Question 1

Social surplus is consumer surplus plus producer surplus and is maximized in markets with externalities.

Accepted Answer

A) True 
 B)False

Question 2

Which of answer best explains how the market for tradable allowances in pollution works?

Accepted Answer

A)  Firms are given a particular dollar subsidy value to clean up pollution, and they can trade these subsidies between themselves if they fall below or surpass the limits. 
B)  Firms are taxed a particular percentage rate according to how much they pollute, and they can trade the pollutants to reduce the effective tax rates they pay. 
C)  Firms are required to stick to particular production levels, and if they go beyond these production levels, they are charged a percentage of their profits. 
D)  Firms are given a particular allowance amount of pollutants, and if they fall below or surpass these targets they can trade their available allowances with other firms. 
A)  Firms are given a particular dollar subsidy value to clean up pollution, and they can trade these subsidies between themselves if they fall below or surpass the limits. 
B)  Firms are taxed a particular percentage rate according to how much they pollute, and they can trade the pollutants to reduce the effective tax rates they pay. 
C)  Firms are required to stick to particular production levels, and if they go beyond these production levels, they are charged a percentage of their profits. 
D)  Firms are given a particular allowance amount of pollutants, and if they fall below or surpass these targets they can trade their available allowances with other firms.

Question 3

Which statement illustrates the concept of external cost?

Accepted Answer

A)  Margaret purchases all her food and clothing in the big city outside her residence. 
B)  A small business owner frequently buys raw materials by using her bank's line of credit. 
C)  Raymond cannot open his windows at times because he lives downwind from a mushroom farm. 
D)  Felicia, an economics major, asks the most insightful questions in class. 
A)  Margaret purchases all her food and clothing in the big city outside her residence. 
B)  A small business owner frequently buys raw materials by using her bank's line of credit. 
C)  Raymond cannot open his windows at times because he lives downwind from a mushroom farm. 
D)  Felicia, an economics major, asks the most insightful questions in class.

Question 4

Make an argument that gun ownership creates external costs. How might the government address the external costs? Next, make an argument that gun ownership creates external benefits. How might the government address the external benefits?

Accepted Answer

Gun ownership may lead to external costs

Question 5

The external benefit of honey production is internalized when:

Accepted Answer

A)  farmers receive tax breaks from the government. 
B)  beekeepers receive tax breaks from the government. 
C)  farmers pay beekeepers to pollinate their crops. 
D)  beekeepers pay farmers to pollinate farmers' crops. 
A)  farmers receive tax breaks from the government. 
B)  beekeepers receive tax breaks from the government. 
C)  farmers pay beekeepers to pollinate their crops. 
D)  beekeepers pay farmers to pollinate farmers' crops.

Question 6

A Pigouvian tax:

Accepted Answer

A)  is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss. 
B)  subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss. 
C)  is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss. 
D)  is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss. 
A)  is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss. 
B)  subsidizes a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss. 
C)  is levied on a good that creates a positive externality and should be set equal to the external benefit to eliminate the deadweight loss. 
D)  is levied on a good that creates a positive externality and should be set equal to the social benefit to eliminate the deadweight loss.

Question 7

Which of the following statements is TRUE?
I. Taxes may reduce consumption by exactly the same amount as government regulations.
II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity.
III. Command and control policies effectively reduce consumption, but they may not be the lowest cost method for doing so.

Accepted Answer

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

Question 8

When significant externalities exist:
I. the market equilibrium is no longer efficient.
II. the market equilibrium is only efficient if the externality is an external benefit.
III. social surplus is not maximized.
IV. the government may increase efficiency by imposing a tax on the market.

Accepted Answer

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

Question 9

In the case of an external benefit, marginal private benefit is ______ marginal social benefit at all quantity levels.

Accepted Answer

A)  equal to 
B)  less than 
C)  greater than 
D)  incomparable to 
A)  equal to 
B)  less than 
C)  greater than 
D)  incomparable to

Question 10

Rank economists' LEAST favorite to MOST favorite method of reducing electricity consumption.

