Chap10.doc

Chapter 10ExternalitiesMULTIPLE CHOICE

1. In the absence of externalities the invisible hand of the market placea. leads to a market outcome that maximizes total benefit to society.b. is unable to resolve inherent inefficiencies in the market system.c. induces people to act in a manner inconsistent with self interest.d. increases the transactions cost of contracting between parties to an exchange.

ANSWER: a. leads to a market outcome that maximizes total benefit to society.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

2. An externality exists whena. the government intercedes in the operation of private markets by forcing the

market to adjust to the balance of supply and demand.b. markets are not able to reach equilibrium.c. a firm sells its product in a foreign market.d. a person engages in an activity that influences the well-being of a bystander and

yet neither pays nor receives payment for that effect.ANSWER: d. a person engages in an activity that influences the well-being of a bystander

and yet neither pays nor receives payment for that effect.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

1

~ANSWER: a. leads to a market outcome that maximizes total benefit to society.

TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

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~ANSWER: d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

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2 Chapter 10/Externalities

3. Negative externalities occur when one person's actionsa. 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 (or bystanders) who is (are) not

party to a market exchange.ANSWER: d. adversely affect the well-being of a bystander (or bystanders) who is (are) not

party to a market exchange.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

4. One of the Ten Principles of Economics is that “markets are usually a good way to organize market behavior.” Use of the word “usually” reflects the fact that a. some markets produce negative externalities.b. the invisible hand of the marketplace does not always lead buyers and sellers to

maximize total benefit to society.c. some markets are characterized by market failure.d. all of the above.

ANSWER: d. all of the above.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

5. When externalities exist, buyers and sellersa. neglect the external effects of their actions but the market equilibrium is still

efficient.b. do not neglect the external effects of their actions and the market equilibrium is

efficient.c. neglect the external effects of their actions and the market equilibrium is not

efficient.d. do not neglect the external effects of their actions and the market equilibrium is

not efficient.ANSWER: c. neglect the external effects of their actions and the market equilibrium is not

efficient.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

3

~ANSWER: d. adversely affect the well-being of a bystander (or bystanders) who is (are) not party to a market exchange.


4

~ANSWER: d. all of the above.


5

~ANSWER: c.neglect the external effects of their actions and the market equilibrium is not efficient


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Chapter 10/Externalities 3

6. Dioxin emission that results from the production of paper is a good example of a negative externality becausea. self-interested paper firms are generally unaware of environmental regulation.b. there are fines for producing too much dioxin.c. self-interested paper producers will not consider the full cost of the dioxin

pollution they create.d. externalities can only be identified with toxic emissions.

ANSWER: c. self-interested paper producers will not consider the full cost of the dioxin pollution they create.


7. The Federal Government attempts to resolve negative externalities caused by automobile exhaust by(i) taxing gasoline to reduce the amount that people drive.(ii) building safer highways.(iii) setting emission standards for automobiles.a. (i), (ii) and (iii) are all used to reduce emissions.b. Only (i) and (iii) are used to reduce emissions.c. Only (ii) and (iii) are used to reduce emissions.d. Only (i) and (ii) are used to reduce emissions.

ANSWER: b. Only (i) and (iii) are used to reduce emissions.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

8. Private owners of restored historical buildings are not likely to capture the full benefit of restoration so they tend to discard them too quickly. Many local governments respond to this problem by(i) condemning historic buildings to make room for new development.(ii) regulating the destruction of historic buildings.(iii) providing tax breaks to owners of historic buildings who restore them.a. (i), (ii) and (iii) are all used.b. Only (i) and (iii) are used.c. Only (ii) and (iii) are used.d. Only (i) and (ii) are used.

ANSWER: c. Only (ii) and (iii) are used.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

6 ANSWER: c. self-interested paper producers will not consider the full cost of the dioxin pollution they create.


7

~ANSWER: b. Only (i) and (iii) are used to reduce emissions.


8

~ANSWER: c.Only (ii) and (iii) are used.




9. Dog owners do not bear the full cost of the noise their barking dogs create and, therefore, tend to take too few precautions to prevent their dogs from barking. Local governments address this problem bya. making it illegal to “disturb the peace.”b. having a well-funded animal control department.c. subsidizing local animal shelters.d. encouraging people to buy cats.

ANSWER: a. making it illegal to “disturb the peace.”TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

10. Inventors in developing countries are usually unable to capture the full benefit of their innovations. They therefore tend to devote too few resources to research. Government can address this problem of under-investment in research by (i) increasing restrictions on trade. (ii) establishing a patent system to provide inventors with exclusive control over their

inventions for a period of time. (iii) subsidizing the purchase of technology from other countries.a. (i), (ii) and (iii) are all used.b. Only (i) is used.c. Only (ii) is used.d. Only (iii) is used.

ANSWER: c. Only (ii) is used.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

11. Private markets don't account for externalities becausea. externalities don't occur in private markets.b. buyers and sellers in private markets are only interested in social well-being.c. decision makers in the market fail to take account of the external effects of their

behavior.d. externalities only occur in a political setting.

ANSWER: c. decision makers in the market fail to take account of the external effects of their behavior.


12. An additional electric automobile on a congested freeway createsa. a positive production externality because electric cars reduce pollution.b. a positive consumption externality because existing cars will increase their speed

after the car enters the freeway.c. a negative consumption externality because its presence reduces the speed of

traffic for cars already on the freeway.d. no production or consumption externality because electric cars do not pollute.

ANSWER: c. a negative consumption externality because its presence reduces the speed of traffic for cars already on the freeway.




13. Which of the following statements about a well maintained yard best conveys the general nature of the externality?a. A maintained yard conveys a positive externality because it increases the home’s

market value.b. A maintained yard conveys a negative externality because it increases the

property tax liability of the owner.c. A maintained yard conveys a negative externality because it makes other property

owners in the neighborhood feel like their homes are less valuable.d. A maintained yard conveys a positive externality because it increases the value of

adjacent properties in the neighborhood.ANSWER: d. A maintained yard conveys a positive externality because it increases the

value of adjacent properties in the neighborhood.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

14. Hikers frequently claim that livestock grazing in Wilderness Recreation Areas reduce the satisfaction of their recreational hiking experience. An explanation would be thata. hikers don’t eat beef.b. grazing cows create negative externalities that make hiking less pleasant.c. ranchers are insensitive to the recreational use of public lands.d. cattle should not be allowed to graze on public property.

ANSWER: b. grazing cows create negative externalities that make hiking less pleasant.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

15. The impact of one person’s actions on the well-being of a bystander is calleda. competitive advantage.b. dead weight loss.c. market equilibrium.d. an externality.

ANSWER: d. an externality.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

16. When a production externality has a beneficial effect on a bystander, at the market equilibriuma. society is unlikely to benefit from production subsidies.b. the social cost of production is less than the private cost.c. the private benefit from consumption is less than the social cost of production.d. none of the above are true.

ANSWER: b. the social cost of production is less than the private cost.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

17. In the presence of externalities, society’s interest in a market outcome includes the well-being ofa. buyers and sellers only.b. bystanders only.c. bystanders and regulatory agencies.d. buyers, sellers, and bystanders.

ANSWER: d. buyers, sellers, and bystanders.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y



18. An externality willa. usually be characterized as a form of market failure.b. cause markets to allocate resources efficiently.c. strengthen the role of the “invisible hand” in the marketplace.d. always require the producer to compensate society.

ANSWER: a. usually be characterized as a form of market failure.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

19. To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results ina. a positive externality that solely benefits the beekeeper.b. no significant additional benefit to anyone.c. a positive externality that benefits only the owner of the fields of fruit and grain.d. positive externalities that benefit both the beekeeper and the owner of the fields

of fruit and grain.ANSWER: d. positive externalities that benefit both the beekeeper and the owner of the

fields of fruit and grain.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

20. At any given quantity, the height of the demand curve for steel shows thea. willingness to pay of the marginal supplier.b. willingness to pay of the marginal buyer.c. cost of the marginal buyer.d. cost of the marginal supplier.

ANSWER: b. willingness to pay of the marginal buyer.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

21. At any given quantity, the willingness to pay in the market for automobile fuel is reflected ina. the value to the consumer of the last unit of automobile fuel bought.b. the height of the supply curve at each quantity.c. the value to the producer of the last unit of automobile fuel sold.d. the total quantity of automobile fuel exchanged in the market.

