Question 1

When a system of pollution rights is in effect, polluters have no economic incentive to reduce the amount of pollution they generate.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is a positive externality of consumption?

Accepted Answer

A)  inoculations against a disease reduce the likelihood of transmitting it to others 
B)  phosphates from laundry detergents 
C)  litter from fast-food containers 
D)  ozone depletion from the production of fast-food containers 
E)  the greenhouse effect 
A)  inoculations against a disease reduce the likelihood of transmitting it to others 
B)  phosphates from laundry detergents 
C)  litter from fast-food containers 
D)  ozone depletion from the production of fast-food containers 
E)  the greenhouse effect

Question 3

The Coase solution to the externality problem only works when bargaining costs are high.

Accepted Answer

A) True 
 B)False

Question 4

Markets will tends to produce too little of activities that generate positive externalities.

Accepted Answer

A) True 
 B)False

Question 5

It is in the long-run economic interest of the world to preserve rainforests, but it is not in the short-run economic interest of the inhabitants of the countries involved to do so.

Accepted Answer

A) True 
 B)False

Question 6

A meditation class meets on the second floor of a building; the first floor is a nightclub. The loud music from the club disturbs the classes. The club could be soundproofed for a cost of $5,000 or move at a cost of $8,000. The class can't soundproof enough to overcome the music, but could be moved for $4,000. According to Coase,

Accepted Answer

A)  the club should be soundproofed so both businesses can stay open 
B)  the club should be soundproofed because it is the one generating the externality 
C)  the club should move rather than be soundproofed because eliminating an externality is better than compensating for it 
D)  the class should move because it can eliminate the externality at a lower cost than can the nightclub 
E)  whichever business has been there longer has the overriding property right; the other should adjust 
A)  the club should be soundproofed so both businesses can stay open 
B)  the club should be soundproofed because it is the one generating the externality 
C)  the club should move rather than be soundproofed because eliminating an externality is better than compensating for it 
D)  the class should move because it can eliminate the externality at a lower cost than can the nightclub 
E)  whichever business has been there longer has the overriding property right; the other should adjust

Question 7

NARRBEGIN: Exhibit 17-1
Exhibit 17-1
  
-If technology is fixed, the discrepancy between the private equilibrium and the efficient level of output in Exhibit 17-1 is best eliminated by

Accepted Answer

A)  subsidizing the production of the good by $10 per unit 
B)  taxing the firm producing the good by $10 per unit 
C)  using a quota system to encourage production of at least 160 units of the good 
D)  using a quota system to restrict production of the good to no more than 160 units 
E)  letting the private market operate freely to determine output at equilibrium 
A)  subsidizing the production of the good by $10 per unit 
B)  taxing the firm producing the good by $10 per unit 
C)  using a quota system to encourage production of at least 160 units of the good 
D)  using a quota system to restrict production of the good to no more than 160 units 
E)  letting the private market operate freely to determine output at equilibrium

Question 8

The optimal level of air quality will increase if

Accepted Answer

A)  the cost of polluting increases 
B)  pollution is found to be self-absorbing 
C)  a new process allows pollution to be removed more cheaply 
D)  the marginal social cost of air quality increases 
E)  the marginal social benefit of air quality decreases 
A)  the cost of polluting increases 
B)  pollution is found to be self-absorbing 
C)  a new process allows pollution to be removed more cheaply 
D)  the marginal social cost of air quality increases 
E)  the marginal social benefit of air quality decreases

Question 9

A metal-stamping factory moves next to a day care center. Noise from the factory makes it impossible for the kids to nap. What would be the optimal solution to this problem?

Accepted Answer

A)  The factory should move. 
B)  The day care center should move. 
C)  The factory should install sound insulation. 
D)  The day care center should install sound insulation. 
E)  We cannot determine the solution without more information. 
A)  The factory should move. 
B)  The day care center should move. 
C)  The factory should install sound insulation. 
D)  The day care center should install sound insulation. 
E)  We cannot determine the solution without more information.

Question 10

If farmers decide individually whether or not to vaccinate their cattle against mad cow disease, which of the following is true?

Accepted Answer

A)  The equilibrium quantity is too low for efficiency. 
B)  The equilibrium price and quantity are too high for efficiency. 
C)  The equilibrium price is efficient. 
D)  The equilibrium quantity is too high for efficiency. 
E)  The equilibrium price and quantity are efficient. 
A)  The equilibrium quantity is too low for efficiency. 
B)  The equilibrium price and quantity are too high for efficiency. 
C)  The equilibrium price is efficient. 
D)  The equilibrium quantity is too high for efficiency. 
E)  The equilibrium price and quantity are efficient.

Question 11

In order to increase society's well-being, a process that produces a positive externality might be

Accepted Answer

A)  taxed to discourage production 
B)  subsidized to encourage production 
C)  taxed to encourage production 
D)  subsidized to discourage production 
E)  provided without government intervention 
A)  taxed to discourage production 
B)  subsidized to encourage production 
C)  taxed to encourage production 
D)  subsidized to discourage production 
E)  provided without government intervention

Question 12

Markets fail when externalities are present

Accepted Answer

A)  because all of the costs and benefits of producing a good are reflected in the market price 
B)  because some of the costs and benefits of producing a good are not reflected in the market price 
C)  only if they are negative; positive externalities are not market failures 
D)  because profits are not maximized 
E)  if the positive externalities are less than the negative externalities 
A)  because all of the costs and benefits of producing a good are reflected in the market price 
B)  because some of the costs and benefits of producing a good are not reflected in the market price 
C)  only if they are negative; positive externalities are not market failures 
D)  because profits are not maximized 
E)  if the positive externalities are less than the negative externalities

