Question 1

Ideally, a market should maximize:

Accepted Answer

A)  consumer surplus. 
B)  producer surplus. 
C)  consumer surplus plus producer surplus. 
D)  social surplus. 
A)  consumer surplus. 
B)  producer surplus. 
C)  consumer surplus plus producer surplus. 
D)  social surplus.

Question 2

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to ________ antibiotics, leading to an ________ market outcome.

Accepted Answer

A)  overuse; inefficient 
B)  underuse; inefficient 
C)  overuse; efficient 
D)  make efficient use of; equilibrium 
A)  overuse; inefficient 
B)  underuse; inefficient 
C)  overuse; efficient 
D)  make efficient use of; equilibrium

Question 3

An external benefit in a market will cause the market to produce:

Accepted Answer

A)  more than the same market would produce in the presence of a negative externality. 
B)  more than is socially desirable. 
C)  less than is socially desirable. 
D)  the socially optimal equilibrium amount. 
A)  more than the same market would produce in the presence of a negative externality. 
B)  more than is socially desirable. 
C)  less than is socially desirable. 
D)  the socially optimal equilibrium amount.

Question 4

Use the following to answer questions: Figure: Market for Vaccines  
-(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

Accepted Answer

A)  1,200; greater 
B)  1,800; less 
C)  2,400; greater 
D)  1,800; greater 
A)  1,200; greater 
B)  1,800; less 
C)  2,400; greater 
D)  1,800; greater

Question 5

Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)?
I. levy taxes on the coal factory's production of pollutants
II. levy taxes on the consumers' consumption of fish
III. create a market for tradable allowances
IV. subsidize firms that produce clean fish

Accepted Answer

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

Question 6

The Clean Air Act of 1990:

Accepted Answer

A)  established a tradable allowances program for sulfur dioxide. 
B)  is an application of the Coase theorem. 
C)  allows firms to profit by selling their unused pollution allowances. 
D)  All of the answers are correct. 
A)  established a tradable allowances program for sulfur dioxide. 
B)  is an application of the Coase theorem. 
C)  allows firms to profit by selling their unused pollution allowances. 
D)  All of the answers are correct.

Question 7

If the government forced external cost internalization with a tax on all firms that emit pollution, then:

Accepted Answer

A)  the market would be socially inefficient because taxes create deadweight losses. 
B)  the market price of these goods would fall. 
C)  production would actually increase. 
D)  deadweight loss to society would decrease. 
A)  the market would be socially inefficient because taxes create deadweight losses. 
B)  the market price of these goods would fall. 
C)  production would actually increase. 
D)  deadweight loss to society would decrease.

Question 8

A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that gets washed down the drain escapes into the environment and releases allergens that cause respiratory problems for people. What is the social cost of a bottle of this cleaner?

Accepted Answer

A)  $5.50 less the external cost of such a bottle of bathroom cleaner 
B)  the cost paid by other people as a result of the use of such a bottle of bathroom cleaner 
C)  $5.50 plus the external cost of such a bottle of bathroom cleaner 
D)  $3.60 
A)  $5.50 less the external cost of such a bottle of bathroom cleaner 
B)  the cost paid by other people as a result of the use of such a bottle of bathroom cleaner 
C)  $5.50 plus the external cost of such a bottle of bathroom cleaner 
D)  $3.60

Question 9

Is a market that generates external benefits considered economically efficient? Explain why or why not.

Accepted Answer

No, even markets that generate

Question 10

Social surplus is consumer surplus:

Accepted Answer

A)  minus producer surplus. 
B)  plus producer surplus. 
C)  plus producer surplus minus everyone else's surplus. 
D)  plus producer surplus plus everyone else's surplus. 
A)  minus producer surplus. 
B)  plus producer surplus. 
C)  plus producer surplus minus everyone else's surplus. 
D)  plus producer surplus plus everyone else's surplus.

Question 11

Externalities are:

Accepted Answer

A)  always good. 
B)  always bad. 
C)  sometimes good and sometimes bad. 
D)  neither good nor bad. 
A)  always good. 
B)  always bad. 
C)  sometimes good and sometimes bad. 
D)  neither good nor bad.

Question 12

Which statement explains the difference between command and control policies and tradable allowances?

