Question 1

If a market solution generates marginal social benefits equal to marginal social costs, then:

Accepted Answer

A)  a positive externality is present. 
B)  a negative externality is present. 
C)  no net externality is present. 
D)  social surplus has been maximized. 
A)  a positive externality is present. 
B)  a negative externality is present. 
C)  no net externality is present. 
D)  social surplus has been maximized.

Question 2

A viable government solution to an external cost is a:

Accepted Answer

A)  tax on the party producing the cost. 
B)  subsidy to the party producing the cost. 
C)  tax on the party incurring the cost. 
D)  subsidy to the party incurring the cost. 
A)  tax on the party producing the cost. 
B)  subsidy to the party producing the cost. 
C)  tax on the party incurring the cost. 
D)  subsidy to the party incurring the cost.

Question 3

Nobel Prize-winning economist James Meade argued that the market for honey was inefficient because pollination is a(n):

Accepted Answer

A)  external benefit of honey production. 
B)  external cost of honey production. 
C)  private benefit of honey production. 
D)  private cost of honey production. 
A)  external benefit of honey production. 
B)  external cost of honey production. 
C)  private benefit of honey production. 
D)  private cost of honey production.

Question 4

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Accepted Answer

A)  a tax of $5 in Market X and a subsidy of $10 in Market Y. 
B)  subsidizing both markets. 
C)  taxing Market Y and subsidizing Market X. 
D)  taxing both markets. 
A)  a tax of $5 in Market X and a subsidy of $10 in Market Y. 
B)  subsidizing both markets. 
C)  taxing Market Y and subsidizing Market X. 
D)  taxing both markets.

Question 5

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity.

Accepted Answer

A) True 
 B)False

Question 6

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 7

If only people who get a flu shot receive all the benefits of the vaccination, then the:

Accepted Answer

A)  demand curve would shift downward. 
B)  supply curve would shift upward. 
C)  market outcome will be efficient. 
D)  deadweight loss will be higher than if the vaccinations benefited others as well. 
A)  demand curve would shift downward. 
B)  supply curve would shift upward. 
C)  market outcome will be efficient. 
D)  deadweight loss will be higher than if the vaccinations benefited others as well.

Question 8

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 market's outcome generates a(n):

Accepted Answer

A)  deadweight loss of approximately $750. 
B)  shortage of 1,800 vaccines. 
C)  equilibrium price of $20. 
D)  All of the answers are correct. 
A)  deadweight loss of approximately $750. 
B)  shortage of 1,800 vaccines. 
C)  equilibrium price of $20. 
D)  All of the answers are correct.

Question 9

Which would be the MOST likely place to find an internalized externality? (Keep transaction costs in mind.)

Accepted Answer

A)  a factory polluting the air surrounding a large suburb 
B)  a wind farm slightly disturbing the mountain view of a nearby city 
C)  a paper mill polluting a stream that only flows into a single farm 
D)  roadwork operating on a major highway, but only operating at night 
A)  a factory polluting the air surrounding a large suburb 
B)  a wind farm slightly disturbing the mountain view of a nearby city 
C)  a paper mill polluting a stream that only flows into a single farm 
D)  roadwork operating on a major highway, but only operating at night

Question 10

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 11

Which is an example of an external cost?

Accepted Answer

A)  secondhand smoke 
B)  increased gas prices for drivers of SUVs 
C)  the cost you pay your plumber to install a new hot water heater 
D)  your high electric bill that results from leaving your lights on all night 
A)  secondhand smoke 
B)  increased gas prices for drivers of SUVs 
C)  the cost you pay your plumber to install a new hot water heater 
D)  your high electric bill that results from leaving your lights on all night

Question 12

Tradable allowances:

Accepted Answer

A)  are typically hard to pass through the Environmental Protection Agency (EP
A)  since they allow firms to legally pollute. 
B)  are an efficient way to reduce pollution at lower costs. 
C)  decrease the profitability of firms since now they have to pay for the rights to pollute. 
D)  are equal to the social surplus in the market. 
A)  are typically hard to pass through the Environmental Protection Agency (EP
A)  since they allow firms to legally pollute. 
B)  are an efficient way to reduce pollution at lower costs. 
C)  decrease the profitability of firms since now they have to pay for the rights to pollute. 
D)  are equal to the social surplus in the market.

Question 13

Which of the following statements is TRUE?
I. If an activity creates an external cost of $15, the government should subsidize the activity by $15.
II. Social surplus is maximized when the private marginal benefit equals the social cost.
III. External costs result in markets producing too much output.
IV. Someone pays external costs other than the producer or consumer.

Accepted Answer

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

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Because there are external benefits from higher education:

Accepted Answer

A)  private markets will oversupply college classes. 
B)  government intervention cannot improve the market for college classes. 
C)  the government should impose a tax on college students. 
D)  private markets will undersupply college classes. 
A)  private markets will oversupply college classes. 
B)  government intervention cannot improve the market for college classes. 
C)  the government should impose a tax on college students. 
D)  private markets will undersupply college classes.

Question 16

Table: Costs of Reducing Sulfur Dioxide
 
Refer to the table. Which statement is FALSE?

Accepted Answer

A)  Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons. 
B)  Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301. 
C)  If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100. 
D)  Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500. 
A)  Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons. 
B)  Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301. 
C)  If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100. 
D)  Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500.

Question 17

Products that create external benefits are:

Accepted Answer

A)  overconsumed because the private benefits exceed the private costs. 
B)  underconsumed because consumers only consider the private benefits of consumption. 
C)  neither overconsumed nor underconsumed because the marginal benefits equal the marginal costs. 
D)  underconsumed because the social costs exceed the social benefits. 
A)  overconsumed because the private benefits exceed the private costs. 
B)  underconsumed because consumers only consider the private benefits of consumption. 
C)  neither overconsumed nor underconsumed because the marginal benefits equal the marginal costs. 
D)  underconsumed because the social costs exceed the social benefits.

Question 18

Deadweight loss results when a good generates external benefits.

Accepted Answer

A) True 
 B)False

Question 19

Figure: External Cost 2   Refer to the figure. What is the deadweight loss in this figure at the market equilibrium?

Accepted Answer

A)  $25.00 
B)  $4.00 
C)  $8.33 
D)  $11.25 
A)  $25.00 
B)  $4.00 
C)  $8.33 
D)  $11.25

Question 20

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.

Exam 10: Externalities- When the Price Is Not Right

If a market solution generates marginal social benefits equal to marginal social costs, then:

A viable government solution to an external cost is a:

Nobel Prize-winning economist James Meade argued that the market for honey was inefficient because pollination is a(n):

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity.

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.

If only people who get a flu shot receive all the benefits of the vaccination, then the:

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 market's outcome generates a(n):

Which would be the MOST likely place to find an internalized externality? (Keep transaction costs in mind.)

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

Which is an example of an external cost?

Tradable allowances:

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

Because there are external benefits from higher education:

Table: Costs of Reducing Sulfur Dioxide Refer to the table. Which statement is FALSE?

Products that create external benefits are:

Deadweight loss results when a good generates external benefits.

Figure: External Cost 2 Refer to the figure. What is the deadweight loss in this figure at the market equilibrium?

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.