ANSWER: a. the value to the consumer of the last unit of automobile fuel bought.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

22. At any given quantity, the height of the supply curve for nuclear power shows thea. willingness to pay of the marginal supplier.b. willingness to pay of the marginal buyer.c. cost of the marginal buyer.d. cost of the marginal seller.

ANSWER: d. cost of the marginal seller.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

23. The height of the supply curve at any given quantity of coal shows thea. value to the consumer of the last unit of coal bought.b. consumer's willingness to pay for coal at each quantity.c. cost to the producer of the last unit of coal sold.d. total quantity of coal exchanged in the market.

ANSWER: c. cost to the producer of the last unit of coal sold.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

The figure below depicts the market for pork. Use this information to answer questions 24 through 26.



24. In the figure above, producer and consumer surplus at the point of market efficiency is represented by area(s)a. a + d.b. b + cc. c + dd. a + b

ANSWER: d. a + bTYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

25. In the figure above, consumer surplus would be maximized at what price and quantity combination?a. P1, Q1.b. P2, Quantity of zero.c. Price of zero, Q2.d. P0, Q2.

ANSWER: c. Price of zero, Q2.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

26. In the figure above, what price and quantity combination efficiently allocates resources in such a way that the total value to consumers who buy and use pork minus the total costs to the producers who make and sell pork is maximized?a. P1, Q1.b. P2, Quantity of zero.c. Price of zero, Q2.d. P0, Q2.

ANSWER: a. P1, Q1.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

27. Air pollution creates a negative production externality. As such, a. welfare will be enhanced when some, but not all air pollution is eliminated.b. social welfare is optimal when all air pollution is eliminated.c. governments should encourage all private firms to consider only private costs.d. the free market result maximizes social welfare.

ANSWER: a. welfare will be enhanced when some, but not all air pollution is eliminated.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



28. Suppose that large scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?a. The groundwater pollution reduces the cost of large scale pork production.b. The economic impact of a large scale pork production facility is localized in a

small geographic area.c. The pollution has the potential for creating a health risk for water users in the

region surrounding the pork production facility.d. Consumers will not reap the benefits of lower production cost from large scale

pork production.ANSWER: c. The pollution has the potential for creating a health risk for water users in

the region surrounding the pork production facility.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

29. Markets are often inefficient when negative production externalities are present because a. private costs exceed social costs at the private market solution.b. externalities can never be corrected without government regulation.c. social costs exceed private costs at the private market solution. d. production externalities lead to consumption externalities.

ANSWER: c. social costs exceed private costs at the private market solution. TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

The figure below reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods. Use this figure to answer questions 30 through 37

30. For each unit of “concert” produced, the social cost would include (i) the private costs of the concert organizers.(iii) the cost that people in the residential neighborhoods will incur as a result of the

increased traffic and noise spillover on concert days.(ii) the enjoyment that concert attendees receive from the concert.a. (i) only.b. (i) and (ii) only.c. (i) and (iii) only.d. (i), (ii) and (iii).

ANSWER: c. (i) and (iii) only.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



31. In the figure above, the social cost curve is above the supply curve becausea. it takes into account the external costs imposed on society by the concert

organizers.b. municipalities always impose noise restrictions on concerts in parks surrounded

by residential neighborhoods.c. concert tickets are likely to cost more than the concert actually costs the

organizers.d. residents in the surrounding neighborhoods get to listen to the concert for free.

ANSWER: a. it takes into account the external costs imposed on society by the concert organizers.


32. In the figure above, the difference between the Social Cost curve and the Supply curve reflectsa. the profit margin of each concert.b. the cost of spillover effects from the concert (e.g., noise and traffic).c. the value of concerts to society as a whole.d. the amount by which the city should subsidize the concert organizers.

ANSWER: b. the cost of spillover effects from the concert (e.g., noise and traffic).TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

33. In the figure above, what price and quantity combination best represents the optimum price and number of concerts that should be organized?a. P1, Q1

b. P2, Q0

c. P3, Q1

d. The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion.

ANSWER: b. P2 Q0


34. Assume that the concert organizers must purchase a concert permit (the cost for the permit is included in private cost) before organizing the concert. What criteria should the city use in determining whether or not to issue a permit?a. The majority vote of the residents in surrounding neighborhoods should determine

whether a permit is issued.b. As long as the value to consumers of concerts exceeds the cost of concerts

(including the external costs) the permit should be issued.c. As long as concert organizers are willing to return the park to its original

condition after the concert, the permit should be issued.d. The permit should not be issued as long as there are identifiable external costs

imposed on residents in surrounding neighborhoods.ANSWER: b. As long as the value to consumers of concerts exceeds the cost of concerts

(including the external costs) the permit should be issued.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

35. Total surplus derived from the most efficient outcome is represented by the areaa. gb. e + gc. c + dd. a + b + c

ANSWER: d. a + b + cTYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



36. At the private market outcome, the equilibrium price will be a. P1

b. P2

c. P3

d. P4

ANSWER: b. P2


37. At the private market outcome, price P3 representsa. the value of concerts to concert consumers.b. the total price that would be charged for tickets to attend the concert.c. the social cost of producing the last concert.d. the optimal price of a concert from the standpoint of society as a whole.

ANSWER: c. the social cost of producing the last concert.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

38. Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. If this market is not required to internalize this externality,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 would not be the socially optimal quantity.d. producers will produce less steel than they otherwise would have if the externality

were internalized.ANSWER: c. the market equilibrium would not be the socially optimal quantity.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

39. Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. The social cost of producing the steel includesa. the private costs of the steel producers and the price consumers pay for the steel.b. the private costs of the steel producers and the costs to the bystanders affected by

the pollution.c. the costs to the bystanders affected by the pollution only.d. the price consumers pay for the steel.

ANSWER: b. the private costs of the steel producers and the costs to the bystanders affected by the pollution.


40. Which of the following statements is most correct about a market that is characterized by a negative production externality?a. The equilibrium quantity of output is equal to the socially optimal quantity.b. The equilibrium quantity of output is greater than the socially optimal quantity.c. Government intervention is not required to achieve a socially optimal quantity of

output.d. The cost to the producer exceeds the cost to society.

ANSWER: b. The equilibrium quantity of output is greater than the socially optimal quantity.




41. When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of producing it, then(i) at market equilibrium the demand curve lies below the social cost curve.(ii) reducing production to a level below the equilibrium level could possibly raise

total economic well-being.(iii) the equilibrium price is higher than necessary to insure maximum economic well-

being.a. (i) and (ii) only.b. ( i) and (iii) only.c. (ii) and (iii) only.d. (i), (ii) and (iii).

ANSWER: a. (i) and (ii) only.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

42. When a producer operates in a market characterized by negative production externalities, a tax that forces them to internalize the externality willa. give sellers the incentive to take account of the external effects of their actions.b. have an offsetting effect that reduces the producer's private production costs.c. increase the amount of the commodity exchanged in market equilibrium.d. restrict the producer's ability to take the costs of the externality into account

when deciding how much to supply.ANSWER: a. give sellers the incentive to take account of the external effects of their

actions.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

43. An optimal tax on pollution (a negative production externality) would be one in whicha. producers choose not to produce any pollution.b. producers internalize the cost of the pollution.c. a benevolent social planner is able to maximize production.d. the value to consumers at market equilibrium exceeds the cost of production

(including tax).ANSWER: b. producers internalize the cost of the pollution.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

Use the figure below to answer questions 44-46

41 ~ANSWER: a. (i) and (ii) only.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

42

~ANSWER: a. give sellers the incentive to take account of the external effects of their actions.


43

~ANSWER: b. producers internalize the cost of the pollution.



44. The figure above reflects the presence ofa. a negative production externality.b. a positive production externality.c. a negative consumption externality.d. a positive consumption externality.

ANSWER: a. a negative production externality.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

45. In the figure above,a. the marginal benefit of the positive production externality is measured by P3 - P1.b. the marginal cost of the negative production externality is measured by P3 - P2.c. the marginal cost of the negative production externality is measured by P3 - P1.d. the marginal cost of the negative production externality cannot be measured.

ANSWER: c. the marginal cost of the negative production externality is measured by P3 - P1.


