Exam 10: Externalities- When the Price Is Not Right

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

External costs cause deadweight losses, whereas external benefits do not.

Which of these statements is TRUE in the case of externalities? I. In the case of externalities, prices do not reflect the true cost or benefit of the product. II. In the case of externalities, prices sometimes send the wrong signals about a market. III. Externalities discourage new producers from entering the industry since the price always remains about the efficient price.

Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:

Which statement is TRUE?

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Which statement about vaccines is correct?

The Coase theorem suggests that efficient solutions to external costs and benefits can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

The market for aquarium cleaners can be defined by the following set of equations: Q_d = 40 - 3P Q_s = -20 + 3P P is the price of aquarium cleaners in dollars, and Q is quantity in thousands. After their use, aquarium cleaners get washed down the drain, and these cleansers increase the mineral content in streams and rivers, thus increasing the fish population. The government estimates that the external benefit related to the use of each container of aquarium cleaner is $3 and is considering a subsidy of $3 per container of the aquarium cleaner. Using this information, answer the following questions. a. What are the market price and market quantity in the aquarium cleaner market? b. What is the social benefit of each container of aquarium cleaner? c. If consumers are offered a subsidy of $3, this would cause the demand curve to shift to the right, and the new equation for the demand curve would be Q_d = 40 - 3(P - 3). What is the efficient quantity traded in this market as a result of this subsidy? d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the subsidy). e. What is the dollar amount of the deadweight loss that has been removed from this market as a result of the subsidy?

The social cost of antibiotic consumption equals the private cost of producing antibiotics plus the cost of increased bacterial resistance to antibiotics.

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

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. What is the dollar amount of the external benefit (per box) that is created by the use of this product?

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Which is an example involving an external benefit?

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

A(n) ______ subsidy is a subsidy on a good with external benefits.

Social surplus is consumer surplus:

Which statement is correct under a market with externalities?

Use the following to answer questions: Figure: Dishwashing Detergent -(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. According to this figure, which statement is TRUE?

Bees produce honey for beekeepers but also pollinate crops for farmers. In the absence of pollination compensation, this external benefit: