Exam 10: Externalities- When the Price Is Not Right

Which of the following statements is TRUE? I. A Pigouvian subsidy reduces the market price to encourage consumption and correct for the underproduction of a good. II. A Pigouvian tax increases the market price to discourage consumption and correct for the overproduction of a good. III. Negative externalities create deadweight losses, but positive externalities do not.

Command and control policies are best suited for:

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?

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

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:

The problem with using command and control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

The price of antibiotics sends the wrong signal because it includes the:

In an effort to save energy, a 1992 federal law requires that new showerheads cannot flow at a rate faster than 2.5 gallons per minute. Which of the following statements is TRUE? I. This law is an example of command and control. II. This policy reduces energy use at a lower cost than a tax on water. III. Economists would prefer to simply tax water consumption because this gives people the flexibility to reduce water consumption in their lowest-valued use.

A private cost is:

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) Suppose the figure displays the demand and supply curves for dry cleaning, a service that creates pollution. The external cost of dry cleaning is:

Your neighbor has a tree that blocks your view of a distant hill. Your neighbor values the tree at $100. You value the tree's removal at $150. Tree removal costs $60. In this case, property rights are clear. Your neighbor owns the airspace extending above his house for some distance. Transaction costs in this case:

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 ________.

Figure: Positive Externality The figure shows the market for a good that when consumed causes an external benefit. Suppose the government decides to begin issuing a subsidy to the consumers of the good. Using the information provided in the figure, answer the following questions. a. What is the initial market quantity in this market? b. What is the social benefit of the product? c. When the consumers of the product are subsidized, what is the dollar amount of deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the subsidy has been allocated?

An externality is either an external cost or external benefit that spills over to bystanders.

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

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?

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

In the presence of external costs, the social cost curve lies ______ the supply curve.

Which best creates incentives to reduce the pollution generated by washing machines?

An external cost: