Question 1

An external cost is built into the market price of a good and thus paid by the consumers.

Accepted Answer

A) True 
 B)False

Question 2

Tradable allowances are ______ to Pigouvian taxes when the position of the supply curve is ______, making it difficult to know the exact size of the tax.

Accepted Answer

A)  superior; unknown 
B)  superior; known 
C)  inferior; unknown 
D)  inferior; known 
A)  superior; unknown 
B)  superior; known 
C)  inferior; unknown 
D)  inferior; known

Question 3

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

Accepted Answer

A)  Legislative transaction costs 
B)  Tradable pollution permits 
C)  A command-and-control policy 
D)  A market-based policy 
A)  Legislative transaction costs 
B)  Tradable pollution permits 
C)  A command-and-control policy 
D)  A market-based policy

Question 4

The Coase theorem uses a ______ solution for a class of externality problems.

Accepted Answer

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

Question 5

If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would:

Accepted Answer

A)  shift left and would be above the social cost curve. 
B)  shift left and would be the same as the social cost curve. 
C)  shift left but would still be under the social cost curve. 
D)  remain unchanged. 
A)  shift left and would be above the social cost curve. 
B)  shift left and would be the same as the social cost curve. 
C)  shift left but would still be under the social cost curve. 
D)  remain unchanged.

Question 6

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

Accepted Answer

A)  high, and so antibiotics are overused. 
B)  high, and so antibiotics are underused. 
C)  low, and so antibiotics are overused. 
D)  low, and so antibiotics are underused. 
A)  high, and so antibiotics are overused. 
B)  high, and so antibiotics are underused. 
C)  low, and so antibiotics are overused. 
D)  low, and so antibiotics are underused.

Question 7

A free market with 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 8

A plague called The Black Death swept Medieval Europe. At the time, people believed cats spread the plague (cats were associated with the Devil) and started killing them to prevent the spread of disease. In reality, rats spread the plague and the slaughter of their natural predators only hastened the disease's proliferation. With this in mind, a market for cats would have had a ______ externality because the cats ______.

Accepted Answer

A)  positive; prevented rats from eating their owners' grain 
B)  positive; killed rats regardless of who those rats would infect 
C)  negative; spread disease to everyone regardless of who owned them 
D)  negative; made everyone sicker through their association with the Devil 
A)  positive; prevented rats from eating their owners' grain 
B)  positive; killed rats regardless of who those rats would infect 
C)  negative; spread disease to everyone regardless of who owned them 
D)  negative; made everyone sicker through their association with the Devil

Question 9

Why are taxes on pollutants and tradable allowances considered to have similar effects in solving externality problems?

Accepted Answer

A)  The companies who are taxed are also simultaneously subject to the allowances of pollutants. 
B)  They both reduce pollution of exactly the same types of pollutants. 
C)  They both bring markets closer to the efficient quantity. 
D)  Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts. 
A)  The companies who are taxed are also simultaneously subject to the allowances of pollutants. 
B)  They both reduce pollution of exactly the same types of pollutants. 
C)  They both bring markets closer to the efficient quantity. 
D)  Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts.

Question 10

As bees make honey, they pollinate fruits and vegetables, which is an important benefit to farmers. Since pollination is an external benefit of honey production, what are the incentives for beekeepers to maintain efficient production of honey?

Accepted Answer

As farmers pay beekeepers to pollinate t

Question 11

The efficient equilibrium maximizes private surplus.

Accepted Answer

A) True 
 B)False

Question 12

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 efficient quantity in this market?

Accepted Answer

A)  1,600 
B)  400 
C)  2,000 
D)  3,600 
A)  1,600 
B)  400 
C)  2,000 
D)  3,600

Question 13

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. The efficient number of vaccinations is ______, and the market quantity of vaccinations is ______.

Accepted Answer

A)  14; 10 
B)  8; 4 
C)  7; 5 
D)  10; 5 
A)  14; 10 
B)  8; 4 
C)  7; 5 
D)  10; 5

Question 14

Which policy does the economics of externalities suggest would encourage an efficient quantity in the corresponding market?

Accepted Answer

A)  subsidizing polluting factories 
B)  subsidizing beautiful flower beds in public spaces 
C)  taxing convenient benches set up in public spaces 
D)  taxing healthy food 
A)  subsidizing polluting factories 
B)  subsidizing beautiful flower beds in public spaces 
C)  taxing convenient benches set up in public spaces 
D)  taxing healthy food

Question 15

Which statement is TRUE?

Accepted Answer

A)  The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus. 
B)  It is easy to internalize the benefits of getting a flu shot because only two companies produce flu vaccines. 
C)  The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot. 
D)  To internalize the costs of getting a flu shot, people who receive the vaccine should pay other people to be vaccinated. 
A)  The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus. 
B)  It is easy to internalize the benefits of getting a flu shot because only two companies produce flu vaccines. 
C)  The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot. 
D)  To internalize the costs of getting a flu shot, people who receive the vaccine should pay other people to be vaccinated.

Question 16

Which statement is INCORRECT?

Accepted Answer

A)  When external benefits exist in a market, Qmarket efficient. 
B)  When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of production. 
C)  When external costs exist in a market, Qmarket > Qefficient. 
D)  Through taxation, government action can result in Qmarket = Qefficient. 
A)  When external benefits exist in a market, Qmarket efficient. 
B)  When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of production. 
C)  When external costs exist in a market, Qmarket > Qefficient. 
D)  Through taxation, government action can result in Qmarket = Qefficient.

Question 17

In the case of an external benefit, the social cost curve lies ______ the supply 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 18

When patients or farmers choose whether to use more antibiotics, they compare:

Accepted Answer

A)  their private benefits with the social cost. 
B)  their private benefits with the market price. 
C)  the social benefits with the social cost. 
D)  the social benefits with the market price. 
A)  their private benefits with the social cost. 
B)  their private benefits with the market price. 
C)  the social benefits with the social cost. 
D)  the social benefits with the market price.

Question 19

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. If the users of the cleaner were given a subsidy to compensate them for the benefit they are creating for the ecological system, how much deadweight loss is removed from this market?

Accepted Answer

A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200 
A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200

Question 20

Government solutions to externality problems include:
I. Pigouvian taxes.
II. tradable allowances.
III. command and control.

Accepted Answer

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

Exam 10: Externalities- When the Price Is Not Right

An external cost is built into the market price of a good and thus paid by the consumers.

Tradable allowances are ______ to Pigouvian taxes when the position of the supply curve is ______, making it difficult to know the exact size of the tax.

______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.

The Coase theorem uses a ______ solution for a class of externality problems.

If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would:

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

A free market with externalities ______ social surplus.

Why are taxes on pollutants and tradable allowances considered to have similar effects in solving externality problems?

As bees make honey, they pollinate fruits and vegetables, which is an important benefit to farmers. Since pollination is an external benefit of honey production, what are the incentives for beekeepers to maintain efficient production of honey?

The efficient equilibrium maximizes private surplus.

Which policy does the economics of externalities suggest would encourage an efficient quantity in the corresponding market?

Which statement is TRUE?

Which statement is INCORRECT?

In the case of an external benefit, the social cost curve lies ______ the supply curve.

When patients or farmers choose whether to use more antibiotics, they compare:

Government solutions to externality problems include: I. Pigouvian taxes. II. tradable allowances. III. command and control.

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

Tradable allowances are to Pigouvian taxes when the position of the supply curve is , making it difficult to know the exact size of the tax.