Question 1

In the case of an external benefit, marginal private benefit is ______ marginal social benefit at all quantity levels.

Accepted Answer

A)  equal to 
B)  less than 
C)  greater than 
D)  incomparable to 
A)  equal to 
B)  less than 
C)  greater than 
D)  incomparable to

Question 2

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

Accepted Answer

A)  Legislative transaction costs 
B)  Tradable pollution permits 
C)  A command-and-control policy 
D)  A market-based policy 
A)  Legislative transaction costs 
B)  Tradable pollution permits 
C)  A command-and-control policy 
D)  A market-based policy

Question 3

You are considering planting a garden of beautiful flowers in your front yard. It would cost you $45 in time and materials to plant it. You would get $40 worth of benefits from the garden and your neighbor, who walks by your front yard every day, would get $10 worth of benefits from it. Which statement is TRUE?

Accepted Answer

A)  Your private benefits exceed your private costs, so you would plant the garden. 
B)  The efficient equilibrium is to not plant the garden, but you would do so anyway since the social benefits exceed your private costs. 
C)  The efficient equilibrium is to plant the garden, but you would not do so since your private costs exceed your private benefits. 
D)  The external benefits are not significant enough to affect the efficiency of this equilibrium. 
A)  Your private benefits exceed your private costs, so you would plant the garden. 
B)  The efficient equilibrium is to not plant the garden, but you would do so anyway since the social benefits exceed your private costs. 
C)  The efficient equilibrium is to plant the garden, but you would not do so since your private costs exceed your private benefits. 
D)  The external benefits are not significant enough to affect the efficiency of this equilibrium.

Question 4

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, a $1 per tin tax on sardines would:

Accepted Answer

A)  create a deadweight loss, as all taxes do, and correct the odorous externality. 
B)  decrease deadweight loss but fail to correct the odorous externality. 
C)  create a deadweight loss and fail to correct the odorous externality. 
D)  decrease deadweight loss by correcting the odorous externality. 
A)  create a deadweight loss, as all taxes do, and correct the odorous externality. 
B)  decrease deadweight loss but fail to correct the odorous externality. 
C)  create a deadweight loss and fail to correct the odorous externality. 
D)  decrease deadweight loss by correcting the odorous externality.

Question 5

Which equation is TRUE?

Accepted Answer

A)  private cost + average cost = social cost 
B)  social cost = private cost + external cost 
C)  external cost = private cost 
D)  private cost + social cost = external cost 
A)  private cost + average cost = social cost 
B)  social cost = private cost + external cost 
C)  external cost = private cost 
D)  private cost + social cost = external cost

Question 6

On the Price Is Right, Bob Barker (and now Drew Carey) encourages people to "Help control the pet population. Have your pets spayed or neutered." An overly large pet population leads to many stray animals that are not only depressing but are also prone to spread disease. Concerning pet ownership, Barker and Carey are attempting to do what?

Accepted Answer

A)  internalize some of its costs 
B)  internalize some of its benefits 
C)  employ Pigouvian taxes 
D)  use the Coase theorem 
A)  internalize some of its costs 
B)  internalize some of its benefits 
C)  employ Pigouvian taxes 
D)  use the Coase theorem

Question 7

In How Economics Saved Christmas, economist Art Carden retold the Dr. Seuss story of the Grinch who hated Christmas and stole the decorations, food, and presents from neighboring Whoville. Complete this passage from Carden's poem:
He reached for his textbooks; he knew what to do
He'd fight them with ideas from A.C. Pigou
This idea has merit, he thought in the frost
A ____ that was equal to _____ cost

Accepted Answer

A)  subsidy; social 
B)  subsidy; private 
C)  tax; total 
D)  tax; external 
A)  subsidy; social 
B)  subsidy; private 
C)  tax; total 
D)  tax; external

Question 8

The prime motivation for low-pollutant firms to enter into the market for tradable allowances is profit.

Accepted Answer

A) True 
 B)False

Question 9

In a market with external costs, suppose the efficient level of output is 1,000 units. Which statement is TRUE?

Accepted Answer

A)  To achieve the efficient level of output, the government should set a subsidy equal to the external cost. 
B)  To achieve the efficient level of output, the government could set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level. 
C)  With external costs, the government can use only taxes to achieve the efficient level of output. 
D)  With external costs, the government can use only tradable allowances to achieve the efficient level of output. 
A)  To achieve the efficient level of output, the government should set a subsidy equal to the external cost. 
B)  To achieve the efficient level of output, the government could set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level. 
C)  With external costs, the government can use only taxes to achieve the efficient level of output. 
D)  With external costs, the government can use only tradable allowances to achieve the efficient level of output.

