Question 1

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

Accepted Answer

A)  low, and the product will be overproduced. 
B)  high, and the product will be underproduced. 
C)  high, and the product will be overproduced. 
D)  low, and the product will be underproduced. 
A)  low, and the product will be overproduced. 
B)  high, and the product will be underproduced. 
C)  high, and the product will be overproduced. 
D)  low, and the product will be underproduced.

Question 2

Use the following to answer questions:
Figure: Dishwashing Detergent  
-(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, what is the external cost of using dishwashing detergent?

Accepted Answer

A)  $6 
B)  $9 
C)  $12 
D)  $18 
A)  $6 
B)  $9 
C)  $12 
D)  $18

Question 3

Transaction costs:

Accepted Answer

A)  are incurred in the production process due to externalities. 
B)  are eliminated when the government intervenes in a market with externalities. 
C)  can keep private parties from solving externality problems. 
D)  increase when taxes are imposed to correct negative externalities. 
A)  are incurred in the production process due to externalities. 
B)  are eliminated when the government intervenes in a market with externalities. 
C)  can keep private parties from solving externality problems. 
D)  increase when taxes are imposed to correct negative externalities.

Question 4

When law-abiding citizens carry concealed weapons, they are better able to defend themselves against criminal attack. This is the ______ of concealed carry. When law-abiding citizens carry concealed weapons, criminals are also less likely to attack all citizens because they cannot tell who is carrying a gun. This is the ______ of concealed carry.

Accepted Answer

A)  private cost; external cost 
B)  private benefit; external benefit 
C)  external benefit; private benefit 
D)  external cost; external benefit 
A)  private cost; external cost 
B)  private benefit; external benefit 
C)  external benefit; private benefit 
D)  external cost; external benefit

Question 5

Markets are always able to find solutions to externality problems and thus maximize social surplus.

Accepted Answer

A) True 
 B)False

Question 6

The Clean Air Act:

Accepted Answer

A)  banned the emission of sulfur dioxide. 
B)  created markets in sulfur dioxide emissions. 
C)  reduced social surplus. 
D)  increased sulfur dioxide emissions. 
A)  banned the emission of sulfur dioxide. 
B)  created markets in sulfur dioxide emissions. 
C)  reduced social surplus. 
D)  increased sulfur dioxide emissions.

Question 7

Conditions for the Coase theorem are typically met, and thus markets alone can solve most externality problems.

Accepted Answer

A) True 
 B)False

Question 8

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

Accepted Answer

A)  less than the private cost. 
B)  greater than the private cost. 
C)  less than the total cost. 
D)  greater than the total cost. 
A)  less than the private cost. 
B)  greater than the private cost. 
C)  less than the total cost. 
D)  greater than the total cost.

Question 9

Which equation is TRUE?

Accepted Answer

A)  private cost + average cost = social cost 
B)  social cost = private cost + external cost 
C)  external cost = private cost 
D)  private cost + social cost = external cost 
A)  private cost + average cost = social cost 
B)  social cost = private cost + external cost 
C)  external cost = private cost 
D)  private cost + social cost = external cost

Question 10

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?

Accepted Answer

A)  No, it would raise the cost of pollution abatement. 
B)  Yes, it would lower the cost of pollution abatement. 
C)  It is impossible to say whether this would or would not be an efficient trade. 
D)  There is no incentive for Alex and Tyler to trade. 
A)  No, it would raise the cost of pollution abatement. 
B)  Yes, it would lower the cost of pollution abatement. 
C)  It is impossible to say whether this would or would not be an efficient trade. 
D)  There is no incentive for Alex and Tyler to trade.

Question 11

If the government forced external cost internalization with a tax on all firms that emit pollution, then:

Accepted Answer

A)  the market would be socially inefficient because taxes create deadweight losses. 
B)  the market price of these goods would fall. 
C)  production would actually increase. 
D)  deadweight loss to society would decrease. 
A)  the market would be socially inefficient because taxes create deadweight losses. 
B)  the market price of these goods would fall. 
C)  production would actually increase. 
D)  deadweight loss to society would decrease.