46. Which price and quantity combination represents the social optimum?a. P1, Q1.b. P2, Q1.c. P1, Q2.d. P2, Q2.

ANSWER: b. P2, Q1.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

44

~ANSWER: a. a negative production externality.




47. Internalizing a positive production externality will cause the demand curve faced by an industry toa. shift to the right.b. shift to the left.c. become more elastic.d. remain unchanged.

ANSWER: d. remain unchanged.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

48. Internalizing a negative production externality will cause the supply curve faced by an industry toa. shift to the right.b. shift to the left.c. expand.d. remain unchanged.

ANSWER: b. shift to the left.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

49. Which of the following statements about internalizing a negative production externality is most correct?a. Internalizing a negative production externality will cause an industry to decrease

the quantity it supplies to the market and decrease the price of the good produced.

b. Internalizing a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.

c. Internalizing a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced.

d. Internalizing a negative production externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

ANSWER: b. internalizing a negative production externality will cause an industry to

decrease the quantity it supplies to the market and increase the price of the good produced.


50. Markets are inefficient when positive production externalities are present because a. private benefits of consumption exceed social benefits of consumption when the

market is in equilibrium.b. social costs of production exceed private costs of production when the market is

in equilibrium.c. social benefits of consumption exceed private benefits of consumption when the

market is in equilibrium.d. private costs of production exceed social costs of production when the market is

in equilibrium.ANSWER: d. private costs of production exceed social costs of production when the

market is in equilibrium.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



51. Technology spillover occurs whena. a firm passes the high costs of technical research on to society through higher

prices.b. a firm’s research yields technical knowledge that is used by society as a whole.c. the government subsidizes firms engaged in high-tech research.d. copyright laws prohibit firms from profiting from the research of others.

ANSWER: b. a firm’s research yields technical knowledge that is used by society as a whole.


52. Which of the following best defines the situation were one firm’s research yields knowledge that is used by society as a whole?a. social costb. opportunity cost of technologyc. internalization of an externalityd. technology spillover

ANSWER: d. technology spillover.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

53. Which of the following statements about a market that is affected by a positive production externality is correct?a. The optimum level of output is less than the free market level of output and the

optimum price is greater than the free market price.b. The optimum level of output is greater than the free market level of output and

the optimum price is less than the free market price.c. The optimum level of output is greater than the free market level of output and

the optimum price is greater than the free market price.d. The optimum level of output is less than the free market level of output and the

optimum price is less than the free market price.ANSWER: b. The optimum level of output is greater than the free market level of output

and the optimum price is less than the free market price.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

54. To enhance the well-being of society, a social planner will encourage firms to increase production whena. the firms are producing basic goods.b. there is excess supply in the market.c. technology spillovers are associated with production.d. any negative externalities associated with production are imposed only upon

consumers.ANSWER: c. technology spillovers are associated with production.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

55. A positive production externality will cause a market toa. produce more than is socially desirable.b. produce more than is market optimal.c. produce less than is socially desirable.d. produce less than is market optimal.

ANSWER: c. produce less than is socially desirable.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



56. Internalizing a positive production externality through technology policya. involves a subsidy to industries that yield the largest spillovers.b. requires that the government be able to measure the size of technology spillovers.c. does not have the support of economists who believe technology spillovers are

difficult to measure.d. all of the above.


57. Internalizing a positive production externality through a government subsidy will cause the industry’s supply curve toa. remain unchanged.b. shift down by an amount less than the subsidy.c. shift down by an amount equal to the subsidy.d. shift down by an amount greater than the subsidy.

ANSWER: c. shift down by an amount equal to the subsidy.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

58. To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidize producers bya. use of a Pigovian tax.b. an amount equal to the value of the technology spillover.c. helping those companies that are adversely affected by the new technology.d. transferring income to the low income portion of the population.

ANSWER: b. an amount equal to the value of the technology spillover.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

59. Which of the following could be associated with positive consumption externalities?(i) Child immunizations (insuring that the general population is vaccinated against

communicable diseases)(ii) Primary and secondary education(iii) Technology spilloversa. all of the aboveb. (ii) and (iii) only.c. (i) and (iii) only.d. (i) and (ii) only.

ANSWER: d. (i) and (ii) only.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

60. A positive consumption externality occurs when a. Jack receives a benefit from John’s consumption of a certain good.b. Jack receives personal benefits from his own consumption of a certain good.c. Jack’s benefit exceeds John’s benefit when they each consume the same good.d. Jack’s consumption is not beneficial to John.

ANSWER: a. Jack receives a benefit from John’s consumption of a certain good.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

61. A negative consumption externality will cause a private market toa. produce less than is socially desirable.b. produce more than is socially desirable.c. produce more than is market optimal.d. produce less than is market optimal.

ANSWER: b. produce more than is socially desirable.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



62. A positive consumption externality will cause a private market toa. produce less than is socially desirable.b. produce more than is socially desirable.c. produce more than is market optimal.d. produce less than is market optimal.

ANSWER: a. produce less than is socially desirable.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

63. When dealing with consumption externalities,a. government can correct the market failure only in the case of positive

consumption externalities.b. government can correct the market failure only in the case of negative

consumption externalities.c. government can correct the market failure in both the positive and negative cases

by inducing market participants to internalize the externality.d. government cannot correct for consumption externalities due to consumer rights

laws. ANSWER: c. government can correct the market failure in both the positive and negative

cases by inducing market participants to internalize the externality.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

64. When dealing with consumption externalities, the market equilibrium can be moved closer to the social equilibrium bya. taxing negative externalities and subsidizing positive externalities.b. taxing both positive and negative externalities.c. subsidizing both positive and negative externalities.d. none of the above because government has no corrective policy with regards to

consumption externalities. ANSWER: a. taxing negative externalities and subsidizing positive externalities.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

65. Private markets fail to reach a socially optimal level when negative consumption externalities are present because a. social costs equal private costs at the private market solution. b. private value exceeds social value at the private market solution. c. private value exceeds social costs at the private market solution.d. consumption externalities lead to production externalities.

ANSWER: b. private value exceeds social value at the private market solution.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

66. Private markets fail to reach a socially optimal level when positive consumption externalities are present because.a. private benefit equals social benefit at the private market solution.b. private costs exceed private benefits at the private market solution.c. social value exceeds private value at the private market solution. d. private costs exceed social benefit at the private market solution.

ANSWER: c. social value exceeds private value at the private market solution.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y



67. Which of the following is true of positive consumption externalities?a. Social value exceeds private value and market quantity exceeds socially optimal

quantity.b. Social value is less than private value and market quantity exceeds socially

optimal quantity.c. Social value exceeds private value and market quantity is less than socially

optimal quantity.d. Social value seldom exceeds private value and therefore social quantity is less

than private quantity.ANSWER: c. Social value exceeds private value and market quantity is less than socially

optimal quantity.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

68. All remedies for externalities share the goal ofa. moving the allocation of resources toward the market equilibrium.b. moving the allocation of resources toward the social optimum.c. increasing the allocation of resources.d. decreasing the allocation of resources.

ANSWER: b. moving the allocation of resources toward the social optimum.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y

69. Externalities tend to keep markets from reaching a socially optimal equilibrium. Therefore, government actiona. 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 consumption externalities.d. will be needed only to compensate consumers.

ANSWER: b. is needed when private solutions fail to arise.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

70. Many times the problems of externalities are solved bya. self-interest.b. moral codes and social sanctions.c. charity.d. all of the above.


71. Firms that are involved in different types of business could be evidence of an attempt toa. increase private profit at the expense of consumers.b. internalize some forms of positive externalities.c. reduce the impact of government regulation on their business.d. increase the marginal external cost of production.

ANSWER: b. internalize some forms of positive externalities.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

72. Private contracts between parties with mutual interestsa. can only reduce the well-being of society.b. will always 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 always cause negative externalities to arise.

ANSWER: c. can solve some inefficiencies associated with positive externalities.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y



73. Which of the following choices suggests that the private market can be effective in dealing with externalities?a. the “invisible hand”b. the law of diminishing social returnsc. the Coase theoremd. technology policy

ANSWER: c. The Coase theoremTYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

74. According to the Coase theorem, private parties can solve the problem of externalities ifa. the cost of bargaining is small.b. the initial distribution of 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 true.