Accepted Answer

A)  Command and control policies are a government solution to externalities, whereas tradable allowances are a type of private market solution. 
B)  Tradable allowances allow for less flexibility than command and control policies. 
C)  Command and control policies require all firms to reduce pollutants by a specific quantity, whereas tradable allowances allow some firms to pollute more than others by trading for pollution rights. 
D)  Tradable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control. 
A)  Command and control policies are a government solution to externalities, whereas tradable allowances are a type of private market solution. 
B)  Tradable allowances allow for less flexibility than command and control policies. 
C)  Command and control policies require all firms to reduce pollutants by a specific quantity, whereas tradable allowances allow some firms to pollute more than others by trading for pollution rights. 
D)  Tradable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control.

Question 13

Use the following to answer questions: Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit-the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
-(Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading allowances?

Accepted Answer

A)  A gains $650, and B saves $550. 
B)  A gains $250, and B saves $350. 
C)  A gains $650, and B saves $1,100. 
D)  A gains $1,050, and B saves $550. 
A)  A gains $650, and B saves $550. 
B)  A gains $250, and B saves $350. 
C)  A gains $650, and B saves $1,100. 
D)  A gains $1,050, and B saves $550.

Question 14

An external 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 15

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

Accepted Answer

A) True 
 B)False

Question 16

Ronald Coase argued that market equilibriums would be efficient even in the presence of externalities when property rights are ______ and transaction costs are ______.

Accepted Answer

A)  uncertain; high 
B)  uncertain; low 
C)  certain; high 
D)  certain; low 
A)  uncertain; high 
B)  uncertain; low 
C)  certain; high 
D)  certain; low

Question 17

Which statement is correct under a market with externalities?

Accepted Answer

A)  Social surplus is maximized as long as consumer surplus is maximized. 
B)  Social surplus is maximized as long as producer surplus is maximized. 
C)  Social surplus is maximized as long as both consumer surplus and producer surplus are maximized. 
D)  None of these statements is correct. 
A)  Social surplus is maximized as long as consumer surplus is maximized. 
B)  Social surplus is maximized as long as producer surplus is maximized. 
C)  Social surplus is maximized as long as both consumer surplus and producer surplus are maximized. 
D)  None of these statements is correct.

Question 18

A(n) ______ subsidy is a subsidy on a good with external benefits.

Accepted Answer

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

Question 19

Command and control may be the best approach to handling externalities if:

Accepted Answer

A)  flexibility is desired. 
B)  the marginal social cost of the externality is greater than the social benefit. 
C)  taxes and/or subsidies fail to reach the efficient outcome. 
D)  success requires strong compliance. 
A)  flexibility is desired. 
B)  the marginal social cost of the externality is greater than the social benefit. 
C)  taxes and/or subsidies fail to reach the efficient outcome. 
D)  success requires strong compliance.

Question 20

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

Accepted Answer

A)  bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities. 
B)  the owners of the beehives can clearly be identified. 
C)  the market limits the beneficial activities of the bees to those farmers who have very small farms. 
D)  All of the answers are correct. 
A)  bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities. 
B)  the owners of the beehives can clearly be identified. 
C)  the market limits the beneficial activities of the bees to those farmers who have very small farms. 
D)  All of the answers are correct.

Exam 10: Externalities- When the Price Is Not Right

Ideally, a market should maximize:

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to ________ antibiotics, leading to an ________ market outcome.

An external benefit in a market will cause the market to produce:

Use the following to answer questions: Figure: Market for Vaccines -(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

The Clean Air Act of 1990:

If the government forced external cost internalization with a tax on all firms that emit pollution, then:

Is a market that generates external benefits considered economically efficient? Explain why or why not.

Social surplus is consumer surplus:

Externalities are:

Which statement explains the difference between command and control policies and tradable allowances?

An external cost is:

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

Ronald Coase argued that market equilibriums would be efficient even in the presence of externalities when property rights are ______ and transaction costs are ______.

Which statement is correct under a market with externalities?

A(n) ______ subsidy is a subsidy on a good with external benefits.

Command and control may be the best approach to handling externalities if:

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

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

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to antibiotics, leading to an market outcome.

Use the following to answer questions: Figure: Market for Vaccines -(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The efficient level of output is vaccines, which is than the market's output.

Ronald Coase argued that market equilibriums would be efficient even in the presence of externalities when property rights are and transaction costs are .