Question 1

Externalities are:

Accepted Answer

A)  benefits received by people other than the producers and consumers exchanging in the market. 
B)  costs paid by people other than the producers and consumers exchanging in the market. 
C)  found either in the form of external benefits or external costs. 
D)  All of these statements are correct. 
A)  benefits received by people other than the producers and consumers exchanging in the market. 
B)  costs paid by people other than the producers and consumers exchanging in the market. 
C)  found either in the form of external benefits or external costs. 
D)  All of these statements are correct.

Question 2

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Accepted Answer

A)  A railroad train that runs the entire East Coast regularly emits both pollution and loud noises for people living near the tracks. 
B)  People who get flu shots actually end up decreasing the spread of the virus. 
C)  Your neighbor's dog routinely gets out of his yard and does his "business" in your yard. 
D)  A company recently turned an abandoned factory at the end of your street into a paper mill that now stinks up the entire town. 
A)  A railroad train that runs the entire East Coast regularly emits both pollution and loud noises for people living near the tracks. 
B)  People who get flu shots actually end up decreasing the spread of the virus. 
C)  Your neighbor's dog routinely gets out of his yard and does his "business" in your yard. 
D)  A company recently turned an abandoned factory at the end of your street into a paper mill that now stinks up the entire town.

Question 3

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Accepted Answer

A) True 
 B)False

Question 4

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Accepted Answer

A) True 
 B)False

Question 5

A number of cities and states have banned smoking in bars because of secondhand smoke. In cities without the ban, the bar owner decides whether smoking is permitted. If smokers have a greater willingness to pay to smoke than nonsmokers have to avoid smoke, then bar owners will ______ smoking, which is an ______ outcome.

Accepted Answer

A)  ban; efficient 
B)  ban; inefficient 
C)  permit; efficient 
D)  permit; inefficient 
A)  ban; efficient 
B)  ban; inefficient 
C)  permit; efficient 
D)  permit; inefficient

Question 6

The main difference between tradable allowances and taxes is:

Accepted Answer

A)  only large firms may trade pollution allowances. 
B)  tradable allowances result in a more efficient outcome. 
C)  taxes decrease firms' profits. 
D)  purely political. 
A)  only large firms may trade pollution allowances. 
B)  tradable allowances result in a more efficient outcome. 
C)  taxes decrease firms' profits. 
D)  purely political.

Question 7

Use the following to answer questions:
Figure: External Cost 1  
-(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?

Accepted Answer

A)  P = $4; Q = 30 
B)  P = $5; Q = 30 
C)  P = $6; Q = 50 
D)  P = $4; Q = 50 
A)  P = $4; Q = 30 
B)  P = $5; Q = 30 
C)  P = $6; Q = 50 
D)  P = $4; Q = 50

Question 8

A properly-set Pigouvian subsidy ______ the price so that the after-subsidy price sends ______ signal.

Accepted Answer

A)  raises; the correct 
B)  reduces; the correct 
C)  raises; an incorrect 
D)  reduces; an incorrect 
A)  raises; the correct 
B)  reduces; the correct 
C)  raises; an incorrect 
D)  reduces; an incorrect

Question 9

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. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market?

Accepted Answer

A)  $90 
B)  $180 
C)  $45 
D)  $255 
A)  $90 
B)  $180 
C)  $45 
D)  $255

Question 10

A viable government solution to an external benefit 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 11

An efficient equilibrium occurs whenever:

Accepted Answer

A)  social surplus is maximized. 
B)  quantity demanded equals quantity supplied. 
C)  there is a negative externality in the market. 
D)  there is a positive externality in the market. 
A)  social surplus is maximized. 
B)  quantity demanded equals quantity supplied. 
C)  there is a negative externality in the market. 
D)  there is a positive externality in the market.

Question 12

A free market void of externalities ______ social surplus.

Accepted Answer

A)  maximizes 
B)  does not maximize 
C)  sometimes maximizes 
D)  precludes 
A)  maximizes 
B)  does not maximize 
C)  sometimes maximizes 
D)  precludes

Question 13

When external costs are present in a market:

Accepted Answer

A)  market prices are still able to send the correct signals. 
B)  market prices send incorrect signals. 
C)  social surplus is maximized. 
D)  consumer surplus is not maximized. 
A)  market prices are still able to send the correct signals. 
B)  market prices send incorrect signals. 
C)  social surplus is maximized. 
D)  consumer surplus is not maximized.

Externalities are:

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

If the government subsidizes activities with external benefits, the market price falls and people consume more.

The main difference between tradable allowances and taxes is:

Use the following to answer questions: Figure: External Cost 1 -(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?

A properly-set Pigouvian subsidy the price so that the after-subsidy price sends signal.

A viable government solution to an external benefit is a:

An efficient equilibrium occurs whenever:

A free market void of externalities ______ social surplus.

When external costs are present in a market:

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

Exam 10: Externalities- When the Price Is Not Right

Externalities are:

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market?

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

If the government subsidizes activities with external benefits, the market price falls and people consume more.

The main difference between tradable allowances and taxes is:

Use the following to answer questions: Figure: External Cost 1 -(Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting horrible smells that impose external costs on those living around the mills. According to the figure, what is the market price and quantity of paper?

A properly-set Pigouvian subsidy ______ the price so that the after-subsidy price sends ______ signal.

A viable government solution to an external benefit is a:

An efficient equilibrium occurs whenever:

A free market void of externalities ______ social surplus.

When external costs are present in a market:

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

A properly-set Pigouvian subsidy the price so that the after-subsidy price sends signal.