Question 1

According to the Coase theorem,private parties can solve the problem of externalities if

Accepted Answer

A)  the cost of bargaining is small.
B)  the initial distribution of legal rights favors the person being adversely affected by the externality.
C)  the number of parties involved is sufficiently large.
D)  All of the above are correct.

Question 2

Corrective taxes are preferred over regulations to deal with pollution because corrective taxes

Accepted Answer

A)  reduce pollution at a lower cost to society.
B)  raise revenue and reduce pollution simultaneously, although efficiency is reduced.
C)  obtain faster results than regulations.
D)  allow for an accurate monitoring of pollution levels.

Question 3

Two types of private solutions to the problem of externalities are

Accepted Answer

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

Question 4

Regulations to reduce pollution

Accepted Answer

A)  cause pollution levels to drop below the regulated amount.
B)  are a less costly solution to society than a corrective tax.
C)  cause each factory to reduce pollution to the same level (or less) .
D)  are a better solution for the environment than a corrective tax.

Question 5

Internalizing a positive externality will cause the demand curve to

Accepted Answer

A)  shift up.
B)  shift down.
C)  become more elastic.
D)  remain unchanged.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Market failure can be caused by

Accepted Answer

A)  too much competition.
B)  externalities.
C)  low consumer demand.
D)  scarcity.

Question 8

The goal of industrial policy should be that

Accepted Answer

A)  industries yielding the largest positive externalities should receive the biggest subsidies.
B)  any industry that produces negative externalities should be heavily taxed.
C)  any production process that produces negative externalities should be shut down.
D)  all industries that produce positive externalities should be equally subsidized.

Question 9

Which of the following policies is the government most inclined to use when faced with a positive externality?

Accepted Answer

A)  taxation
B)  permits
C)  subsidies
D)  usage fees

Question 10

What is the difference between command-and-control policies and market-based policies toward externalities?

Accepted Answer

A)  Command-and-control policies provide incentives for private decisionmakers to solve the problems on their own, whereas market-based policies regulate behavior directly.
B)  Command-and-control policies rely on taxes, whereas market-based policies rely on quotas.
C)  Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior.
D)  Command-and-control policies are efficient, whereas market-based policies are inefficient.

Question 11

When a market experiences a positive externality,

Accepted Answer

A)  the demand curve does not reflect the value to society of the good.
B)  too much of the good is being produced.
C)  the government can internalize the externality by imposing a tax on the product.
D)  the private value is greater than the social value.

Question 12

If a sawmill creates too much noise for local residents,

Accepted Answer

A)  noise restrictions will force residents to move out of the area.
B)  a sense of social responsibility will cause owners of the mill to reduce noise levels.
C)  the government can raise economic well-being through noise-control regulations.
D)  the government should avoid intervening because the market will allocate resources efficiently.

Question 13

The impact of one person's actions on the well-being of a bystander is called

Accepted Answer

A)  an economic dilemma.
B)  deadweight loss.
C)  a multi-party problem.
D)  an externality.

Question 14

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Accepted Answer

A)  They are equal.
B)  The equilibrium quantity is greater than the socially optimal quantity.
C)  The equilibrium quantity is less than the socially optimal quantity.
D)  There is not enough information to answer the question.

Question 15

Negative externalities occur when one person's actions

Accepted Answer

A)  cause another person to lose money in a stock market transaction.
B)  cause his or her employer to lose business.
C)  reveal his or her preference for foreign-produced goods.
D)  adversely affect the well-being of a bystander who is not party to the action.

Question 16

The tax on gasoline is an example of

Accepted Answer

A)  a consumption tax.
B)  a corrective tax.
C)  an income tax.
D)  a command-and-control policy.

Question 17

Assume that your roommate is very messy.According to campus policy,you have a right to live in an uncluttered apartment.Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you.The Coase theorem would suggest that an efficient solution would be for your roommate to

Accepted Answer

A)  stop her messy habits or else move out.
B)  pay you at least $100 but less than $200 to live with the clutter.
C)  continue to be messy and force you to move out.
D)  demand payment of at least $100 but no more than $200 to clean up after herself.

Question 18

Private contracts between parties with mutual interests

Accepted Answer

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 19

In the case of a technology spillover,the government can encourage firms to internalize a positive externality by

Accepted Answer

A)  taxing production, which would decrease supply.
B)  taxing production, which would increase supply.
C)  subsidizing production, which would decrease supply.
D)  subsidizing production, which would increase supply.

Question 20

Suppose that a steel factory emits a certain amount of air pollution,which constitutes a negative externality.If the market does not internalize the externality,

Accepted Answer

A)  the supply curve would adequately reflect the marginal social cost of production.
B)  consumers will be required to pay a higher price for steel than they would have if the externality were internalized.
C)  the market equilibrium quantity will not be the socially optimal quantity.
D)  producers will produce less steel than they otherwise would if the externality were internalized.

Exam 10: Externalities

The impact of one person's actions on the well-being of a bystander is called

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Two types of private solutions to the problem of externalities are

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Market failure can be caused by

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When a market experiences a positive externality,

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Internalizing a positive externality will cause the demand curve to

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The tax on gasoline is an example of

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The goal of industrial policy should be that

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Assume that your roommate is very messy.According to campus policy,you have a right to live in an uncluttered apartment.Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you.The Coase theorem would suggest that an efficient solution would be for your roommate to

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Regulations to reduce pollution

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Which of the following policies is the government most inclined to use when faced with a positive externality?

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Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

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Negative externalities occur when one person's actions

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Corrective taxes are preferred over regulations to deal with pollution because corrective taxes

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What is the difference between command-and-control policies and market-based policies toward externalities?

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According to the Coase theorem,private parties can solve the problem of externalities if

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Private contracts between parties with mutual interests

Correct AnswerverifiedShow Answer

Suppose that a steel factory emits a certain amount of air pollution,which constitutes a negative externality.If the market does not internalize the externality,

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If a sawmill creates too much noise for local residents,

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

Correct AnswerverifiedShow Answer

In the case of a technology spillover,the government can encourage firms to internalize a positive externality by

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