Question 1

For an efficient equilibrium, the Coase theorem does NOT require that:

Accepted Answer

A)  transaction costs are low. 
B)  the government sets a Pigouvian tax equal to the external cost. 
C)  property rights are clearly defined. 
D)  private bargains are possible. 
A)  transaction costs are low. 
B)  the government sets a Pigouvian tax equal to the external cost. 
C)  property rights are clearly defined. 
D)  private bargains are possible.

Question 2

An external benefit is a benefit received by:

Accepted Answer

A)  the consumers trading in the market. 
B)  the producers trading in the market. 
C)  both the consumers and producers trading in the market. 
D)  people other than the consumers or producers trading in the market. 
A)  the consumers trading in the market. 
B)  the producers trading in the market. 
C)  both the consumers and producers trading in the market. 
D)  people other than the consumers or producers trading in the market.

Question 3

A transaction cost is:

Accepted Answer

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

Question 4

If a market solution provides greater marginal social benefits than 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)  any externality has already been internalized. 
A)  a positive externality is present. 
B)  a negative externality is present. 
C)  no net externality is present. 
D)  any externality has already been internalized.

Question 5

Private solutions to externalities are MOST likely to occur when there are:

Accepted Answer

A)  well-defined property rights and low transaction costs. 
B)  communal property rights and large numbers of sellers. 
C)  private property rights and high transaction costs. 
D)  communal property rights and large numbers of buyers and sellers with equal bargaining power. 
A)  well-defined property rights and low transaction costs. 
B)  communal property rights and large numbers of sellers. 
C)  private property rights and high transaction costs. 
D)  communal property rights and large numbers of buyers and sellers with equal bargaining power.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The social cost is:

Accepted Answer

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

Question 8

An efficient equilibrium occurs when:

Accepted Answer

A)  private costs equals private benefits. 
B)  social costs equals private benefits. 
C)  private costs equals social benefits. 
D)  social costs equals social benefits. 
A)  private costs equals private benefits. 
B)  social costs equals private benefits. 
C)  private costs equals social benefits. 
D)  social costs equals social benefits.

Question 9

Markets in which externalities are present are economically inefficient.

Accepted Answer

A) True 
 B)False

Question 10

Command and control methods do not always produce the most efficient outcomes because:

Accepted Answer

A)  consumers sometimes are mislead regarding their own preferences. 
B)  they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior. 
C)  it does not always allow suppliers to produce the efficient market quantity. 
D)  it reduces consumption in all cases. 
A)  consumers sometimes are mislead regarding their own preferences. 
B)  they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior. 
C)  it does not always allow suppliers to produce the efficient market quantity. 
D)  it reduces consumption in all cases.

Question 11

Use the following to answer questions:
Figure: Softella  
-(Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what is the dollar amount of deadweight loss that would be removed from this market?

Accepted Answer

A)  $1,600 
B)  $2,800 
C)  $5,600 
D)  $800 
A)  $1,600 
B)  $2,800 
C)  $5,600 
D)  $800

Question 12

Which is an example of an external benefit?

Accepted Answer

A)  You get a raise that increases your pay 20%. 
B)  Your neighbor's rooster wakes you up every morning before your alarm clock goes off, reducing the amount of sleep you get at night. 
C)  Researchers at Johnson & Johnson are working on a cure for cancer. 
D)  Your neighbors fix up their homes, which raises property values on the entire street. 
A)  You get a raise that increases your pay 20%. 
B)  Your neighbor's rooster wakes you up every morning before your alarm clock goes off, reducing the amount of sleep you get at night. 
C)  Researchers at Johnson & Johnson are working on a cure for cancer. 
D)  Your neighbors fix up their homes, which raises property values on the entire street.

Question 13

If a market solution provides greater marginal social costs than marginal social benefits, then:

Accepted Answer

A)  a positive externality is present. 
B)  a negative externality is present. 
C)  no net externality is present. 
D)  any externality has already been internalized. 
A)  a positive externality is present. 
B)  a negative externality is present. 
C)  no net externality is present. 
D)  any externality has already been internalized.

Question 14

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

Question 15

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 16

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

Accepted Answer

A)  social value exceeds the private value at the private market solution. 
B)  private cost exceeds the social benefit at the private market solution. 
C)  private benefit equals the social benefit at the private market solution. 
D)  None of the answers is correct. Private markets DO achieve a socially optimal equilibrium when external benefits are present. 
A)  social value exceeds the private value at the private market solution. 
B)  private cost exceeds the social benefit at the private market solution. 
C)  private benefit equals the social benefit at the private market solution. 
D)  None of the answers is correct. Private markets DO achieve a socially optimal equilibrium when external benefits are present.

Question 17

Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)?
I. levy taxes on the coal factory's production of pollutants
II. levy taxes on the consumers' consumption of fish
III. create a market for tradable allowances
IV. subsidize firms that produce clean fish

Accepted Answer

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

Question 18

The Coase theorem posits that externality problems can be solved without government intervention:

Accepted Answer

A)  when transaction costs are low and property rights are clearly defined. 
B)  when trading in tradable allowances occurs. 
C)  if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market. 
D)  only rarely, that in general, markets cannot maximize social surplus. 
A)  when transaction costs are low and property rights are clearly defined. 
B)  when trading in tradable allowances occurs. 
C)  if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market. 
D)  only rarely, that in general, markets cannot maximize social surplus.

Question 19

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

Accepted Answer

A)  higher than the marginal cost to antibiotic sellers. 
B)  less than the marginal cost to antibiotic sellers. 
C)  higher than the marginal benefit to the antibiotic buyers. 
D)  less than the marginal benefit to the antibiotic buyers. 
A)  higher than the marginal cost to antibiotic sellers. 
B)  less than the marginal cost to antibiotic sellers. 
C)  higher than the marginal benefit to the antibiotic buyers. 
D)  less than the marginal benefit to the antibiotic buyers.

Question 20

In an efficient market, the supply curve will decrease by the amount of the external cost.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities- When the Price Is Not Right

For an efficient equilibrium, the Coase theorem does NOT require that:

An external benefit is a benefit received by:

A transaction cost is:

If a market solution provides greater marginal social benefits than marginal social costs, then:

Private solutions to externalities are MOST likely to occur when there are:

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

The social cost is:

An efficient equilibrium occurs when:

Markets in which externalities are present are economically inefficient.

Command and control methods do not always produce the most efficient outcomes because:

Which is an example of an external benefit?

If a market solution provides greater marginal social costs than marginal social benefits, then:

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

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

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

The Coase theorem posits that externality problems can be solved without government intervention:

If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be:

In an efficient market, the supply curve will decrease by the amount of the external cost.

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