Deck 10: Externalities

Question 1

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Answer 1

False

Question 2

Research into new technologies conveys neither negative externalities nor positive externalities.

Answer 2

False

Question 3

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

Answer 3

True

Question 4

Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

Question 5

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

Question 6

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

Question 7

If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots.

Question 8

Markets sometimes fail to allocate resources efficiently.

Question 9

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Question 10

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Question 11

A technology spillover is a type of negative externality.

Question 12

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

Question 13

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

Question 14

In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

Question 15

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Question 16

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality.

Question 17

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Question 18

The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.

Question 19

Government intervention in the economy with the goal of promoting technology-producing industries is known as patent policy.

Question 20

When firms internalize a negative externality, the market supply curve shifts to the left.

Question 21

When correcting for an externality, command-and-control policies are always preferable to market-based policies.

Question 22

Patent protection is one way to deal with technology spillovers.

Question 23

Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government.

Question 24

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Question 25

The concept of external cost is associated with a negative externality, but not with a positive externality.

Question 26

The tax on gasoline causes deadweight losses, as is the case with all taxes.

Question 27

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Question 28

Economists believe that the optimal level of pollution is zero.

Question 29

Even if possible, it would be inefficient to prohibit all polluting activity.

Question 30

The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the use of pollution permits.

Question 31

Suppose a certain good provides an external benefit. If the private cost of the last unit of the good that was produced is equal to the social value of that unit, then the sum of producer and consumer surplus is maximized.

Question 32

According to recent research, the gas tax in the United States is lower than the optimal level.

Question 33

A corrective tax places a price on the right to pollute.

Question 34

Corrective taxes are more efficient than regulations for keeping the environment clean.

Question 35

To determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the level of output at which private cost equals private value.

Question 36

Corrective taxes cause deadweight losses, reducing economic efficiency.

Question 37

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Question 38

The concept of external benefit is associated with a negative externality, but not with a positive externality.

Question 39

Laws that are passed that either require or forbid certain behaviors are examples of command-and-control policies.

Question 40

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Question 41

​Figure 10-20. ​
​Refer to Figure 10-20. The socially optimal price and quantity are $250 and 250 units, respectively.

Question 42

​Figure 10-20. ​
​Refer to Figure 10-20. This market would benefit from a tax equal to $50 per unit.

Question 43

​Figure 10-20. ​
​Refer to Figure 10-20. This market is characterized by a negative externality.

Question 44

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

Question 45

In some circumstances, selling pollution permits may be better than levying a corrective tax.

Question 46

According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

Question 47

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Question 48

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

Question 49

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Question 50

All externalities impose a cost on others. ​

Question 51

According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome.

Question 52

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Question 53

Many charities like the Sierra Club are established to deal with externalities.

Question 54

Government intervention is necessary to correct all externalities.

Question 55

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

Question 56

Firms that can reduce pollution easily would be willing to sell their pollution permits.

Question 57

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Question 58

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Question 59

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Question 60

According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

Question 61

For the purpose of protecting the environment, upon which of the following approaches do we rely more and more as time goes by?

A)adherence to the notion of the invisible hand
B)command-and-control policies
C)the development and enforcement of regulations
D)the requirement that decision makers bear the full costs of their actions

Question 62

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action

A)is always needed because private solutions can never be attained.
B)is needed when private solutions fail to arise.
C)will be needed only to correct for positive externalities.
D)will be needed only to correct for negative externalities.

Question 63

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called

A)the Pigovian theorem.
B)a corrective tax.
C)the externality theorem.
D)the Coase theorem.

Question 64

Two types of private solutions to the problem of externalities are

A)charities and the Golden Rule.
B)charities and subsidies.
C)the Golden Rule and taxes.
D)taxes and subsidies.

Question 65

In markets, the invisible hand allocates resources efficiently

A)in all cases.
B)when the buyers and sellers are the only interested parties.
C)when there are positive externalities, but not when there are negative externalities.
D)when there are negative externalities, but not when there are positive externalities.

Question 66

Transaction costs

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

Question 67

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

A)if the government does not become involved in the process.
B)when the number of interested parties is large and bargaining costs are high.
C)if the firm in the market is a monopoly.
D)if some people benefit from the externality.

Question 68

Private contracts between parties with mutual interests

A)will reduce the well-being of society.
B)will lead to market outcomes in which the public interest is sacrificed for personal gain.
C)can solve some inefficiencies associated with positive externalities.
D)will create negative externalities.

Question 69

Firms that are involved in more than one type of business could be evidence of an attempt to

A)increase private profit at the expense of consumers.
B)internalize some forms of positive externalities.
C)reduce the impact of government regulations on their business.
D)increase the private marginal cost of production.

Question 70

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

A)an opportunity cost.
B)an implicit cost.
C)a sunk cost.
D)a transaction cost.

Question 71

The Golden Rule is an example of a private solution for

A)subsidizing higher education.
B)internalizing externalities.
C)increasing production.
D)reducing scarcity.

Question 72

​Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia to pay Gabriel $15 to not recline his seat.
​

Question 73

One reason that private solutions to externalities do not always work is that

A)government intervention negates the benefits of positive externalities.
B)some people benefit from externalities.
C)interested parties incur costs in the bargaining process.
D)charities are not well organized.

Question 74

Which of the following statements is not correct?

A)Private markets tend to over-produce products with negative externalities.
B)Private markets tend to under-produce products with positive externalities.
C)Private parties can bargain to efficient outcomes even in the presence of externalities.
D)Private parties are usually more successful in achieving efficient outcomes than government policies in the presence of externalities.

Question 75

Which of the following suggests that private markets can be effective in dealing with externalities?

A)the "invisible hand"
B)the law of diminishing social returns
C)the Coase theorem
D)technology policy

Question 76

Externalities can be corrected by each of the following except

A)self-interest.
B)moral codes and social sanctions.
C)charity.
D)normal market adjustments.

Question 77

Honey producers provide a positive externality to orchards because

A)the honey producers get more honey.
B)the orchard owner frequently gets stung by the honey producer's bees.
C)the orchard owner does not have to purchase bees to pollinate his flowers.
D)the honey producers have to rent access to the orchard grounds.

Question 78

​The majority of economists believe that the social benefit of mandating measles vaccines for all Americans (except those with compelling medical reasons) would exceed the social cost.

Question 79

When externalities cause markets to be inefficient,

A)government action is always needed to solve the problem.
B)private solutions can be developed to solve the problem.
C)given enough time, externalities can be solved through normal market adjustments.
D)there is no way to eliminate the problem of externalities in a market.

Question 80

Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called

A)transaction costs.
B)corrective costs.
C)input costs.
D)private costs.