Question 1

Briefly list some private and public solutions to the existence of externalities (negative or positive) in markets.

Accepted Answer

Private solutions include trade in exter

Question 2

In the presence of an external benefit, a Pigouvian ______ that is set equal to the ______ the market output to its efficient level.

Accepted Answer

A)  subsidy; external benefit can increase 
B)  tax; external benefit can increase 
C)  subsidy; private cost can increase 
D)  subsidy; external benefit can decrease 
A)  subsidy; external benefit can increase 
B)  tax; external benefit can increase 
C)  subsidy; private cost can increase 
D)  subsidy; external benefit can decrease

Question 3

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

Accepted Answer

A)  only the owner of the orchard. 
B)  only the beekeeper. 
C)  the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner. 
D)  both the beekeeper and the orchard owner. 
A)  only the owner of the orchard. 
B)  only the beekeeper. 
C)  the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner. 
D)  both the beekeeper and the orchard owner.

Question 4

Command and control policies are best suited for:

Accepted Answer

A)  reducing electricity consumption. 
B)  addressing the problem of acid rain. 
C)  the suppression of deadly infectious diseases. 
D)  All of the answers are correct. 
A)  reducing electricity consumption. 
B)  addressing the problem of acid rain. 
C)  the suppression of deadly infectious diseases. 
D)  All of the answers are correct.

Question 5

A private cost is:

Accepted Answer

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

Question 6

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Accepted Answer

A) True 
 B)False

Question 7

The proposition that private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the:

Accepted Answer

A)  voluntary tax theorem. 
B)  Bee theorem. 
C)  Coase theorem. 
D)  transaction cost theorem. 
A)  voluntary tax theorem. 
B)  Bee theorem. 
C)  Coase theorem. 
D)  transaction cost theorem.

Question 8

One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.

Accepted Answer

A) True 
 B)False

Question 9

A Pigouvian subsidy should be set equal to the amount of the external benefit.

Accepted Answer

A) True 
 B)False

Question 10

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 external ________ of vaccination is ________.

Accepted Answer

A)  cost; $15 
B)  cost; $10 
C)  benefit; $20 
D)  benefit; $5 
A)  cost; $15 
B)  cost; $10 
C)  benefit; $20 
D)  benefit; $5

Question 11

In the case of an external benefit, the social cost curve lies ______ the supply curve.

Accepted Answer

A)  above 
B)  below 
C)  with 
D)  sometimes above and sometimes below 
A)  above 
B)  below 
C)  with 
D)  sometimes above and sometimes below

Question 12

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 external cost of the bathroom cleaner?

Accepted Answer

A)  $6 
B)  $9 
C)  $12 
D)  $3 
A)  $6 
B)  $9 
C)  $12 
D)  $3

Question 13

If a good has an external cost, the efficient price is greater than the market price.

Accepted Answer

A) True 
 B)False

Question 14

If the production of a good causes a negative externality, the efficient level of output of that good is zero.

Accepted Answer

A) True 
 B)False

Question 15

Markets in which externalities are present are economically inefficient.

Accepted Answer

A) True 
 B)False

Question 16

The external benefit of honey production is internalized when:

Accepted Answer

A)  farmers receive tax breaks from the government. 
B)  beekeepers receive tax breaks from the government. 
C)  farmers pay beekeepers to pollinate their crops. 
D)  beekeepers pay farmers to pollinate farmers' crops. 
A)  farmers receive tax breaks from the government. 
B)  beekeepers receive tax breaks from the government. 
C)  farmers pay beekeepers to pollinate their crops. 
D)  beekeepers pay farmers to pollinate farmers' crops.

Question 17

When significant externalities exist:
I. the market equilibrium is no longer efficient.
II. the market equilibrium is only efficient if the externality is an external benefit.
III. social surplus is not maximized.
IV. the government may increase efficiency by imposing a tax on the market.

Accepted Answer

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

Question 18

Rank economists' LEAST favorite to MOST favorite method of reducing electricity consumption.

Accepted Answer

A)  tax on electricity, command and control, tax on the pollutants generated from electricity production 
B)  command and control, tax on electricity, tax on the pollutants generated from electricity production 
C)  tax on electricity, tax on the pollutants generated from electricity production, command and control 
D)  tax on the pollutants generated from electricity production, command and control, tax on electricity 
A)  tax on electricity, command and control, tax on the pollutants generated from electricity production 
B)  command and control, tax on electricity, tax on the pollutants generated from electricity production 
C)  tax on electricity, tax on the pollutants generated from electricity production, command and control 
D)  tax on the pollutants generated from electricity production, command and control, tax on electricity

Question 19

The efficient equilibrium maximizes private surplus.

Accepted Answer

A) True 
 B)False

Question 20

One benefit of markets in pollution allowances is that environmentalists can pay to permanently take emissions off the market.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities- When the Price Is Not Right

Briefly list some private and public solutions to the existence of externalities (negative or positive) in markets.

In the presence of an external benefit, a Pigouvian ______ that is set equal to the ______ the market output to its efficient level.

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

Command and control policies are best suited for:

A private cost is:

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

The proposition that private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the:

One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.

A Pigouvian subsidy should be set equal to the amount of the external benefit.

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 external ________ of vaccination is ________.

In the case of an external benefit, the social cost curve lies ______ the supply curve.

If a good has an external cost, the efficient price is greater than the market price.

If the production of a good causes a negative externality, the efficient level of output of that good is zero.

Markets in which externalities are present are economically inefficient.

The external benefit of honey production is internalized when:

When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market.

Rank economists' LEAST favorite to MOST favorite method of reducing electricity consumption.

The efficient equilibrium maximizes private surplus.

One benefit of markets in pollution allowances is that environmentalists can pay to permanently take emissions off the market.

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

In the presence of an external benefit, a Pigouvian that is set equal to the the market output to its efficient level.

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 external of vaccination is .