Question 1

Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market?

Accepted Answer

A)  $90 
B)  $180 
C)  $45 
D)  $255

Question 2

Which of the following is an example involving an external benefit?

Accepted Answer

A)  the pollution of a stream 
B)  a person littering a public highway 
C)  air pollution 
D)  a nice garden in front of someone's house

Question 3

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 4

Government solutions to externality problems include:

Accepted Answer

A)  taxing the consumption of goods that cause externalities. 
B)  subsidies. 
C)  allowing firms to trade the rights to create pollutants. 
D)  All of the answers are correct.

Question 5

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct?

Accepted Answer

A)  The EPA should limit both firms' pollution to the same level. 
B)  The EPA should limit High's pollution level to a lower level than Low's in an attempt to entice High to find more efficient ways to lower its costs. 
C)  The EPA should allow Low to increase its pollution level and trade with High who would cut its pollution to lower than the required level. 
D)  The EPA should allow High to increase its pollution level and trade with Low who would cut its pollution to lower than the required level.

Question 6

When external benefits are significant:

Accepted Answer

A)  market output is too low. 
B)  market output is too high. 
C)  market output is at the efficient level. 
D)  social surplus is maximized.

Question 7

(Figure: Negative Externality) The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions. Figure: Negative Externality  a. What is the market quantity in this market? b. What is the social cost of the product? c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the tax has been imposed?

Accepted Answer

The answer of (Figure: Negative Externality) The figure shows the...

Question 8

If an external cost is present in a market, economic efficiency may be enhanced by:

Accepted Answer

A)  increased competition. 
B)  weakening property rights. 
C)  better informed market participants. 
D)  government intervention.

Question 9

External benefits lead to inefficient market outcomes.

Accepted Answer

A) True 
 B)False

Question 10

All of the following would be government solutions to externality problems EXCEPT:

Accepted Answer

A)  public sector charities. 
B)  taxes and subsidies. 
C)  command and control. 
D)  tradeable allowances

Question 11

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

Accepted Answer

A)  bees don't fly far and thus it is easy to identify which farmers are getting the benefits of their pollination activities. 
B)  the owners of the bee-hives can clearly be identified. 
C)  the market limits the beneficial activities of the bees to those farmers who have very small farms. 
D)  All of the answers are correct.

Question 12

Which of the following statements is TRUE? I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances. III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

Accepted Answer

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

Question 13

Which of the following answers best explains how the market for tradeable 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.

Question 14

Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit is:

Accepted Answer

A)  $15. 
B)  $5. 
C)  $35. 
D)  $30.

Question 15

When external benefits are present in a market:

Accepted Answer

A)  the market is more efficient than if the externalities were not present. 
B)  the market outcome is inefficient. 
C)  overall social surplus is maximized because others are gaining in addition to the market consumers. 
D)  the external benefit must be offset by an external cost.

Question 16

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

Accepted Answer

A)  the government does not involve itself in the process. 
B)  the market is sufficiently competitive. 
C)  the number of market participants is large. 
D)  transaction costs are low and property rights are clearly defined.

Question 17

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:

Accepted Answer

A)  Pigouvian legal fees. 
B)  transaction costs. 
C)  legal inefficiency. 
D)  punitive-cost agreements.

Question 18

The prime motivation for low-pollutant firms to enter into the market for tradeable allowances is profit.

Accepted Answer

A) True 
 B)False

Question 19

The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct?

Accepted Answer

A)  The social benefit of Good X is $13.75, a justification for the government to give buyers a $3.00 subsidy. 
B)  The social benefit of Good X is $7.75, a justification for the government to give buyers a $3.00 subsidy. 
C)  The social benefit of Good X is $7.75, a justification for the government to tax sellers $13.75 per unit. 
D)  The social benefit of Good X is $13.75, a justification for the government to tax sellers $3.00 per unit.

Question 20

Tradable pollution permits:

Accepted Answer

A)  have helped reduce sulfur dioxide emissions but not carbon emissions. 
B)  have helped reduce sulfur dioxide and carbon emissions. 
C)  have not helped reduce any pollution emissions. 
D)  are widely viewed as an ineffective way to reduce pollution.

Exam 10: Externalities: When the Price Is Not Right

Which of the following is an example involving an external benefit?

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

Government solutions to externality problems include:

Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct?

When external benefits are significant:

If an external cost is present in a market, economic efficiency may be enhanced by:

External benefits lead to inefficient market outcomes.

All of the following would be government solutions to externality problems EXCEPT:

The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:

Which of the following answers best explains how the market for tradeable allowances in pollution works?

Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit is:

When external benefits are present in a market:

The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if:

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:

The prime motivation for low-pollutant firms to enter into the market for tradeable allowances is profit.

The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct?

Tradable pollution permits: