Question 1

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Accepted Answer

A)  the government does not involve itself in the process. 
B)  the market is sufficiently competitive. 
C)  the number of market participants is large. 
D)  transaction costs are low and property rights are clearly defined. 
A)  the government does not involve itself in the process. 
B)  the market is sufficiently competitive. 
C)  the number of market participants is large. 
D)  transaction costs are low and property rights are clearly defined.

Question 2

Explain in your own words: 1) What is an externality? and 2) What is the difference between a positive and negative externality. Provide examples.

Accepted Answer

Externalities are side effects of a prod

Question 3

If you are a government official, under which of the following situations would you opt for a command and control solution to an externality problem?
I. Lack of running water in part of the country is exacerbating the spread of cholera in the population.
II. Foreign ships are dumping toxic wastes in the waters off your country's shores.
III. A large number of banks fail due to excessive risk taking.

Accepted Answer

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

Question 4

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

Accepted Answer

A)  taxing sardine tins at a rate of $1 per tin. 
B)  subsidizing sardine tins at a rate of $1 per tin. 
C)  capping total sardine consumption at 1000 tins per day. 
D)  banning sardines. 
A)  taxing sardine tins at a rate of $1 per tin. 
B)  subsidizing sardine tins at a rate of $1 per tin. 
C)  capping total sardine consumption at 1000 tins per day. 
D)  banning sardines.

Question 5

Government subsidies for goods that generate external benefits may increase economic efficiency.

Accepted Answer

A) True 
 B)False

Question 6

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 would be the efficient quantity in this market?

Accepted Answer

A)  700 
B)  500 
C)  1,200 
D)  200 
A)  700 
B)  500 
C)  1,200 
D)  200

Question 7

Markets are often inefficient when external costs are present because:

Accepted Answer

A)  externalities cannot be corrected without government regulation. 
B)  social costs exceed private costs at the private market solution. 
C)  private costs exceed social costs at the private market solution. 
D)  production externalities lead to consumption externalities. 
A)  externalities cannot be corrected without government regulation. 
B)  social costs exceed private costs at the private market solution. 
C)  private costs exceed social costs at the private market solution. 
D)  production externalities lead to consumption externalities.

Question 8

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 efficient quantity in this market?

Accepted Answer

A)  100 
B)  85 
C)  15 
D)  9 
A)  100 
B)  85 
C)  15 
D)  9

Question 9

An external benefit in a market will cause the market to produce:

Accepted Answer

A)  more than the same market would produce in the presence of a negative externality. 
B)  more than is socially desirable. 
C)  less than is socially desirable. 
D)  the socially optimal equilibrium amount. 
A)  more than the same market would produce in the presence of a negative externality. 
B)  more than is socially desirable. 
C)  less than is socially desirable. 
D)  the socially optimal equilibrium amount.

Question 10

Use the following to answer questions:
Figure: External Benefit  
-(Figure: External Benefit) Refer to the figure. Shingles is a painful and blistering skin rash that generally affects older adults. The shingles virus is transmitted by those with an active outbreak, and it can cause chicken pox in people who never had it. In this figure depicting the market for shingles vaccinations, what is the external benefit of a shingles vaccine?

Accepted Answer

A)  $4 
B)  $10 
C)  $5 
D)  $7 
A)  $4 
B)  $10 
C)  $5 
D)  $7

Question 11

In the case of an external benefit, the social value curve lies ______ the demand 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

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 13

Command and control may be the best approach to handling externalities if:

Accepted Answer

A)  flexibility is desired. 
B)  the marginal social cost of the externality is greater than the social benefit. 
C)  taxes and/or subsidies fail to reach the efficient outcome. 
D)  success requires strong compliance. 
A)  flexibility is desired. 
B)  the marginal social cost of the externality is greater than the social benefit. 
C)  taxes and/or subsidies fail to reach the efficient outcome. 
D)  success requires strong compliance.

Question 14

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

Accepted Answer

A)  corrective tax. 
B)  subsidy. 
C)  regulation. 
D)  market-based policy. 
A)  corrective tax. 
B)  subsidy. 
C)  regulation. 
D)  market-based policy.

Question 15

All of the following would be government solutions to externality problems EXCEPT:

Accepted Answer

A)  public sector charities. 
B)  taxes and subsidies. 
C)  command and control. 
D)  tradable allowances. 
A)  public sector charities. 
B)  taxes and subsidies. 
C)  command and control. 
D)  tradable allowances.

Question 16

The EPA's system of tradable allowances:

Accepted Answer

A)  was unable to internalize the external costs of pollution. 
B)  actually lead to increased levels of pollution. 
C)  was moderately successful in helping to decrease pollution levels. 
D)  is a successful application of the Coase theorem. 
A)  was unable to internalize the external costs of pollution. 
B)  actually lead to increased levels of pollution. 
C)  was moderately successful in helping to decrease pollution levels. 
D)  is a successful application of the Coase theorem.

Question 17

In a competitive market, a free market approach is always best when no externalities are present.

Accepted Answer

A) True 
 B)False

Question 18

Which statement correctly describes what a Pigouvian subsidy is?

Accepted Answer

A)  Subsidies received by the producers are called Pigouvian subsidies. 
B)  Pigouvian subsidies are awarded to producers whose goods have external benefits. 
C)  Taxes on producers creating negative externalities are called Pigouvian subsidies. 
D)  Lower corporate tax rates are also known as Pigouvian subsidies. 
A)  Subsidies received by the producers are called Pigouvian subsidies. 
B)  Pigouvian subsidies are awarded to producers whose goods have external benefits. 
C)  Taxes on producers creating negative externalities are called Pigouvian subsidies. 
D)  Lower corporate tax rates are also known as Pigouvian subsidies.

Question 19

If there were no transaction costs and property rights were always well-defined, there would be no external costs after trade.

Accepted Answer

A) True 
 B)False

Question 20

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities- When the Price Is Not Right

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Explain in your own words: 1) What is an externality? and 2) What is the difference between a positive and negative externality. Provide examples.

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by:

Government subsidies for goods that generate external benefits may increase economic efficiency.

Markets are often inefficient when external costs are present because:

An external benefit in a market will cause the market to produce:

In the case of an external benefit, the social value curve lies ______ the demand curve.

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

Command and control may be the best approach to handling externalities if:

If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a:

All of the following would be government solutions to externality problems EXCEPT:

The EPA's system of tradable allowances:

In a competitive market, a free market approach is always best when no externalities are present.

Which statement correctly describes what a Pigouvian subsidy is?

If there were no transaction costs and property rights were always well-defined, there would be no external costs after trade.

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

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