ANSWER: a. cost of bargaining is small.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

75. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is thata. Jane pays Dick $500 to get rid of the dog.b. Dick pays Jane $650 for her inconvenience.c. Jane pays Dick $650 to get rid of the dog.d. There is no private solution that would improve this situation.

ANSWER: c. Jane pays Dick $650 to get rid of the dog.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

76. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is thata. There is no private solution that would improve this situation.b. Jane pays Dick $650 to get rid of the dog.c. Jane pays Dick $800 to get rid of the dog.d. Dick pays Jane $600 for her inconvenience.

ANSWER: a. There is no private solution that would improve this situation.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

77. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick’s ownership of the dog. Assuming Dick has the legal right to keep the dog, which of the following choices are true?a. A private solution can always be arranged.b. A private solution can be arranged only if the cost Jane bears exceeds the benefit

Dick gets from his dog.c. A private solution can be arranged only if Jane’s cost equals Dick’s benefit from

the dog.d. A private solution can be arranged only if Dick’s benefit from his dog exceeds

Jane’s cost.ANSWER: b. A private solution can be arranged only if the cost Jane bears exceeds the

benefit Dick gets from his dog.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y



78. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick’s ownership of the dog. Assuming Dick has the legal right to keep the dog, which of the following statements is true?a. Depending on Jane’s cost, Dick may have to pay Jane to solve the externality

problem.b. Only if Dick’s benefit exceeds Jane’s cost will Jane have to pay Dick to solve the

problem.c. Jane will have to pay Dick in order to create a private solution.d. None of the answers are correct.

ANSWER: c. Jane will have to pay Dick in order to create a private solution.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

78

~ANSWER: c.Jane will have to pay Dick in order to create a private solution.


9

~ANSWER: a. making it illegal to “disturb the peace.”


10

~ANSWER: c.Only (ii) is used.


11

~ANSWER: c.decision makers in the market fail to take account of the external effects of their behavior.


12 ~ANSWER: c.a negative consumption externality because its presence reduces the speed

of traffic for cars already on the freeway.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

13 ~ANSWER: d. A maintained yard conveys a positive externality because it increases

the value of adjacent properties in the neighborhood.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

14

~ANSWER: b. grazing cows create negative externalities that make hiking less pleasant.



79. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick’s ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the following statements is true?a. If Dick’s benefit exceeds Jane’s cost, government intervention is necessary.b. Dick will pay to keep his dog if his benefit exceeds Jane’s cost.c. If Jane’s cost exceeds Dick’s benefit, Dick will pay Jane to keep his dog.d. If Jane has legal right to peace and quiet, she only has to pay Dick when her cost

is below his benefit.ANSWER: b. Dick will pay to keep his dog if his benefit exceeds Jane’s cost.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


15

~ANSWER: d. an externality.


16

~ANSWER: b. the social cost of production is less than the private cost.


17

~ANSWER: d. buyers, sellers and bystanders.


18

~ANSWER: a. usually be characterized as a form of market failure.


19

~ANSWER: d. positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain.


20

~ANSWER: b. willingness to pay of the marginal buyer.




80. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Dick receives personal benefit from owning the dog, and Jane bears a cost of Dick’s ownership of the dog. Which of the following statements is true?a. The initial distribution of rights affects the market’s ability to reach an efficient

outcome.b. The initial distribution of rights affects the distribution of economic well-being.c. Government intervention is required if the distribution of rights favors Dick.d. Government intervention is always required.

ANSWER: b. The initial distribution of rights affects the distribution of economic well-being.


21

~ANSWER: a. the value to the consumer of the last unit of automobile fuel bought.


22

~ANSWER: d. cost of the marginal seller.


23

~ANSWER: c.cost to the producer of the last unit of coal sold.


24

~ANSWER: d. a + b


25

~ANSWER: c.Price of zero, Q2.


26

~ANSWER: a. P1, Q1.


27

~ANSWER: a. welfare will be enhanced when some, but not all air pollution is eliminated.



81. According to the Coase theorem, private solutions to externalities can occur when(i) bargaining costs are small.(ii) property ownership/rights cannot be defined.(iii) the number of parties involved is small.a. All of the aboveb. (i) and (ii) onlyc. (iii) onlyd. (i) and (iii) only

ANSWER: d. (i) and (iii) onlyTYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y


28

~ANSWER: c.The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility.


29

~ANSWER: c.social costs exceed private costs at the private market solution.


30 ANSWER: c. (i) and (iii) only.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

31

~ANSWER: a. it takes into account the external costs imposed on society by the concert organizers.


32

~ANSWER: b. the cost of spillover effects from the concert (e.g., noise and traffic).


33

~ANSWER: b. P2 Q0


34



82. Which of the following is true of the Coase theorem ?a. Interested parties can reach an outcome in which everyone is better off.b. The bargain outcome will be inefficient.c. Interested parties will need an arbitrator in order to reach an agreement that is

efficient.d. None of the above is true.

ANSWER: a. Interested parties can reach an outcome in which everyone is better off.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER: b. As long as the value to consumers of concerts exceeds the cost of concerts (including the external costs) the permit should be issued.


35

~ANSWER: d. a + b + c


36

~ANSWER: b. P2


37

~ANSWER: c.the social cost of producing the last concert.


38 ~ANSWER: c.the market equilibrium would not be the socially optimal quantity.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

39

~ANSWER: b. the private costs of the steel producers and the costs to the bystanders affected by the pollution.


40

~ANSWER: b. The equilibrium quantity of output is greater than the socially optimal quantity.




83. Private solutions often are not possible due to the costs of negotiating and enforcing these solutions. Such costs are calleda. transaction costs.b. opportunity costs.c. dead weight loss.d. Pigovian taxes.

ANSWER: a. transaction costs.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

45

~ANSWER: c.the marginal cost of the negative production externality is measured by P3 - P1.


46 ~ANSWER: b. P2, Q1.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

47

~ANSWER: d. remain unchanged.


48

~ANSWER: b. shift to the left.


49 ANSWER: b. internalizing a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.


50

~ANSWER: d. private costs of production exceed social costs of production when the market is in equilibrium.


51

~ANSWER: b. a firm’s research yields technical knowledge that is used by society as a whole.



84. Assuming transaction costs are small, the Coase Theorem is likely to be helpful in articulating a solution toa. a neighborhood problem with unattended dogs running loose.b. a neighbor who doesn’t care for his yard.c. a neighbor who deals drugs out of his house.d. all of the above.



52

~ANSWER: d. technology spillover.


53 ~ANSWER: b. The optimum level of output is greater than the free market level of output and the optimum price is less than the free market price.TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

54

~ANSWER: c.technology spillovers are associated with production.


55

~ANSWER: c.produce less than is socially desirable.


56



57

~ANSWER: c.shift down by an amount equal to the subsidy.


58



85. If only a few people are affected by an externality, then it is likely thata. Pigovian taxes will provide the most efficient solution to the externality.b. command and control regulation will provide the most efficient solution to the

externality.c. a private solution to the inefficiency will occur.d. a private solution will be very difficult to negotiate.

ANSWER: c. a private solution to the inefficiency will occur.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

~ANSWER: b. an amount equal to the value of the technology spillover


59

~ANSWER: d. (i) and (ii) only.


60

~ANSWER: a. Jack receives a benefit from John’s consumption of a certain good.


61

~ANSWER: b. produce more than is socially desirable.


62

~ANSWER: a. produce less than is socially desirable.


63

~ANSWER: c.government can correct the market failure in both the positive and negative cases by inducing market participants to internalize the externality.


64

~ANSWER: a. taxing negative externalities and subsidizing positive externalities.




86. Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example ofa. an opportunity cost.b. an implicit cost. c. a sunk cost.d. a transaction cost.

ANSWER: d. a transaction cost.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

65

~ANSWER: b. private value exceeds social value at the private market solution.


66

~ANSWER: c.social value exceeds private value at the private market solution.


67

~ANSWER: c.Social value exceeds private value and market quantity is less than socially optimal quantity.


68

~ANSWER: b. moving the allocation of resources toward the social optimum.


69

~ANSWER: b. is needed when private solutions fail to arise.


70



71



87. Which of the following is one problem that keeps people from privately solving externalities?a. Each party involved holds out for a better deal.b. An efficient bargain price is unattainable.c. Only problems with a sufficiently large number of parties can be solved.d. There is a lack of government intervention.