Question 12

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 13

What negative externality does antibiotic use create?

Accepted Answer

A)  With greater use of antibiotics, bacteria become increasingly resistant to them, thus increasing the likelihood of people dying from drug-resistant bacteria. 
B)  When drug companies increase the price of antibiotics, some people can no longer afford to buy antibiotics, putting them at increased risk of death. 
C)  The taxes on companies that produce antibiotics are passed on to consumers in the form of higher prices. 
D)  Because drug companies use very few workers in their production process, there is a larger than necessary demand for unemployment insurance and other social programs. 
A)  With greater use of antibiotics, bacteria become increasingly resistant to them, thus increasing the likelihood of people dying from drug-resistant bacteria. 
B)  When drug companies increase the price of antibiotics, some people can no longer afford to buy antibiotics, putting them at increased risk of death. 
C)  The taxes on companies that produce antibiotics are passed on to consumers in the form of higher prices. 
D)  Because drug companies use very few workers in their production process, there is a larger than necessary demand for unemployment insurance and other social programs.

Question 14

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

Accepted Answer

A)  bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities. 
B)  the owners of the beehives can clearly be identified. 
C)  the market limits the beneficial activities of the bees to those farmers who have very small farms. 
D)  All of the answers are correct. 
A)  bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities. 
B)  the owners of the beehives can clearly be identified. 
C)  the market limits the beneficial activities of the bees to those farmers who have very small farms. 
D)  All of the answers are correct.

Question 15

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, it follows that the market produces:

Accepted Answer

A)  too few tins of sardines relative to the social optimum. 
B)  too many tins of sardines relative to the social optimum. 
C)  the socially optimal level of sardines. 
D)  too many or too few tins of sardines, but it is impossible to say which. 
A)  too few tins of sardines relative to the social optimum. 
B)  too many tins of sardines relative to the social optimum. 
C)  the socially optimal level of sardines. 
D)  too many or too few tins of sardines, but it is impossible to say which.

Question 16

The EPA's system of tradable allowances is a successful application of the Coase theorem.

Accepted Answer

A) True 
 B)False

Question 17

The command and control method is a ______ solution to the externality problem.

Accepted Answer

A)  democratic 
B)  private 
C)  regulatory 
D)  lottery-based 
A)  democratic 
B)  private 
C)  regulatory 
D)  lottery-based

Question 18

When the government uses a command-and-control policy to solve an externality, it:

Accepted Answer

A)  usually involves taxing the consumption of a commodity. 
B)  relies on the Coase theorem to structure the policy. 
C)  creates policies that directly regulate behavior. 
D)  is usually the most effective policy option available. 
A)  usually involves taxing the consumption of a commodity. 
B)  relies on the Coase theorem to structure the policy. 
C)  creates policies that directly regulate behavior. 
D)  is usually the most effective policy option available.

Question 19

The prime motivation for low-pollutant firms to enter into the market for tradable allowances is profit.

Accepted Answer

A) True 
 B)False

Question 20

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

Accepted Answer

A)  only the owner of the orchard. 
B)  only the beekeeper. 
C)  the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner. 
D)  both the beekeeper and the orchard owner. 
A)  only the owner of the orchard. 
B)  only the beekeeper. 
C)  the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner. 
D)  both the beekeeper and the orchard owner.

Exam 10: Externalities- When the Price Is Not Right

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too:

Use the following to answer questions: Figure: Dishwashing Detergent -(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, what is the external cost of using dishwashing detergent?

Transaction costs:

Markets are always able to find solutions to externality problems and thus maximize social surplus.

The Clean Air Act:

Conditions for the Coase theorem are typically met, and thus markets alone can solve most externality problems.

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

Which equation is TRUE?

If the government forced external cost internalization with a tax on all firms that emit pollution, then:

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

What negative externality does antibiotic use create?

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, it follows that the market produces:

The EPA's system of tradable allowances is a successful application of the Coase theorem.

The command and control method is a ______ solution to the externality problem.

When the government uses a command-and-control policy to solve an externality, it:

The prime motivation for low-pollutant firms to enter into the market for tradable allowances is profit.

A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:

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

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