Question 1

Which answer suggests that private markets can be effective in dealing with external costs and benefits?

Accepted Answer

A)  external technology policy 
B)  the Coase theorem 
C)  the law of diminishing returns 
D)  the "invisible hand" 
A)  external technology policy 
B)  the Coase theorem 
C)  the law of diminishing returns 
D)  the "invisible hand"

Question 2

Tradable pollution permits:

Accepted Answer

A)  have helped reduce sulfur dioxide emissions but not carbon emissions. 
B)  have helped reduce sulfur dioxide and carbon emissions. 
C)  have not helped reduce any pollution emissions. 
D)  are widely viewed as an ineffective way to reduce pollution. 
A)  have helped reduce sulfur dioxide emissions but not carbon emissions. 
B)  have helped reduce sulfur dioxide and carbon emissions. 
C)  have not helped reduce any pollution emissions. 
D)  are widely viewed as an ineffective way to reduce pollution.

Question 3

External benefits lead to inefficient market outcomes.

Accepted Answer

A) True 
 B)False

Question 4

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 efficient 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 5

The market for bathroom cleaners can be defined by this set of equations:
Qd = 24 - 2P
Qs = -4 + 2P
where P is the price of bathroom cleaners in dollars, and Q is quantity in thousands. When bathroom cleaners are washed down the drain, they cause environmental poisoning. The government estimates that the external cost related to the use of each container of bathroom cleaner is $3 and is considering imposing a tax of $3 on the producers of the bathroom cleaner. Using this information, answer the following questions.
a. What are the market price and market quantity in the bathroom cleaner market?
b. What is the social cost of this quantity of bathroom cleaner?
c. If producers are charged a tax of $3, this would cause the supply curve to the shift to the left, and the new equation for the supply curve would be Qs = -4 + 2(P - 3). What is the efficient quantity traded in this market as a result of the tax?
d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the tax).
e. What is the dollar amount of the deadweight loss that would be removed from this market as a result of the tax?

Accepted Answer

a. 24 – 2P = –4 + 2P
28 = 4P
P = 7 or th

Question 6

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

Accepted Answer

A)  air quality that is neither improved nor worsened. 
B)  an improved air quality. 
C)  a worsening in air quality. 
D)  a less efficient market outcome. 
A)  air quality that is neither improved nor worsened. 
B)  an improved air quality. 
C)  a worsening in air quality. 
D)  a less efficient market outcome.

Question 7

President Barack Obama proposed using a system of:

Accepted Answer

A)  Pigouvian taxes to reduce carbon dioxide emissions. 
B)  tradable allowances to reduce carbon dioxide emissions. 
C)  depreciation permits to reduce carbon emissions. 
D)  fines and levies to address greenhouse gas emissions. 
A)  Pigouvian taxes to reduce carbon dioxide emissions. 
B)  tradable allowances to reduce carbon dioxide emissions. 
C)  depreciation permits to reduce carbon emissions. 
D)  fines and levies to address greenhouse gas emissions.

Question 8

Use the following to answer questions:
Figure: ABC Company  
-(Figure: ABC Company) Refer to the figure. The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the dollar amount of the external benefit created per can of the cleaner?

Accepted Answer

A)  $12 
B)  $6 
C)  $3 
D)  $15 
A)  $12 
B)  $6 
C)  $3 
D)  $15

Question 9

Use the following to answer questions:
Figure: Efficient Market Outcome  
-(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

Accepted Answer

A)  P1 and Q1. 
B)  P1 and Q2. 
C)  P2 and Q1. 
D)  P3 and Q2. 
A)  P1 and Q1. 
B)  P1 and Q2. 
C)  P2 and Q1. 
D)  P3 and Q2.

Question 10

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?

Accepted Answer

A)  the government fining the firm which owns the power plants 
B)  the injured demanding compensation through a class-action law suit 
C)  a ban on all future Japanese nuclear power plants and the shutdown of existing ones in Japan 
D)  None of these would be a Coasian solution. 
A)  the government fining the firm which owns the power plants 
B)  the injured demanding compensation through a class-action law suit 
C)  a ban on all future Japanese nuclear power plants and the shutdown of existing ones in Japan 
D)  None of these would be a Coasian solution.

Question 11

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to ________ antibiotics, leading to an ________ market outcome.

Accepted Answer

A)  overuse; inefficient 
B)  underuse; inefficient 
C)  overuse; efficient 
D)  make efficient use of; equilibrium 
A)  overuse; inefficient 
B)  underuse; inefficient 
C)  overuse; efficient 
D)  make efficient use of; equilibrium

Question 12

Use the following to answer questions:
Figure: Market with External Cost  
-(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

Accepted Answer

A)  Q1; ce 
B)  Q0; ce 
C)  Q0; gh 
D)  Q1; de 
A)  Q1; ce 
B)  Q0; ce 
C)  Q0; gh 
D)  Q1; de

Question 13

On the Price Is Right, Bob Barker (and now Drew Carey) encourages people to "Help control the pet population. Have your pets spayed or neutered." An overly large pet population leads to many stray animals that are not only depressing but are also prone to spread disease. Concerning pet ownership, Barker and Carey are attempting to do what?