ANSWER: a. Each party involved holds out for a better deal.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

~ANSWER: b. internalize some forms of positive externalities.


72

~ANSWER: c.can solve some inefficiencies associated with positive externalities.


73

~ANSWER: c.The Coase theorem


74

~ANSWER: a. cost of bargaining is small.


75

~ANSWER: c.Jane pays Dick $650 to get rid of the dog.


76

~ANSWER: a. There is no private solution that would improve this situation.


77

~ANSWER: b. A private solution can be arranged only if the cost Jane bears exceeds the benefit Dick gets from his dog.




88. Consider a local factory that pollutes a nearby stream. The Coase theorem might fail to explain the fishermen’s inability to strike a deal with the local factory to eliminate the negative externality becausea. the fishermen’s cost will never exceed the factory’s benefit from polluting the

stream.b. the local law gives the factory the right to pollute.c. the cost of coordinating the fishermen into one bargaining body is too large.d. some of the local fishermen work at the factory.

ANSWER: c. the cost of coordinating the fishermen into one bargaining body is too large.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

79

~ANSWER: b. Dick will pay to keep his dog if his benefit exceeds Jane’s cost.


80

~ANSWER: b. The initial distribution of rights affects the distribution of economic well-being.


81 ~ANSWER: d. (i) and (iii) onlyTYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

82

~ANSWER: a. Interested parties can reach an outcome in which everyone is better off.


83

~ANSWER: a. transaction costs.


84



85

~ANSWER: c.a private solution to the inefficiency will occur.




89. In class action law suits, interested parties to the law suit are not required to pay attorney fees directly. This is an example of an attempt toa. increase attorney fees from a final judgment.b. reduce the incentive of attorneys to take-on class action law suits.c. reduce the transaction costs of finding a private solution to an externality.d. regulate attorney fees in class action law suits.

ANSWER: c. reduce the transaction costs of finding a private solution to an externality.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

90. Nancy loves to landscape her yard, but her neighbor Tom places a low value on his landscaping. When Tom’s grass is neglected and gets long, Nancy will mow it for Tom. This is an example ofa. a situation in which the Coase theorem fails to explain the law mowing

arrangement.b. improper allocation of resources.c. a private solution to a negative externality problem.d. an exploitation of a common resource.

ANSWER: c. a private solution to a negative externality problem.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

86

~ANSWER: d. a transaction cost.


87

~ANSWER: a. Each party involved holds out for a better deal.


88

~ANSWER: c.the cost of coordinating the fishermen into one bargaining body is too large.


89

~ANSWER: c.reduce the transaction costs of finding a private solution to an externality.


90

~ANSWER: c.a private solution to a negative externality problem.




91. Japanese fishermen use gill nets to catch tuna with great efficiency. Many environmentalists have objected to this practice since many marine animals such as dolphins and sharks are killed by the nets and discarded by the fishermen. Which of the following statements is most correct?a. A private solution can be reached through negotiation between the fishermen and

the environmentalists.b. A private solution is not practical due to the number of individuals effected.c. The market price of tuna is higher than the socially optimum price of tuna.d. A private solution to this problem would not effect the price of tuna.

ANSWER: b. A private solution is not practical due to the number of individuals effected.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 4 RANDOM: Y

92. The Coase theorem suggests that private solutions to the externality problema. will always allocate resources efficiently if private parties can bargain without

cost.b. are effective under all conditions.c. are only efficient when there are negative externalities.d. may not be possible because of the distribution of property rights.

ANSWER: a. will always allocate resources efficiently if private parties can bargain without cost.


91

~ANSWER: b. A private solution is not practical due to the number of individuals effected.


92

~ANSWER: a. will always allocate resources efficiently if private parties can bargain without cost.




93. Assume that your roommate is very messy. (There is no law against being messy.) Suppose (s)he gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you toa. pay your roommate at least $100 but no more than $200 to clean up after

(her)himself.b. pay your roommate at least $201 to clean up after (her)himself.c. charge your roommate at least $100 to have you clean up after (her)him.d. charge your roommate at least $200 but no more than $300 to keep you from

complaining about the mess.ANSWER: a. pay your roommate at least $100 but no more than $200 to clean up after

(her)himself.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

94. Assume that your roommate is very messy. (There is no law against being messy.) Suppose (s)he 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 you toa. pay your roommate at least $100 but no more than $200 to clean up after

(her)himself.b. pay your roommate at least $201 to clean up after (her)himself.c. continue to live with your messy roommate until you are able to make other living

arrangements elsewhere.d. charge your roommate at least $100 to have you clean up after (her)him.

ANSWER: c. continue to live with your messy roommate until you are able to make other living arrangements elsewhere.


93

~ANSWER: a. pay your roommate at least $100 but no more than $200 to clean up after (her)himself.


94

~ANSWER: c.continue to live with your messy roommate until you are able to make other living arrangements elsewhere.




95. Assume that your roommate is very messy. (According to campus policy you have a right to live in an uncluttered apartment.) Suppose (s)he gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you toa. continue to live with your messy roommate until you are able to make other living

arrangements elsewhere.b. encourage your messy roommate to stop (her) his messy habits or you will force

(her)him to move out.c. pay your roommate at least $100 but no more than $200 to clean up after

(her)himself.d. charge your roommate at least $100 but no more than $200 to have you clean up

after (her) him.ANSWER: b. encourage your messy roommate to stop (her) his messy habits or you will

force (her)him to move out.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

96. Assume that your roommate is very messy. (According to campus policy you have a right to live in an uncluttered apartment.) Suppose (s)he 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 toa. stop (her)his messy habits or you force (her)him to 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 make other living arrangements elsewhere.d. demand payment of at least $100 but no more than $200 to clean up after

(her)himself.ANSWER: b. pay you at least $100 but less than $200 to live with the clutter.TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

95

~ANSWER: b. encourage your messy roommate to stop (her) his messy habits or you will force (her)him to move out.


96

~ANSWER: b. pay you at least $100 but less than $200 to live with the clutter.




97. In the case of a private solution to the externality problem, the distribution of rightsa. restricts the ability of private parties to properly price the externalities.b. enhances the market incentive to reach an efficient solution.c. determines who bears the cost of the solution but does not affect the ultimate

efficiency of the outcome.d. affects the efficiency of the outcome, but does not determine who bears the cost.

ANSWER: c. determines who bears the cost of the solution but does not affect the ultimate efficiency of the outcome.


98. When the government reverts to command-and-control policy to solve an externality, ita. is usually the most effective policy option available.b. creates policies that directly regulate behavior.c. usually involves taxing consumption of a commodity.d. typically refers to the Coase theorem to structure the policy.

ANSWER: b. creates policies that directly regulate behavior.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

99. When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality,a. it provides incentives to private decision makers to induce them to solve the

externality problem on their own.b. it typically uses command and control techniques.c. the use of taxes is strictly forbidden.d. subsidies are always the best policy.

ANSWER: a. it provides incentives to private decision makers to induce them to solve the externality problem on their own.


97

~ANSWER: c.determines who bears the cost of the solution but does not affect the ultimate efficiency of the outcome.


98

~ANSWER: b. creates policies that directly regulate behavior.


99

~ANSWER: a. it provides incentives to private decision makers to induce them to solve the externality problem on their own.




100. A local cafe that allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards. This decision provides an example ofa. direct regulation of an externality.b. Pigovian taxes.c. a Coase theorem solution to an externality.d. unjustified discrimination against smokers.

ANSWER: a. direct regulation of an externality.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

101. In Singapore, littering fines are strictly enforced. This is an example of a policya. in which moral codes and social sanctions reduce the pollution externality.b. that relies on command and control techniques.c. that discriminates against foreigners.d. in which private incentives are used to reduce the pollution externality in

Singapore.ANSWER: d. in which private incentives are used to reduce the pollution externality in

Singapore.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

102. In Singapore, property taxes on an automobile can exceed the purchase price of a new automobile. Assuming that the tax is a fixed percentage of market value, this tax is an example of(i) a policy in which private incentives are used to reduced the traffic externality on

congested roads in Singapore.(ii) the government's direct control over the number of automobiles that are

purchased.(iii) a policy in which private incentives are used to reduce automobile pollution.a. (i) and (ii) onlyb. (i) and (iii) onlyc. (ii) and (iii) onlyd. All of the above

ANSWER: b. (i) and (iii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

100

~ANSWER: a. direct regulation of an externality.