Question 13

If the marginal social benefit of consuming a product exceeds the marginal social cost of producing it, social welfare is

Accepted Answer

A)  increased by reducing output 
B)  decreased by expanding output 
C)  unchanged by expanding or reducing output 
D)  increased by expanding output 
E)  maximized 
A)  increased by reducing output 
B)  decreased by expanding output 
C)  unchanged by expanding or reducing output 
D)  increased by expanding output 
E)  maximized

Question 14

Property rights can be defined and enforced

Accepted Answer

A)  only by the government 
B)  only by ethical norms 
C)  by the government and by ethical norms 
D)  only through constant renegotiation 
E)  by government, by informal social actions, and by ethical norms 
A)  only by the government 
B)  only by ethical norms 
C)  by the government and by ethical norms 
D)  only through constant renegotiation 
E)  by government, by informal social actions, and by ethical norms

Question 15

In order to increase society's total welfarer, a production process that produces a negative externality should be

Accepted Answer

A)  taxed 
B)  provided by the government 
C)  ignored 
D)  subsidized 
E)  exported 
A)  taxed 
B)  provided by the government 
C)  ignored 
D)  subsidized 
E)  exported

Question 16

The Coase theorem says that, if the appropriate property right is assigned to __________, an efficient solution to an externality problem will be achieved.

Accepted Answer

A)  the party causing the externality 
B)  the victim of the externality 
C)  the party that can avoid the externality at the higher cost 
D)  the party that can avoid the externality at the lower cost 
E)  either one of the parties involved 
A)  the party causing the externality 
B)  the victim of the externality 
C)  the party that can avoid the externality at the higher cost 
D)  the party that can avoid the externality at the lower cost 
E)  either one of the parties involved

Question 17

When consumption of a good creates positive externalities,

Accepted Answer

A)  the private demand curve shifts rightward 
B)  the private demand curve shifts leftward 
C)  the private demand curve is below the marginal social benefit curve 
D)  the private demand curve is above the marginal social benefit curve 
E)  the equilibrium quantity determined by the free private market is too high 
A)  the private demand curve shifts rightward 
B)  the private demand curve shifts leftward 
C)  the private demand curve is below the marginal social benefit curve 
D)  the private demand curve is above the marginal social benefit curve 
E)  the equilibrium quantity determined by the free private market is too high

Question 18

NARRBEGIN: Exhibit 17-6
Exhibit 17-6
  
-In Exhibit 17-6, the socially efficient production level is

Accepted Answer

A)  0 units 
B)  10 units 
C)  20 units 
D)  40 units 
E)  50 units 
A)  0 units 
B)  10 units 
C)  20 units 
D)  40 units 
E)  50 units

Question 19

Marginal social cost includes both the marginal private cost and the marginal external cost that production imposes on society

Accepted Answer

A) True 
 B)False

Question 20

NARRBEGIN: Exhibit 17-2
Exhibit 17-2
  
-In Exhibit 17-2, the total social gain from producing the socially efficient output rather than the private equilibrium output is

Accepted Answer

A)  $60 
B)  $30 
C)  $6 
D)  $480 
E)  $300 
A)  $60 
B)  $30 
C)  $6 
D)  $480 
E)  $300

Exam 17: Externalities and the Environment

When a system of pollution rights is in effect, polluters have no economic incentive to reduce the amount of pollution they generate.

Which of the following is a positive externality of consumption?

The Coase solution to the externality problem only works when bargaining costs are high.

Markets will tends to produce too little of activities that generate positive externalities.

It is in the long-run economic interest of the world to preserve rainforests, but it is not in the short-run economic interest of the inhabitants of the countries involved to do so.

NARRBEGIN: Exhibit 17-1 Exhibit 17-1 -If technology is fixed, the discrepancy between the private equilibrium and the efficient level of output in Exhibit 17-1 is best eliminated by

The optimal level of air quality will increase if

A metal-stamping factory moves next to a day care center. Noise from the factory makes it impossible for the kids to nap. What would be the optimal solution to this problem?

If farmers decide individually whether or not to vaccinate their cattle against mad cow disease, which of the following is true?

In order to increase society's well-being, a process that produces a positive externality might be

Markets fail when externalities are present

If the marginal social benefit of consuming a product exceeds the marginal social cost of producing it, social welfare is

Property rights can be defined and enforced

In order to increase society's total welfarer, a production process that produces a negative externality should be

The Coase theorem says that, if the appropriate property right is assigned to __________, an efficient solution to an externality problem will be achieved.

When consumption of a good creates positive externalities,

NARRBEGIN: Exhibit 17-6 Exhibit 17-6 -In Exhibit 17-6, the socially efficient production level is

Marginal social cost includes both the marginal private cost and the marginal external cost that production imposes on society

NARRBEGIN: Exhibit 17-2 Exhibit 17-2 -In Exhibit 17-2, the total social gain from producing the socially efficient output rather than the private equilibrium output is

The Art and Science of Economic Analysis

Appendix: Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Consumer Choice and Demand

Production and Cost in the Firm

A: Perfect Competition

B: Perfect Competition

A: Monopoly

B: Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Capital, Interest, and Corporate Finance

Transaction Costs, Imperfect Information, and Behavioral Economics

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Income Distribution and Poverty

International Trade

International Finance

Economic Development

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