Accepted Answer

A)  internalize some of its costs 
B)  internalize some of its benefits 
C)  employ Pigouvian taxes 
D)  use the Coase theorem 
A)  internalize some of its costs 
B)  internalize some of its benefits 
C)  employ Pigouvian taxes 
D)  use the Coase theorem

Question 14

Which of the following statements is TRUE?
I. The EPA's tradable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradable allowances is that they prohibit nonbusinesses and environmental groups from purchasing the allowances.
III. The tradable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

Accepted Answer

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

Question 15

Why is the market for honey efficient despite the potential problem of pollination externalities?

Accepted Answer

A)  The government offers a Pigouvian subsidy for the production of honey. 
B)  The government imposes a Pigouvian tax on the production of honey. 
C)  The quantity of honey that can be produced each year is capped. 
D)  Beekeepers are paid for the pollination services their bees provide, thus internalizing the externality. 
A)  The government offers a Pigouvian subsidy for the production of honey. 
B)  The government imposes a Pigouvian tax on the production of honey. 
C)  The quantity of honey that can be produced each year is capped. 
D)  Beekeepers are paid for the pollination services their bees provide, thus internalizing the externality.

Question 16

The social cost of driving an SUV is equal to:

Accepted Answer

A)  only the cost of the pollution emitted by the vehicle. 
B)  both the cost of the vehicle's pollution and its operation (gas, etc.). 
C)  the cost of producing the vehicle. 
D)  both the cost of producing and driving the vehicle. 
A)  only the cost of the pollution emitted by the vehicle. 
B)  both the cost of the vehicle's pollution and its operation (gas, etc.). 
C)  the cost of producing the vehicle. 
D)  both the cost of producing and driving the vehicle.

Question 17

If in an attempt to correct an externality the government sets a Pigouvian subsidy too high the equilibrium quantity will be:

Accepted Answer

A)  higher than the efficient quantity. 
B)  lower than the efficient quantity. 
C)  equal to the efficient quantity. 
D)  zero. 
A)  higher than the efficient quantity. 
B)  lower than the efficient quantity. 
C)  equal to the efficient quantity. 
D)  zero.

Question 18

Command and control refers to:

Accepted Answer

A)  military maneuvers that actually increase economic efficiency. 
B)  government regulations that directly limit the production or use of a good. 
C)  a market-based solution to the externality problem. 
D)  government taxes and/or subsidies in markets that generate externalities. 
A)  military maneuvers that actually increase economic efficiency. 
B)  government regulations that directly limit the production or use of a good. 
C)  a market-based solution to the externality problem. 
D)  government taxes and/or subsidies in markets that generate externalities.

Question 19

The text identifies one major disadvantage to command and control methods of resolving externalities that can, however, sometimes be an advantage. What is it?

Accepted Answer

A)  high transaction costs 
B)  inflexibility 
C)  inefficiency 
D)  priority over social surplus 
A)  high transaction costs 
B)  inflexibility 
C)  inefficiency 
D)  priority over social surplus

Question 20

Tradable allowances for pollution:

Accepted Answer

A)  allow firms to reduce pollution levels at lower costs. 
B)  decrease the availability of resources able to be utilized in other areas of production. 
C)  typically decrease firms' profits. 
D)  seem good in theory but have never been successfully enacted in market economies. 
A)  allow firms to reduce pollution levels at lower costs. 
B)  decrease the availability of resources able to be utilized in other areas of production. 
C)  typically decrease firms' profits. 
D)  seem good in theory but have never been successfully enacted in market economies.

Which answer suggests that private markets can be effective in dealing with external costs and benefits?

Tradable pollution permits:

External benefits lead to inefficient market outcomes.

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

President Barack Obama proposed using a system of:

Use the following to answer questions: Figure: Efficient Market Outcome -(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to antibiotics, leading to an market outcome.

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of units would eliminate the deadweight loss area of .

Why is the market for honey efficient despite the potential problem of pollination externalities?

The social cost of driving an SUV is equal to:

If in an attempt to correct an externality the government sets a Pigouvian subsidy too high the equilibrium quantity will be:

Command and control refers to:

The text identifies one major disadvantage to command and control methods of resolving externalities that can, however, sometimes be an advantage. What is it?

Tradable allowances for pollution:

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

Which answer suggests that private markets can be effective in dealing with external costs and benefits?

Tradable pollution permits:

External benefits lead to inefficient market outcomes.

Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances program has resulted in:

President Barack Obama proposed using a system of:

Use the following to answer questions: Figure: Efficient Market Outcome -(Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively:

In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked dangerous radiation into the surrounding population. If this leakage could have been prevented, given a disaster of this level, which answer would be a Coasian solution to this externality?

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to ________ antibiotics, leading to an ________ market outcome.

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________.

Why is the market for honey efficient despite the potential problem of pollination externalities?

The social cost of driving an SUV is equal to:

If in an attempt to correct an externality the government sets a Pigouvian subsidy too high the equilibrium quantity will be:

Command and control refers to:

The text identifies one major disadvantage to command and control methods of resolving externalities that can, however, sometimes be an advantage. What is it?

Tradable allowances for pollution:

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

Suppose that the private cost of using antibiotics is less than its social cost-we would then expect people to antibiotics, leading to an market outcome.

Use the following to answer questions: Figure: Market with External Cost -(Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of units would eliminate the deadweight loss area of .