Question 1

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Accepted Answer

A)   Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities.
B)   Externalities result in prices that are too high for many consumers to pay.
C)   Markets fail to produce the maximum total benefit to society when positive or negative externalities are present.
D)   Markets produce too little of a good when positive or negative externalities are present.E) A) and D)
F) A) and C)

Question 2

Figure 10-9
 
-Refer to Figure 10-9. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in

Accepted Answer

A)   Panel a) .
B)   Panel b) .
C)   Panel c) .
D)   Both b)  and c)  are correct.E) B) and D)
F) A) and B)

Question 3

Figure 10-19 
-Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Accepted Answer

A)   the private cost of the good
B)   the social cost of the good
C)   the private value of the good
D)   the external benefit of the goodE) A) and B)
F) C) and D)

Question 4

When the government uses a command-and-control policy to solve an externality, it

Accepted Answer

A)   is usually the most effective policy option available.
B)   creates policies that directly regulate behavior.
C)   usually involves taxing the consumption of a commodity.
D)   typically refers to the Coase theorem to structure the policy.E) B) and C)
F) A) and D)

Question 5

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

A)   The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
B)   The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.
C)   The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.
D)   There is not enough information to answer the question.E) A) and C)
F) A) and B)

Question 6

Figure 10-9
 
-Refer to Figure 10-9, Panel b) . The market equilibrium quantity is

Accepted Answer

A)   Q2, which is the socially optimal quantity.
B)   Q3, which is the socially optimal quantity.
C)   Q2, and the socially optimal quantity is Q3.
D)   Q3, and the socially optimal quantity is Q2.E) B) and D)
F) None of the above

Question 7

Figure 10-1 
-Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Accepted Answer

A)   $1.90 and 38 units, respectively.
B)   $1.80 and 35 units, respectively.
C)   $1.60 and 42 units, respectively.
D)   $1.35 and 58 units, respectively.E) A) and C)
F) None of the above

Question 8

Which of the following is the most effective way to internalize a technology spillover?

Accepted Answer

A)   taxes
B)   patents
C)   government regulations
D)   free marketsE) A) and B)
F) A) and C)

Question 9

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

Accepted Answer

A)   give sellers the incentive to account for the external effects of their actions.
B)   increase demand.
C)   increase the amount of the commodity exchanged in market equilibrium.
D)   restrict the producers' ability to take the costs of the externality into account when deciding how much to supply.E) None of the above
F) A) and B)

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

Accepted Answer

A)   Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
B)   Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
C)   Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river.
D)   Firm A will increase its pollution and Firm B will reduce its pollution.E) All of the above
F) None of the above

Question 12

When a negative externality exists in a market, the cost to producers

Accepted Answer

A)   is greater than the cost to society.
B)   will be the same as the cost to society.
C)   will be less than the cost to society.
D)   will differ from the cost to society, regardless of whether an externality is present.E) A) and D)
F) B) and C)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Table 10-6
The following table shows the total costs for each of four firms A, B, C, and D to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $46, and for Firm A to eliminate two units of pollution, it would cost a total of $103.
 
-Refer to Table 10-6. Suppose the government wanted to reduce pollution from 16 units to exactly 6 units. Which one of the following fees per unit of pollution would achieve that goal?

Accepted Answer

A)   $65
B)   $70
C)   $75
D)   $95E) B) and C)
F) A) and B)

Question 15

In some cases, tradable pollution permits may be better than a corrective tax because

Accepted Answer

A)   pollution permits allow for a market solution while a corrective tax does not.
B)   pollution permits generate more revenue for the government than a corrective tax.
C)   pollution permits are never preferred over a corrective tax.
D)   the government can set a maximum level of pollution using permits.E) All of the above
F) B) and C)

Question 16

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

Accepted Answer

A)   the Pigovian theorem.
B)   a corrective tax.
C)   the externality theorem.
D)   the Coase theorem.E) None of the above
F) A) and B)

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The tax on gasoline

Accepted Answer

A)   reduces efficiency by causing large deadweight losses.
B)   reduces efficiency by decreasing consumer surplus and producer surplus.
C)   enhances efficiency by serving as a corrective device in a market with positive externalities.
D)   enhances efficiency by serving as a corrective device in a market with negative externalities.E) C) and D)
F) A) and B)

Question 19

Scenario 10-4
The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th fire extinguisher entails the following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
•
-Refer to Scenario 10-4. Does the production of fire extinguishers convey a positive externality, a negative externality, or neither?

Accepted Answer

The social value exceeds the p...

Question 20

Figure 10-10 
-Refer to Figure 10-10. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

Accepted Answer

A)   $760.
B)   $1,080.
C)   $1,440.
D)   $1,920.E) A) and C)
F) B) and C)

Exam 10: Externalities

Correct Answer
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The social value exceeds the p...
View Answer

Figure 10-9 -Refer to Figure 10-9. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in

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

Correct Answer
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Which of the following is the most effective way to internalize a technology spillover?

Correct Answer
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Figure 10-9 -Refer to Figure 10-9, Panel b) . The market equilibrium quantity is

Correct Answer
verified

In some cases, tradable pollution permits may be better than a corrective tax because

Correct Answer
verified

When a negative externality exists in a market, the cost to producers

Correct Answer
verified

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

Correct Answer
verified

Figure 10-10 -Refer to Figure 10-10. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

Correct Answer
verified

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

Correct Answer
verified

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Correct Answer
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The tax on gasoline

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

Correct Answer
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Correct Answer
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When the government uses a command-and-control policy to solve an externality, it

Correct Answer
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Correct Answer
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Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Correct Answer
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In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Correct Answer
verified

Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Correct Answer
verified

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

Correct Answer
verified

Exam 10: Externalities

Correct AnswerverifiedThe social value exceeds the p...View AnswerShow Answer

Figure 10-9 -Refer to Figure 10-9. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is the most effective way to internalize a technology spillover?

Correct AnswerverifiedShow Answer

Figure 10-9 -Refer to Figure 10-9, Panel b) . The market equilibrium quantity is

Correct AnswerverifiedShow Answer

In some cases, tradable pollution permits may be better than a corrective tax because

Correct AnswerverifiedShow Answer

When a negative externality exists in a market, the cost to producers

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 10-10 -Refer to Figure 10-10. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

Correct AnswerverifiedShow Answer

The tax on gasoline

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When the government uses a command-and-control policy to solve an externality, it

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Correct AnswerverifiedShow Answer

In what sense do externalities cause the "invisible hand" of the marketplace to fail?

Correct AnswerverifiedShow Answer

Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

Correct AnswerverifiedShow Answer

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

Correct AnswerverifiedShow Answer

Correct Answer
verified
The social value exceeds the p...
View Answer

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