Accepted Answer

A)  tax on electricity, command and control, tax on the pollutants generated from electricity production 
B)  command and control, tax on electricity, tax on the pollutants generated from electricity production 
C)  tax on electricity, tax on the pollutants generated from electricity production, command and control 
D)  tax on the pollutants generated from electricity production, command and control, tax on electricity 
A)  tax on electricity, command and control, tax on the pollutants generated from electricity production 
B)  command and control, tax on electricity, tax on the pollutants generated from electricity production 
C)  tax on electricity, tax on the pollutants generated from electricity production, command and control 
D)  tax on the pollutants generated from electricity production, command and control, tax on electricity

Question 11

Government can be used to solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False

Question 12

Fewer people get flu shots than is efficient because:

Accepted Answer

A)  people usually perceive that the private cost of getting flu shots is higher than their private benefit. 
B)  people usually perceive that the private benefit of getting flu shots is higher than their private cost. 
C)  the cost of producing flu shots is too high in relation to profits. 
D)  there are always more people getting flu shots than the amount of flu shots available. 
A)  people usually perceive that the private cost of getting flu shots is higher than their private benefit. 
B)  people usually perceive that the private benefit of getting flu shots is higher than their private cost. 
C)  the cost of producing flu shots is too high in relation to profits. 
D)  there are always more people getting flu shots than the amount of flu shots available.

Question 13

A free market with an external benefit is ______, and one with an external cost is ______.

Accepted Answer

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

Question 14

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

Accepted Answer

A) True 
 B)False

Question 15

When there are significant external costs associated with its production, the market produces ______ of that good.

Accepted Answer

A)  too little 
B)  too much 
C)  just the right amount 
D)  an unknown amount 
A)  too little 
B)  too much 
C)  just the right amount 
D)  an unknown amount

Question 16

Externalities are:

Accepted Answer

A)  always good. 
B)  always bad. 
C)  sometimes good and sometimes bad. 
D)  neither good nor bad. 
A)  always good. 
B)  always bad. 
C)  sometimes good and sometimes bad. 
D)  neither good nor bad.

Question 17

In the case of an external cost, marginal private cost:

Accepted Answer

A)  is equal to marginal social cost for all quantity levels. 
B)  is less than marginal social cost for all quantity levels. 
C)  is greater than marginal social cost for all quantity levels. 
D)  and marginal social cost cannot be compared at any quantity. 
A)  is equal to marginal social cost for all quantity levels. 
B)  is less than marginal social cost for all quantity levels. 
C)  is greater than marginal social cost for all quantity levels. 
D)  and marginal social cost cannot be compared at any quantity.

Question 18

A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that gets washed down the drain escapes into the environment and releases allergens that cause respiratory problems for people. What is the social cost of a bottle of this cleaner?

Accepted Answer

A)  $5.50 less the external cost of such a bottle of bathroom cleaner 
B)  the cost paid by other people as a result of the use of such a bottle of bathroom cleaner 
C)  $5.50 plus the external cost of such a bottle of bathroom cleaner 
D)  $3.60 
A)  $5.50 less the external cost of such a bottle of bathroom cleaner 
B)  the cost paid by other people as a result of the use of such a bottle of bathroom cleaner 
C)  $5.50 plus the external cost of such a bottle of bathroom cleaner 
D)  $3.60

Question 19

Figure: Social Benefit   Refer to the figure. Which price and quantity combination represents the efficient equilibrium?

Accepted Answer

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

Question 20

Table: Sulfur Dioxide
 
The table sets forth the sulfur dioxide emissions along with the costs of reducing sulfur dioxide emissions for two industries. Suppose the government gives each industry 100 tradable allowances; each allowance allows for 1 ton of sulfur dioxide emissions. Explain how the industries will trade the allowances and the range of prices that the allowances will trade for. What is the final allocation of allowances between the industries? How many tons of sulfur dioxide are removed from the air and at what cost?

Accepted Answer

Industry Y will pay between $100 and $30

Exam 10: Externalities- When the Price Is Not Right

Social surplus is consumer surplus plus producer surplus and is maximized in markets with externalities.

Which of answer best explains how the market for tradable allowances in pollution works?

Which statement illustrates the concept of external cost?

Make an argument that gun ownership creates external costs. How might the government address the external costs? Next, make an argument that gun ownership creates external benefits. How might the government address the external benefits?

The external benefit of honey production is internalized when:

A Pigouvian tax:

When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market.

In the case of an external benefit, marginal private benefit is ______ marginal social benefit at all quantity levels.

Rank economists' LEAST favorite to MOST favorite method of reducing electricity consumption.

Government can be used to solve externality problems that are too costly for private parties to solve.

Fewer people get flu shots than is efficient because:

A free market with an external benefit is ______, and one with an external cost is ______.

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

When there are significant external costs associated with its production, the market produces ______ of that good.

Externalities are:

In the case of an external cost, marginal private cost:

Figure: Social Benefit Refer to the figure. Which price and quantity combination represents the efficient equilibrium?

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 free market with an external benefit is , and one with an external cost is .