101

~ANSWER: d. a policy in which private incentives are used to reduce the pollution externality in Singapore.


102

~ANSWER: b. (i) and (iii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y



103. Which of the following is a command-and-control policy?a. subsidiesb. pollution permitsc. regulationd. all of the above

ANSWER: c. regulationTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

104. The Environmental Protection Agency (EPA) is an agency that has a mandate to address externality problems bya. regulating polluting industries.b. monitoring polluting industries.c. imposing taxes on polluting industries.d. all of the above.


105. Emission controls on automobiles is an example ofa. a Pigovian tax on automobiles, based on how much they pollute.b. a command-and-control policy to increase social efficiency.c. a policy that reduces pollution by allocating resources through market

mechanisms.d. a policy to reduce congestion on urban freeways.

ANSWER: b. a command-and-control policy to increase social efficiency.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

106. Pigovian taxes are typically advocated to correct for the effects ofa. positive externalities.b. negative externalities.c. regulatory burden.d. all of the above.

ANSWER: d. negative externalities.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

107. Pigovian taxesa. encourage consumers to avoid sales taxes by shopping on-line.b. are frequently used to encourage exports.c. are rarely preferred to direct regulation.d. give factory owners an economic incentive to reduce pollution.

ANSWER: d. give factory owners an economic incentive to reduce pollution.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

108. Which of the following statements is most correct?a. Pigovian taxes are often preferred over direct regulation because they typically

reduce externalities at a lower cost.b. Pigovian taxes are less preferred than direct regulation because they typically

reduce externalities at a higher cost.c. Pigovian taxes are often preferred over direct regulation because they typically

reduce externalities at a faster rate.d. Pigovian taxes are less preferred than direct regulation because they typically

reduce externalities at a slower rate.ANSWER: a. Pigovian taxes are often preferred over direct regulation because they

typically reduce externalities at a lower cost.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y



109. If the government were to limit the release of air-pollution produced by a steel mill to 10,000 units, this policy would be considered aa. regulation.b. Pigovian tax.c. subsidy.d. market-based policy.

ANSWER: a. regulation.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

110. If the government were to impose a fee of $10,000 for each unit of air-pollution released by a steel mill, this policy would be considered aa. subsidy.b. regulation.c. Pigovian tax.d. command-and-control policy.

ANSWER: c. Pigovian tax.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

Use the figure below to answer questions 111 and 112

111. In the figure above, which curve best represents a Pigovian tax?a. Ab. Bc. Cd. D

ANSWER: a. ATYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

112. In the figure above, the equivalence of a Pigovian tax and a pollution permit would require thata. PB be equivalent to the Pigovian tax.b. QA be equivalent to the amount of pollution allowed by the pollution permit

holders.c. the equilibrium price and quantity of pollution are the same in both panel A and

panel B.d. All of the above.

ANSWER: d. All of the above.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y



113. In order for regulation to be efficient, it often requires detailed information about the relationship between a. taxes and subsidies.b. command and control.c. governments and individuals.d. production and technology.

ANSWER: d. production and technology.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

114. A Pigovian taxa. allocates pollution to those factories that face the highest cost of reducing it.b. is a form of regulation.c. works well for all types of externalities.d. is deemed inferior to regulatory policy by most economists.

ANSWER: a. allocates pollution to those factories that face the highest cost of reducing it.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

Use the figure below to answer questions 115 through 120



115. Which of the graphs above best depicts the case of a negative production externality?a. Panel Ab. Panel Bc. Panel Cd. Panel D

ANSWER: d. Panel DTYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

116. Which of the graphs above best depicts the case of a positive production externality?a. Panel Ab. Panel Bc. Panel Cd. Panel D

ANSWER: c. Panel CTYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

117. Which of the graphs above best depicts the case of a negative consumption externality?a. Panel Ab. Panel Bc. Panel Cd. Panel D

ANSWER: a. Panel ATYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

118. Which of the graphs above best depicts the case of a positive consumption externality?a. Panel Ab. Panel Bc. Panel Cd. Panel D

ANSWER: b. Panel BTYPE: M KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

119. In the figure above, which set of graphs depict a situation most likely to benefit from a Pigovian tax?a. Panels A and Cb. Panels B and Dc. Panels B and Cd. Panels A and D

ANSWER: d. Panels A and DTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

120. A policy that restricts the use of a mobile phone while driving an automobile would best be applied to a market characterized bya. Panel Ab. Panel Bc. Panel Cd. Panel D

ANSWER: a. Panel ATYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y



121. Pigovian taxes are unlike most other taxes because theya. distort incentives.b. move the allocation of resources away from the social optimum.c. raise revenue for the government.d. move the allocation of resources closer to the social optimum.

ANSWER: d. move the allocation of resources closer to the social optimum.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

122. The gasoline tax in the United States is an example ofa. a negative externality.b. a Pigovian tax.c. a command and control policy.d. a regulatory burden.

ANSWER: b. a Pigovian tax.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

123. Increasing automobile fuel taxes could be regarded as a policy in which(i) private incentives are used to reduce automobile pollution.(ii) private incentives are used to reduce highway congestion.(iii) governments directly control the amount of automobile fuel that is purchased.a. (i) and (ii) onlyb. (ii) and (iii) onlyc. (iii) onlyd. all of the above

ANSWER: a. (i) and (ii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

124. One advantage of allowing a market for pollution permits to control the total amount of pollution released in an area is thata. the government knows exactly how much each firm is allowed to pollute.b. government revenue from the sale of permits is greater than revenue from a

Pigovian tax.c. the initial allocation of permits to firms does not effect the efficiency of the

market.d. firms will work together to eventually eliminate pollution.

ANSWER: c. the initial allocation of permits to firms does not effect the efficiency of the market.


125. Pigovian taxes and pollution permits are similar in that (i) in both cases, firms pay for their pollution.(ii) both internalize the externality of pollution by making it costly to pollute.(iii) each policy allows for a market-based solution.a. all of the aboveb. (i) and (iii) onlyc. (ii) onlyd. (ii) and (iii) only

ANSWER: a. all of the aboveTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y



126. In some cases, pollution permits may be better than a Pigovian tax becausea. pollution permits allow for a market solution while a Pigovian tax does not.b. pollution permits generate more revenue for the government than a Pigovian tax.c. pollution permits are never preferred over a Pigovian tax.d. the government can set a maximum level of pollution using permits.

ANSWER: d. the government can set a maximum level of pollution using permits.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y and 219

127. Once tradable pollution permits have been allocated to firms,a. the government controls the price of permits.b. firms that can reduce pollution only at high cost will be willing to pay the most for

the pollution permits.c. the value of pollution saving technology is always lower than the market value of a

pollution permit.d. the total amount of pollution governed by the permit will always decrease.

ANSWER: b. firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.


128. When one firm sells its pollution permit to another firm,a. both firms benefit.b. the total amount of pollution remains the same.c. social welfare is enhanced.d. all of the above.


129. Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. The implication of such a disregard for cost is likely to lead to(i) lower levels of nutrition, health care, and housing.(ii) a lower standard of living.(iii) slowing or reversing technological advancement.a. all of the aboveb. (ii) and (iii) onlyc. (i) onlyd. (i) and (ii) only

ANSWER: a. all of the aboveTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y

130. A clean environment is a good like any other good. In fact, it is most likely a(n)a. price inelastic good.b. low cost good.c. inferior good.d. normal good.

ANSWER: d. normal good.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y



131. Tradable pollution permits(i) are a scarce resource.(ii) can be traded in a market governed by supply and demand.(iii) eventually lead to an efficient elimination of all pollution.a. all of the aboveb. (iii) onlyc. (i) and (iii) onlyd. (i) and (ii) only

ANSWER: d. (i) and (ii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

132. Tradable pollution permits(i) will be sold by firms that can reduce pollution at low costs.(ii) will be bought by firms that can reduce pollution only at high costs.(iii) are likely to create a higher level of total pollution.a. all of the aboveb. (iii) onlyc. (ii) and (iii) onlyd. (i) and (ii) only

ANSWER: d. (i) and (ii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

133. Tradable pollution permits may be preferred to Pigovian taxes in cases where(i) they internalize the externality of pollution(ii) regulatory agencies (like the EPA) do not know the demand curve for pollution(iii) the government is interested in generating maximum revenue from polluting firmsa. (i) onlyb. (ii) onlyc. (ii) and (iii) onlyd. all of the above

ANSWER: b. (ii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

134. Children can be thought of as imposing negative externalities on airplane passengers becausea. when they cry passengers bear a portion of the cost of this discomfort.b. their tickets are free or obtained at reduced cost.c. children (and their parents) are typically isolated in the rear of the airplane.d. all of the above.

