Question 1

Suppose government subsidized the consumption of education by giving education vouchers to parents to spend at the school of their choice.The subsidy would:

Accepted Answer

A)  shift the private demand curve to the left. 
B)  shift the private demand curve to the right. 
C)  shift the private supply curve to the right. 
D)  shift the private supply curve to the left.

Question 2

Suppose government wants to get the amount of pollution right.Which instrument for intervention should the government choose?

Accepted Answer

A)  quantity intervention 
B)  price (tax)intervention 
C)  direct government provision of the product in question 
D)  no action

Question 3

Which type of approach does the Environmental Protection Agency take toward resolving externality problems?

Accepted Answer

A)  public-sector solutions 
B)  Coasian bargaining 
C)  military action 
D)  free market solutions

Question 4

Which of the following suggests that when an investment has a personal cost but a common benefit,individuals will invest too little?

Accepted Answer

A)  holdout problem 
B)  assignment problem 
C)  free rider problem 
D)  externality-internalization problem

Question 5

In a free market with pollution and no government intervention,the market equilibrium quantity of pollution reduction is reached when:

Accepted Answer

A)  pollution reduction is zero.(No pollution is reduced.) 
B)  the social marginal cost of reduction equals twice the marginal benefit of reduction. 
C)  the social marginal benefits of reduction equal its social costs. 
D)  the social marginal benefits of reduction equal its social marginal costs.

Question 6

People who live on the edge of small lakes sometimes have break walls constructed on their property by the shore.A break wall is typically a vertical column of wood or concrete that prevents high water levels from covering part of the owner's property,reducing the size of the beach,and/or eroding the yard.However,several communities have restricted property owners from building break walls.Can you think of a reason for that? Hint: Think about potential externalities of building a break wall.

Accepted Answer

The answer of People who live on the edge of...

Question 7

When are quantity restrictions not the same as price restrictions (via taxes)? Describe one situation in which the government would be better off imposing quantity restrictions than setting a tax,and explain why quantity restrictions are better in that case.

Accepted Answer

The answer of When are quantity restrictions not the same...

Question 8

If SUVs produce a negative externality,taxing the buyers of SUVs would do which of the following?

Accepted Answer

A)  shift the private demand curve to the left 
B)  shift the private demand curve to the right 
C)  shift the private supply curve to the right 
D)  shift the private supply curve to the left

Question 9

Suppose that factories in Chicago,Illinois,and Gary,Indiana,produce pollution that affects people living in western Michigan.Even though the polluting plants and affected individuals can be identified,the externality cannot be resolved privately because of the large number of both polluters and affected individuals.This is an example of:

Accepted Answer

A)  the assignment problem. 
B)  the free rider problem. 
C)  the problem of internalizing an externality. 
D)  transaction costs and negotiating problems.

Question 10

In private equilibrium,a positive production externality will lead to __________; a negative consumption externality will lead to ___________.

Accepted Answer

A)  SMC less than PMC; SMC greater than PMC 
B)  SMC less than PMC; SMC less than PMC 
C)  SMB less than PMB; SMC greater than PMC 
D)  SMC less than PMC; SMB less than PMB

Question 11

With respect to solving a problem of a negative externality,the assignment problem refers to the difficulty in determining who:

Accepted Answer

A)  to tax or subsidize. 
B)  is to blame for an externality. 
C)  bears the damage caused by an externality. 
D)  is not affected by an externality.

Question 12

If government knows the private and social benefit and cost curves associated with reducing pollution,which type of instrument for intervention should the government choose?

Accepted Answer

A)  either price or quantity interventions 
B)  neither price nor quantity interventions 
C)  direct government provision of the product in question 
D)  no action because the free market level of pollution is efficient

Question 13

Which of the following results when shared ownership of property rights gives each owner power over all the others?

Accepted Answer

A)  the holdout problem 
B)  the assignment problem 
C)  the free rider problem 
D)  the problem of internalizing an externality

Question 14

Your neighbor Gabriella plays loud music that irritates you and the rest of her neighbors.She agrees to turn down the music by 5 decibels for every $25 she receives from her neighbors,and even though you and your neighbors collectively value reductions of 5 decibels at more than $25 per person,no one pays.This is an example of:

Accepted Answer

A)  the holdout problem. 
B)  the assignment problem. 
C)  the free rider problem. 
D)  the problem of internalizing an externality.

Question 15

Suppose your neighbor enjoys riding around his yard on a rather loud dirt bike.What kind of externality is this (positive or negative,consumption or production)? What would the government have to do,if anything,to facilitate a Coasian solution to this externality? Would the result be socially optimal? Explain.

Accepted Answer

The answer of Suppose your neighbor enjoys riding around his...

Question 16

The purchase of coal by a utility is best described as a:

Accepted Answer

A)  social cost. 
B)  private cost. 
C)  private benefit. 
D)  negative externality.

Question 17

Suppose your neighbor decides to secure his single-room air conditioner with duct tape and black plastic,creating a view from your house that you consider visually unappealing.The duct tape and black plastic are an example of:

Accepted Answer

A)  a negative production externality. 
B)  a positive production externality. 
C)  a positive consumption externality. 
D)  a negative consumption externality.

Question 18

If plumes of exhaust from passing buses are inhaled by bicyclists,a _________ externality is being imposed on __________.

Accepted Answer

A)  positive; bus riders 
B)  negative; bus riders 
C)  positive; bicyclists 
D)  negative; bicyclists

Question 19

The success of the Coase theorem depends crucially on:

Accepted Answer

A)  one party internalizing the externality. 
B)  the ability of at least one party to make a credible threat. 
C)  negotiation between the parties. 
D)  one party internalizing the externality,and negotiation between the parties.

Question 20

_____ is a problem that causes the market economy to deliver an outcome that does not maximize efficiency.

Accepted Answer

A)  Internalities 
B)  Externalities 
C)  Moral hazard 
D)  Market failure

Exam 5: Externalities- Problems and Solutions