Question 1

Which of the following suggests that the private market can be effective in dealing with externalities?

Accepted Answer

A)  the 'invisible hand' 
B)  the law of diminishing social returns 
C)  the Coase theorem 
D)  technology policy 
A)  the 'invisible hand' 
B)  the law of diminishing social returns 
C)  the Coase theorem 
D)  technology policy C

Question 2

The distribution of rights among parties affected by an externality:

Accepted Answer

A)  hinders the ability of private parties to properly price the externality 
B)  enhances the market incentive to reach an efficient solution 
C)  determines who bears the cost of the solution but has no effect on the efficiency of this outcome 
D)  affects the efficiency of the outcome, but does not determine who bears the cost 
A)  hinders the ability of private parties to properly price the externality 
B)  enhances the market incentive to reach an efficient solution 
C)  determines who bears the cost of the solution but has no effect on the efficiency of this outcome 
D)  affects the efficiency of the outcome, but does not determine who bears the cost C

Question 3

Government can solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following statements is most correct?

Accepted Answer

A)  Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost 
B)  Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost 
C)  Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate 
D)  Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate 
A)  Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost 
B)  Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost 
C)  Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate 
D)  Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate

Question 5

Which of the following are true of tradeable pollution permits? (i) they will be sold by firms that can reduce pollution at low costs
(ii) they will be bought by firms that can reduce pollution only at high costs
(iii) they are likely to create a higher level of total pollution

Accepted Answer

A)  (i), (ii) and (iii) 
B)  (iii) only 
C)  (ii) and (iii) only 
D)  (i) and (ii) only 
A)  (i), (ii) and (iii) 
B)  (iii) only 
C)  (ii) and (iii) only 
D)  (i) and (ii) only

Question 6

Graph 10-3
   This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-3. The total surplus derived from the most efficient kiwifruit production levels is represented by the area:

Accepted Answer

A)  g 
B)  e + g 
C)  c + d 
D)  a + b + c 
A)  g 
B)  e + g 
C)  c + d 
D)  a + b + c

Question 7

Japanese fishermen use gill nets to catch tuna with great efficiency. Many environmentalists have objected to this practice since many marine animals such as dolphins and sharks are killed by the nets and discarded by the fishermen. Which of the following statements is most correct?

Accepted Answer

A)  a private solution can be reached through negotiation between the fishermen and the environmentalists 
B)  a private solution is not practical due to the number of individuals affected 
C)  the market price of tuna is higher than the socially optimum price of tuna 
D)  a private solution to this problem would not effect the price of tuna 
A)  a private solution can be reached through negotiation between the fishermen and the environmentalists 
B)  a private solution is not practical due to the number of individuals affected 
C)  the market price of tuna is higher than the socially optimum price of tuna 
D)  a private solution to this problem would not effect the price of tuna

Question 8

A local cafe that allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards. This decision provides an example of:

Accepted Answer

A)  direct regulation of an externality 
B)  Pigovian taxes 
C)  a Coase theorem solution to an externality 
D)  unjustified discrimination against smokers 
A)  direct regulation of an externality 
B)  Pigovian taxes 
C)  a Coase theorem solution to an externality 
D)  unjustified discrimination against smokers

Question 9

In order for regulation to be efficient, it often requires detailed information about the relationship between:

Accepted Answer

A)  taxes and subsidies 
B)  command and control 
C)  governments and individuals 
D)  production and technology 
A)  taxes and subsidies 
B)  command and control 
C)  governments and individuals 
D)  production and technology

Question 10

Private markets fail to reach a socially optimal level when positive consumption externalities are present because:

Accepted Answer

A)  private benefit equals social benefit at the private market solution 
B)  private costs exceed private benefits at the private market solution 
C)  social value exceeds private value at the private market solution 
D)  private costs exceed social benefit at the private market solution 
A)  private benefit equals social benefit at the private market solution 
B)  private costs exceed private benefits at the private market solution 
C)  social value exceeds private value at the private market solution 
D)  private costs exceed social benefit at the private market solution

Question 11

One advantage of allowing a market for pollution permits to control the total amount of pollution released in an area is that:

Accepted Answer

A)  the government knows exactly how much each firm is allowed to pollute 
B)  government revenue from the sale of permits is greater than revenue from a Pigovian tax 
C)  the initial allocation of permits to firms does not affect the efficiency of the market 
D)  firms will work together to eventually eliminate pollution 
A)  the government knows exactly how much each firm is allowed to pollute 
B)  government revenue from the sale of permits is greater than revenue from a Pigovian tax 
C)  the initial allocation of permits to firms does not affect the efficiency of the market 
D)  firms will work together to eventually eliminate pollution

Question 12

Internalising externalities is one reason that some firms involve themselves in only one type of business.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following policies is government most inclined to use when faced with a positive externality?

