
C)  The maximum willingness to pay for the 12th unit equals $18, or the private cost plus the social cost. 
D)  The social cost of the 9th unit is $15 while the value to consumers is $9, creating a deadweight loss equal to $6.

Question 15

When there are significant external costs associated with its production, the market produces ______ of that good.

Accepted Answer

A)  too little 
B)  too much 
C)  just the right amount 
D)  an unknown amount 
A)  too little 
B)  too much 
C)  just the right amount 
D)  an unknown amount

Question 16

President Barack Obama proposed using a system of:

Accepted Answer

A)  Pigouvian taxes to reduce carbon dioxide emissions. 
B)  tradable allowances to reduce carbon dioxide emissions. 
C)  depreciation permits to reduce carbon emissions. 
D)  fines and levies to address greenhouse gas emissions. 
A)  Pigouvian taxes to reduce carbon dioxide emissions. 
B)  tradable allowances to reduce carbon dioxide emissions. 
C)  depreciation permits to reduce carbon emissions. 
D)  fines and levies to address greenhouse gas emissions.

Question 17

Use the following to answer questions: Figure: External Benefit  
-(Figure: External Benefit) Refer to the figure. Shingles is a painful and blistering skin rash that generally affects older adults. The shingles virus is transmitted by those with an active outbreak, and it can cause chicken pox in people who never had it. In this figure depicting the market for shingles vaccinations, what is the external benefit of a shingles vaccine?

Accepted Answer

A)  $4 
B)  $10 
C)  $5 
D)  $7 
A)  $4 
B)  $10 
C)  $5 
D)  $7

Question 18

The Clean Air Act:

Accepted Answer

A)  banned the emission of sulfur dioxide. 
B)  created markets in sulfur dioxide emissions. 
C)  reduced social surplus. 
D)  increased sulfur dioxide emissions. 
A)  banned the emission of sulfur dioxide. 
B)  created markets in sulfur dioxide emissions. 
C)  reduced social surplus. 
D)  increased sulfur dioxide emissions.

Question 19

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

Accepted Answer

A)  impose a mandatory vaccination program. 
B)  provide research grants to those firms engaging in increasing the supply of vaccine. 
C)  give a subsidy to people who are vaccinated. 
D)  impose a tax on people who are unwilling to be vaccinated. 
A)  impose a mandatory vaccination program. 
B)  provide research grants to those firms engaging in increasing the supply of vaccine. 
C)  give a subsidy to people who are vaccinated. 
D)  impose a tax on people who are unwilling to be vaccinated.

Question 20

Social surplus is consumer surplus plus producer surplus and is maximized in markets with externalities.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities- When the Price Is Not Right

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

Private solutions to externalities are MOST likely to occur when there are:

A free market void of externalities ______ social surplus.

Think of a market example that generates external costs. Is the market efficient under the current conditions? How could the government help the market to reach economic efficiency?

Tradable allowances are ______ to Pigouvian taxes when the position of the supply curve is ______, making it difficult to know the exact size of the tax.

A tax on an externally costly activity is ______ command and control regulation that seeks to limit the activity.

In a competitive market, a free market approach is always best when no externalities are present.

External benefits lead to inefficient market outcomes.

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

A transaction cost is:

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

Use the following to answer questions: Figure: Dishwashing Detergent -(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. According to this figure, which statement is TRUE?

When there are significant external costs associated with its production, the market produces ______ of that good.

President Barack Obama proposed using a system of:

The Clean Air Act:

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

Social surplus is consumer surplus plus producer surplus and is maximized in markets with externalities.

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

Tradable allowances are to Pigouvian taxes when the position of the supply curve is , making it difficult to know the exact size of the tax.