ANSWER: a. when they cry passengers bear a portion of the cost of this discomfort.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 1 RANDOM: Y

135. Mobile phones (or cell phones) are banned in some public places. This is likely a response toa. negative externalities associated with use of a mobile phone in public places.b. a mobile phone user's private costs do not reflect the cost he or she imposes on

bystanders.c. mobile phone conversations in public are likely to annoy bystanders.d. all of the above.




136. If children impose a negative externality, the following must be true.a. Parents would rather have less children.b. Parent’s costs exceed the benefits associated with having children. c. Parents do not bear the full cost imposed by their children.d. all of the above.

ANSWER: c. Parents do not bear the full cost imposed by their children.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y

137. Medical research is often presented as an example of a positive externality. What tools are available to policymakers that would encourage producers of medical knowledge to provide a socially optimal level of production?(i) Impose price ceilings on selected medical procedures.

(ii) Place taxes on the sale of prescription drugs.(iii) Provide subsidies to these firms.a. all of the aboveb. (i) and (ii) onlyc. (iii) onlyd. none of the above

ANSWER: c. (iii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

138. In many cities, vacant lots are required to be mowed on a regular basis. This is an example of(i) regulation to reduce the effects of negative externalities from weeds and vermin.

(ii) a command-and-control approach to solving the externality problem.(iii) a Pigovian approach to solving the externality problem.a. (i) and (ii) onlyb. (i) and (iii) onlyc. (ii) and (iii) onlyd. all of the above

ANSWER: a. (i) and (ii) only.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

139. Which of the following policies is government most inclined to use when faced with a positive externality?a. taxationb. permitsc. subsidiesd. usage fees

ANSWER: c. subsidiesTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

140. It is illegal for a biochemical manufacturer to release its waste into a nearby stream. This is an example ofa. a market-based policy.b. a command-and-control policy.c. pollution permits.d. transaction costs.

ANSWER: b. a command-and-control policy.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

TRUE/FALSE



141. Governments can sometimes improve market outcomes.ANSWER: TTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

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

ANSWER: TTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

143. Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

ANSWER: FTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

144. Restored historic buildings convey a positive externality because people who walk or ride by them can enjoy their beauty and the sense of history they provide.


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


146. Internet technologies are a good example of a positive externality because they create knowledge that other people can use.


147. 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.


148. The marginal consumer values steel at less than the social cost of producing it when a steel market that is characterized by a negative production externality is in equilibrium.


149. All externalities must be corrected by government intervention.ANSWER: FTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

150. Internalizing a negative consumption externality will cause the market supply curve to shift to the left.


151. If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.




152. Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

ANSWER: T TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

153. Government can measure the size of technology spillovers with ease.ANSWER: FTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

154. Patent protection is a type of technology policy.ANSWER: TTYPE: T KEY1: D SECTION: 1 OBJECTIVE: 5 RANDOM: Y

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


156. Externalities exist with the production of goods, but not with the consumption of goods.


157. Negative consumption externalities will have a socially optimal quantity that is smaller than the quantity determined by the private market.


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


159. Government can internalize an externality by taxing the goods that have negative externalities, and subsidizing the goods that have positive externalities.


160. All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.


161. In some circumstances, people can develop private solutions to problems created by externalities.


162. When Jake takes into account how his actions affect Jill, the problem of externalities is solved.




163. Education has positive externalities for society.ANSWER: TTYPE: T KEY1: D SECTION: 2 OBJECTIVE: 1 RANDOM: Y

164. Internalizing externalities is one reason that some firms involve themselves in only one type of business.


165. Contracts cannot solve the inefficiency that arises from externalities.ANSWER: FTYPE: T KEY1: D SECTION: 2 OBJECTIVE: 3 RANDOM: Y

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


167. The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.


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


169. Private parties may choose to leave an externality problem unsolved if the transaction costs are large enough.


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


171. Despite the stated goals of some environmentalists, it would be impossible to prohibit all polluting activity.


172. When weighing the costs and benefits of pollution, the costs always exceed the benefits because the benefit equals zero.


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




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


175. Unfortunately, the gasoline tax does not make people take into account the risk they impose on others by driving large vehicles.


176. In essence, the Pigovian tax places a price on the right to pollute.ANSWER: TTYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

177. Equal reduction in pollution, among all firms, is the least expensive way to clean up the environment.


178. Pigovian taxes enhance efficiency, but the cost to administer the tax frequently exceeds the revenue they raise for the government.


179. A large-car owner enjoys a positive externality because a large car offers added safeness when compared to a small car.


180. Social welfare can be enhanced by allowing firms to trade their rights to pollute.ANSWER: TTYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

181. Total pollution is increased when firms are allowed to trade pollution permits.ANSWER: FTYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

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


183. The initial allocation of tradable pollution permits will affect the level of economic efficiency in a market with a pollution externality.


184. Firms that can reduce pollution easily would be willing to sell their pollution permits.ANSWER: TTYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

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




186. Both pollution permits and Pigovian taxes are viewed as cost effective ways to keep the environment clean.


187. “No jeans” policies in restaurants are aimed at solving the problem of a negative externality associated with people wearing jeans in restaurants.


188. Because a driver’s private motoring costs do not reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.


189. Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than, the bystander.


190. By creating a “child-free zone,” a restaurant could attempt to account for the costs that children impose on others.


SHORT ANSWER

191. Explain the difference between market equilibrium and social optimum.ANSWER: Market equilibrium is when demand is equal to supply; social optimum is when

marginal social benefit is equal to marginal social cost.TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y

192. What is meant by “internalizing” an externality? How can a negative externality be internalized?

ANSWER: Internalizing an externality is when the parties to a market exchange perceive the external cost or benefit as a “cost” or “benefit” that accrues to them as part of the market exchange. One way of internalizing a negative externality is through a unit tax (Pigovian tax) on production and/or consumption.

TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y

193. Evaluate the following statement: “Universities should subsidize on-campus recreation to encourage positive externalities from students engaging in recreational activities together.”

ANSWER: It is not clear that there is a positive externality from having students participating in “on-campus” recreation versus “off-campus” recreation. Hence, there is probably not a good positive externality argument for subsidizing “on-campus” recreation.




194. Using a supply and demand diagram, demonstrate how a positive consumption externality leads to market inefficiency.

ANSWER

194 ANSWER

[INSERT FIGURE 10.6 HERE]

A positive consumption externality leads the market to exchange a smaller quantity than is socially desirable.

TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 2 RANDOM: Y PAGE: 212

103

~ANSWER: c.regulation


104

~ANSWER: d. all of the above


105

~ANSWER: b. a command-and-control policy to increase social efficiency.


106

~ANSWER: d. negative externalities.


107

~ANSWER: d. give factory owners an economic incentive to reduce pollution.


108



~ANSWER: a. Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.


109

~ANSWER: a. regulation.


110

~ANSWER: c.Pigovian tax.


111

~ANSWER: a. A


112

~ANSWER: d. All of the above.


113

~ANSWER: d. production and technology.


114 ANSWER: a. allocates pollution to those factories that face the highest cost of reducing it.


115



A positive consumption externality leads the market to exchange a smaller quantity than is socially desirable.


195. The Coase theorem suggests that efficient solutions to externalities can be arrived at through bargaining. Under what circumstances does this fail to produce a solution?

ANSWER: 1. The existence of significant transactions costs.2. Parties may try to hold out for a better deal, and thus the bargaining process breaks

down.3. The number of parties to a bargaining process is large.


~ANSWER: d. Panel D


116

~ANSWER: c.Panel C.


117

~ANSWER: a. Panel A.


118

~ANSWER: b. Panel B.


119

~ANSWER: d. Panels A and D.