Accepted Answer

A)  taxation 
B)  permits 
C)  subsidies 
D)  usage fees 
A)  taxation 
B)  permits 
C)  subsidies 
D)  usage fees

Question 14

Contracts cannot solve the inefficiency that arises from externalities.

Accepted Answer

A) True 
 B)False

Question 15

Graph 10-2
   This graph depicts the market for pork. Use this information to answer the following question(s).
-In Graph 10-2, producer and consumer surplus at the point of market efficiency is represented by area(s):

Accepted Answer

A)  a + b 
B)  a + d 
C)  b + c 
D)  c + d 
A)  a + b 
B)  a + d 
C)  b + c 
D)  c + d

Question 16

Which of the following would be true of an increase in automobile fuel taxes? (i) private incentives are used to reduce automobile pollution
(ii) private incentives are used to reduce highway congestion
(iii) government directly controls the amount of automobile fuel that is purchased

Accepted Answer

A)  (i) and (ii) only 
B)  (ii) and (iii) only 
C)  (iii) only 
D)  (i), (ii) and (iii) 
A)  (i) and (ii) only 
B)  (ii) and (iii) only 
C)  (iii) only 
D)  (i), (ii) and (iii)

Question 17

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Accepted Answer

A) True 
 B)False

Question 18

Assuming that Dick has the legal right to keep the dog, which of the following statements is true?

Accepted Answer

A)  Jane will have to pay Dick in order to create a private solution 
B)  only if Dick's benefit exceeds Jane's cost will Jane have to pay Dick to solve the problem 
C)  depending on Jane's cost, Dick may have to pay Jane to solve the externality problem 
D)  none of the above statements is true 
A)  Jane will have to pay Dick in order to create a private solution 
B)  only if Dick's benefit exceeds Jane's cost will Jane have to pay Dick to solve the problem 
C)  depending on Jane's cost, Dick may have to pay Jane to solve the externality problem 
D)  none of the above statements is true

Question 19

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

Accepted Answer

A)  give sellers the incentive to take account of the external effects of their actions 
B)  have an offsetting effect that reduces the producer's private production costs 
C)  increase the amount of the commodity exchanged in market equilibrium 
D)  restrict the producer's ability to take the costs of the externality into account when deciding how much to supply 
A)  give sellers the incentive to take account of the external effects of their actions 
B)  have an offsetting effect that reduces the producer's private production costs 
C)  increase the amount of the commodity exchanged in market equilibrium 
D)  restrict the producer's ability to take the costs of the externality into account when deciding how much to supply

Question 20

When one firm sells its pollution permit to another firm:

Accepted Answer

A)  both firms benefit 
B)  the total amount of pollution remains the same 
C)  social welfare is enhanced 
D)  all of the above occur 
A)  both firms benefit 
B)  the total amount of pollution remains the same 
C)  social welfare is enhanced 
D)  all of the above occur

Exam 10: Externalities

Which of the following suggests that the private market can be effective in dealing with externalities?

The distribution of rights among parties affected by an externality:

Government can solve externality problems that are too costly for private parties to solve.

Which of the following statements is most correct?

Which of the following are true of tradeable pollution permits? (i) they will be sold by firms that can reduce pollution at low costs (ii) they will be bought by firms that can reduce pollution only at high costs (iii) they are likely to create a higher level of total pollution

Graph 10-3 This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees. -Refer to Graph 10-3. The total surplus derived from the most efficient kiwifruit production levels is represented by the area:

Japanese fishermen use gill nets to catch tuna with great efficiency. Many environmentalists have objected to this practice since many marine animals such as dolphins and sharks are killed by the nets and discarded by the fishermen. Which of the following statements is most correct?

A local cafe that allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards. This decision provides an example of:

In order for regulation to be efficient, it often requires detailed information about the relationship between:

Private markets fail to reach a socially optimal level when positive consumption externalities are present because:

One advantage of allowing a market for pollution permits to control the total amount of pollution released in an area is that:

Internalising externalities is one reason that some firms involve themselves in only one type of business.

Which of the following policies is government most inclined to use when faced with a positive externality?

Contracts cannot solve the inefficiency that arises from externalities.

Graph 10-2 This graph depicts the market for pork. Use this information to answer the following question(s). -In Graph 10-2, producer and consumer surplus at the point of market efficiency is represented by area(s):

Which of the following would be true of an increase in automobile fuel taxes? (i) private incentives are used to reduce automobile pollution (ii) private incentives are used to reduce highway congestion (iii) government directly controls the amount of automobile fuel that is purchased

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Assuming that Dick has the legal right to keep the dog, which of the following statements is true?

When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:

When one firm sells its pollution permit to another firm:

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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