Question 10

Market solutions to externality problems are more likely to occur when:

Accepted Answer

A)  the costs of reaching an agreement are low and property rights are well defined. 
B)  the transaction costs are low and property rights are nonexistent. 
C)  transaction costs are high and property rights are well defined. 
D)  the costs of reaching an agreement are high and property rights are nonexistent. 
A)  the costs of reaching an agreement are low and property rights are well defined. 
B)  the transaction costs are low and property rights are nonexistent. 
C)  transaction costs are high and property rights are well defined. 
D)  the costs of reaching an agreement are high and property rights are nonexistent.

Question 11

Use the following to answer questions: Figure: Market with External Cost  
-(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

Accepted Answer

A)  Q1; ce 
B)  Q0; ce 
C)  Q0; gh 
D)  Q1; de 
A)  Q1; ce 
B)  Q0; ce 
C)  Q0; gh 
D)  Q1; de

Question 12

In the past few years many state governments have made it illegal to smoke inside public buildings (restaurants, subways stations, and so forth). Using the concept of externalities, explain why governments are taking these measures and explain whether the solution ensures an efficient outcome.

Accepted Answer

Smoking creates an external cost to thos

Question 13

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, the market equilibrium quantity is ______ units, and the efficient quantity is ______.

Accepted Answer

A)  6; 9 
B)  12; 6 
C)  9; 6 
D)  12; 9 
A)  6; 9 
B)  12; 6 
C)  9; 6 
D)  12; 9

Question 14

The Coase theorem states that private solutions can correct for the inefficiencies of externalities if transaction costs are low and property rights are clearly defined.

Accepted Answer

A) True 
 B)False

Question 15

Antibiotics may be ________ since people consider only the ________.

Accepted Answer

A)  underused; private and not the social costs of consumption 
B)  overused; private and not the social costs of consumption 
C)  underused; external and not the private costs of consumption 
D)  overused; external and not the private costs of consumption 
A)  underused; private and not the social costs of consumption 
B)  overused; private and not the social costs of consumption 
C)  underused; external and not the private costs of consumption 
D)  overused; external and not the private costs of consumption

Question 16

An external cost is a cost paid by:

Accepted Answer

A)  the consumers trading in the market. 
B)  the producers trading in the market. 
C)  the government regulating the market. 
D)  people other than the consumer and the producer trading in the market. 
A)  the consumers trading in the market. 
B)  the producers trading in the market. 
C)  the government regulating the market. 
D)  people other than the consumer and the producer trading in the market.

Question 17

Government intervention is necessary to correct all externalities.

Accepted Answer

A) True 
 B)False

Question 18

The EPA's system of tradable allowances:

Accepted Answer

A)  was unable to internalize the external costs of pollution. 
B)  actually lead to increased levels of pollution. 
C)  was moderately successful in helping to decrease pollution levels. 
D)  is a successful application of the Coase theorem. 
A)  was unable to internalize the external costs of pollution. 
B)  actually lead to increased levels of pollution. 
C)  was moderately successful in helping to decrease pollution levels. 
D)  is a successful application of the Coase theorem.

Question 19

The market for a good that generates an external benefit is still considered efficient.

Accepted Answer

A) True 
 B)False

Question 20

Antibiotic use carries an external ______ of building bacterial resistance against drugs.

Accepted Answer

A)  benefit 
B)  cost 
C)  price 
D)  revenue 
A)  benefit 
B)  cost 
C)  price 
D)  revenue

Exam 10: Externalities- When the Price Is Not Right

In the case of an external benefit, marginal private benefit is ______ marginal social benefit at all quantity levels.

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, a $1 per tin tax on sardines would:

Which equation is TRUE?

The prime motivation for low-pollutant firms to enter into the market for tradable allowances is profit.

In a market with external costs, suppose the efficient level of output is 1,000 units. Which statement is TRUE?

Market solutions to externality problems are more likely to occur when:

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

In the past few years many state governments have made it illegal to smoke inside public buildings (restaurants, subways stations, and so forth). Using the concept of externalities, explain why governments are taking these measures and explain whether the solution ensures an efficient outcome.

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, the market equilibrium quantity is ______ units, and the efficient quantity is ______.

The Coase theorem states that private solutions can correct for the inefficiencies of externalities if transaction costs are low and property rights are clearly defined.

Antibiotics may be ________ since people consider only the ________.

An external cost is a cost paid by:

Government intervention is necessary to correct all externalities.

The EPA's system of tradable allowances:

The market for a good that generates an external benefit is still considered efficient.

Antibiotic use carries an external ______ of building bacterial resistance against drugs.

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

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of units would eliminate the deadweight loss area of .

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, the market equilibrium quantity is units, and the efficient quantity is .

Antibiotics may be since people consider only the .