120

~ANSWER: a. Panel A.


121

~ANSWER: d. move the allocation of resources closer to the social optimum.




196. To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields increasing the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality and how might the solution be reached.

ANSWER: One solution would be to have the farmer also own the beehives. This internalizes the externality. Another solution would be to have the farmer compensate the owner of the beehives for the value of the pollination. On the other hand, the owner of the beehives prospers by locating his hives next to the farmer’s fields. She should be willing to compensate the farmer for this benefit.


122

~ANSWER: b. a Pigovian tax.


123 ~ANSWER: a. (i) and (ii) onlyTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

124

~ANSWER: c.the initial allocation of permits to firms does not effect the efficiency of the market.


125 ~ANSWER: a. All of the aboveTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

126

~ANSWER: d. the government can set a maximum level of pollution using permits.

TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y and 219

127

~ANSWER: b. firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.


128

~ANSWER: d. all of the above


129



197. Environmental groups are often interested in leasing their own land for oil exploration and production but are strongly opposed to the government leasing its land for similar development activities. Explain this apparent contradiction.

ANSWER: The apparent contradiction is explained by the fact that once the environmental group owns the land, it has internalized all of the externalities. As such it has an incentive to extract the optimal rent (profit) from the land—including possible development. It is opposed to development on government land since it typically does not receive any of the benefit from it.


~ANSWER: a. all of the aboveTYPE: M KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y

130

~ANSWER: d. normal good.


131 ~ANSWER: d. (i) and (ii) only.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

132 ~ANSWER: d. (i) and (ii) only.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

133 ~ANSWER: b. (ii) only.TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y

134

~ANSWER: a. when they cry passengers bear a portion of the cost of this discomfort.


135



136

~ANSWER: c.Parents do not bear the full cost imposed by their children.


137

~ANSWER: c.(iii) only.




198. Many communities are considering the purchase of land development rights from local farmers as a method to focus development in urban centers. Describe how this program would help communities that are interested in using the market to encourage the positive externalities associated with open spaces.

ANSWER: The purchase of development rights to farmland is an explicit subsidy to owners of farmland. As long as open spaces associated with farmland are perceived to have positive external benefits to a community, such a program makes sense.

TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y PAGE: Not directly in the text, but is an interesting thought question for students to consider.

138

~ANSWER: a. (i) and (ii) only.


139

~ANSWER: c.subsidies


140

~ANSWER: b. a command-and-control policy.


141

~ANSWER: T

TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 4 RANDOM: Y

142

~ANSWER: T


143

~ANSWER: F


144

~ANSWER: T



199. Evaluate the following statement: “The problem of secondhand smoke in places of employment is different than the problem in public restaurants. People typically don’t have very many employment options but they do have many alternatives for selecting a place to eat. As such, direct regulation of secondhand smoke in public restaurants is likely to be inefficient.”

ANSWER: If one believes that the restaurant market is able to segment itself to meet the demands of a differentiated clientele this statement is probably true. One is also likely to make a strong argument that people have many employment options as well, and direct government regulation of secondhand smoke in places of employment is also probably inefficient. This argument breaks down for regulation of secondhand smoke in public places that people don’t have a choice about frequenting.



145

~ANSWER: F


146

~ANSWER: T


147

~ANSWER: F


148

~ANSWER: T


149

~ANSWER: F


150

~ANSWER: F


151



200. Why are public policy solutions such as Pigovian taxes and subsidies preferred over regulatory policies?

ANSWER: The preference of Pigovian taxes and subsidies is based on the ability of markets to signal optimal resource allocations.


~ANSWER: T


152

~ANSWER: T


153

~ANSWER: F


154

~ANSWER: T


155

~ANSWER: T


156

~ANSWER: F


157

~ANSWER: T




201. The availability of “pornography” on the Internet has invited much discussion about government regulation of Internet access. In some countries, this has led to limited access to Internet connections. Identify the externalities in this situation. Is it possible to correct the externalities through regulation or taxation? Explain your answer.

158

~ANSWER: F


159

~ANSWER: T


160

~ANSWER: F


161

~ANSWER: T


162

~ANSWER: T


163

~ANSWER: T


164

~ANSWER: F




ANSWER: The answers to this question can be quite varied. Some students may argue that the availability of pornography on the Internet provides a positive consumption externality because society benefits from the fact that pornography is consumed in a format that can’t degrade the social values of a community (i.e., fewer adult bookstores, fewer strip bars, less sex-related crime). Other students may argue that the availability of pornography on the Internet provides negative consumption externalities since society incurs a cost from the fact that pornography distributed a low cost will increase the pornography addiction of consumers and lead to more divorce and sex-related crimes. Depending on the argument, students can identify ways in which the government can either use direct regulation, taxes, or subsidies to resolve the private market externality.

TYPE: S KEY1: D SECTION: 1,3 OBJECTIVE: 5 RANDOM: Y

165

~ANSWER: F


166

~ANSWER: F


167

~ANSWER: F


168

~ANSWER: T


169

~ANSWER: T


170

~ANSWER: T


171

~ANSWER: T




172 ANSWER: FTYPE: T KEY1: D SECTION: 3 OBJECTIVE: 2 RANDOM: Y

173

~ANSWER: T


174

~ANSWER: F


175

~ANSWER: F


176

~ANSWER: T


177

~ANSWER: F


178

~ANSWER: F




179

~ANSWER: F


180

~ANSWER: T


181

~ANSWER: F


182

~ANSWER: T


183

~ANSWER: F


184

~ANSWER: T


185

~ANSWER: F



TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 5 RANDOM: Y and 219

186

~ANSWER: T


187

~ANSWER: T


188

~ANSWER: T


189

~ANSWER: F


190

~ANSWER: T


191

~ANSWER:

Market equilibrium is when demand is equal to supply; social optimum is when marginal social benefit is equal to marginal social cost.



192

~ANSWER:

Internalizing an externality is when the parties to a market exchange perceive the external cost or benefit as a “cost” or “benefit” which accrues to them as part of the market exchange. One way of internalizing a negative externality is through a unit tax (Pigovian tax) on production and/or consumption.

193

~ANSWER:

It is not clear that there is a positive externality from having students participating in “on-campus” recreation versus “off-campus” recreation. Hence, there is probably not a good positive externality argument for subsidizing “on-campus” recreation.

195

~ANSWER:

1. The existence of significant transactions costs.

2. Parties may try to hold out for a better deal, and thus the bargaining process breaks down.

196

~ANSWER:

One solution would be to have the farmer also own the beehives. This internalizes the externality. Another solution would be to have the farmer compensate the owner of the beehives for the value of the pollination. On the other hand, the owner of the beehives prospers by locating his hives next to the farmer’s fields. She should be willing to compensate the farmer for this benefit.



197

~ANSWER:

The apparent contradiction is explained by the fact that once the environmental group owns the land, it has internalized all of the externalities. As such it has an incentive to extract the optimal rent (profit) from the land -- including possible development. It is opposed to development on government land since it typically does not receive any of the benefit from it.

198

~ANSWER:

The purchase of development rights to farmland is an explicit subsidy to owners of farmland. As long as open spaces associated with farm land are perceived to have positive external benefits to a community, such a program makes sense.

199

~ANSWER:

If one believes that the restaurant market is able to segment itself to meet the demands of a differentiated clientele this statement is probably true. One is also likely to make a strong argument that people have many employment options as well, and direct government regulation of second hand smoke in places of employment is also probably inefficient. This argument breaks down for regulation of secondhand smoke in public places that people don’t have a choice about frequenting.

200

~ANSWER:

The preference of Pigovian taxes and subsidies is based on the ability of markets to signal optimal resource allocations.



201

~ANSWER:

The answers to this question can be quite varied. Some students may argue that the availability of pornography on the internet provides a positive consumption externality since society benefits from the fact that pornography is consumed in a format that can’t degrade the social values of a community (i.e., fewer adult bookstores, fewer strip bars, less sex-related crime). Other students may argue that the availability of pornography on the internet provides negative consumption externalities since society incurs a cost from the fact that pornography distributed at a low cost will increase the pornography addiction of consumers and lead to more divorce and sex-related crimes. Depending on the argument, students can identify ways in which the government can either use direct regulation, taxes, or subsidies to resolve the private market externality.


Documents

Chap10.doc