ECO chapter 10 by King Malsonz

a

What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? a. the Coase theorem b. the laws of supply and demand c. the law of comparative advantage d. the law of externalities

c

In a market economy, government intervention a. will always improve market outcomes. b. reduces efficiency in the presence of externalities. c. may improve market outcomes in the presence of externalities. d. is necessary to control individual greed.

b

In the absence of externalities, the "invisible hand" leads a market to maximize a. producer profit from that market. b. total benefit to society from that market. c. both equality and efficiency in that market. d. output of goods or services in that market.

a

The term market failure refers to a. a market that fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand. c. ruthless competition among firms. d. a firm that is forced out of business because of losses.

b

Market failure can be caused by a. too much competition. b. externalities. c. low consumer demand. d. scarcity.

c

An externality is an example of a. a corrective tax. b. a tradable pollution permit. c. a market failure. d. Both a and b are correct.

c

An externality is the impact of a. society’s decisions on the well-being of society. b. a person’s actions on that person’s well-being. c. one person’s actions on the well-being of a bystander. d. society’s decisions on the poorest person in the society.

d

The impact of one person’s actions on the well-being of a bystander is called a. an economic dilemma. b. deadweight loss. c. a multi-party problem. d. an externality.

a

An externality a. results in an equilibrium that does not maximize the total benefits to society. b. causes demand to exceed supply. c. strengthens the role of the "invisible hand" in the marketplace. d. affects buyers but not sellers.

b

An externality is a. the costs that parties incur in the process of agreeing and following through on a bargain. b. the uncompensated impact of one person’s actions on the well-being of a bystander. c. the proposition that private parties can bargain without cost over the allocation of resources. d. a market equilibrium tax.

d

A cost imposed on someone who is neither the consumer nor the producer is called a a. corrective tax. b. command and control policy. c. positive externality. d. negative externality.

c

An externality arises when a person engages in an activity that influences the well-being of a. buyers in the market for that activity and yet neither pays nor receives any compensation for that effect. b. sellers in the market for that activity and yet neither pays nor receives any compensation for that effect. c. bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect. d. Both (a) and (b) are correct.

d

An externality exists whenever a. the economy cannot benefit from government intervention. 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.

c

When externalities are present in a market, the well-being of market participants a. and market bystanders are both directly affected. b. and market bystanders are both indirectly affected. c. is directly affected, and market bystanders are indirectly affected. d. is indirectly affected, and market bystanders are directly affected.

a

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

c

Which of the following statements about a well-maintained yard best conveys the general nature of the externality? a. A well-maintained yard conveys a positive externality because it increases the home’s market value. b. A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. d. A well-maintained yard cannot provide any type of externality.

d

Since restored historic buildings convey a positive externality, local governments may choose to a. regulate the demolition of them. b. provide tax breaks to owners who restore them. c. increase property taxes in historic areas. d. Both a and b are correct.

a

All externalities a. cause markets to fail to allocate resources efficiently. b. cause equilibrium prices to be too high. c. benefit producers at the expense of consumers. d. cause equilibrium prices to be too low.

c

When externalities exist, buyers and sellers a. 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.

c

Dioxin emission that results from the production of paper is a good example of a negative externality because a. self-interested paper firms are generally unaware of environmental regulations. 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. toxic emissions are the best example of an externality.

b

If a paper manufacturer does not bear the entire cost of the dioxin it emits, it will a. emit a lower level of dioxin than is socially efficient. b. emit a higher level of dioxin than is socially efficient. c. emit an acceptable level of dioxin. d. not emit any dioxin in an attempt to avoid paying the entire cost.

d

Which of the following is an example of an externality? a. cigarette smoke that permeates an entire restaurant b. a flu shot that prevents a student from transmitting the virus to her roommate c. a beautiful flower garden outside of the local post office d. All of the above are correct.

d

Which of the following statements is not correct? a. Government policies may improve the market’s allocation of resources when negative externalities are present. b. Government policies may improve the market’s allocation of resources when positive externalities are present. c. A positive externality is an example of a market failure. d. Without government intervention, the market will tend to undersupply products that produce negative externalities.

d

Which of the following represents a way that a government can help the private market to internalize an externality? a. taxing goods that have negative externalities b. subsidizing goods that have positive externalities c. The government cannot improve upon the outcomes of private markets. d. Both a and b are correct.

d

Which of the following is not correct? a. Markets allocate scarce resources with the forces of supply and demand. b. The equilibrium of supply and demand is typically an efficient allocation of resources. c. Governments can sometimes improve market outcomes. d. Externalities cannot be positive.

a

A negative externality arises when a person engages in an activity that has a. an adverse effect on a bystander who is not compensated by the person who causes the effect. b. an adverse effect on a bystander who is compensated by the person who causes the effect. c. a beneficial effect on a bystander who pays the person who causes the effect. d. a beneficial effect on a bystander who does not pay the person who causes the effect.

d

A positive externality arises when a person engages in an activity that has a. an adverse effect on a bystander who is not compensated by the person who causes the effect. b. an adverse effect on a bystander who is compensated by the person who causes the effect. c. a beneficial effect on a bystander who pays the person who causes the effect. d. a beneficial effect on a bystander who does not pay the person who causes the effect.

d

When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

d

If an externality is present in a market, economic efficiency may be enhanced by a. increased competition. b. weakening property rights. c. better informed market participants. d. government intervention.

a

Externalities tend to cause markets to be a. inefficient. b. unequal. c. unnecessary. d. overwhelmed.

c

If a sawmill creates too much noise for local residents, a. noise restrictions will force residents to move out of the area. b. a sense of social responsibility will cause owners of the mill to reduce noise levels. c. the government can raise economic well-being through noise-control regulations. d. the government should avoid intervening because the market will allocate resources efficiently.

c

Private markets fail to account for externalities because a. externalities don’t occur in private markets. b. sellers include costs associated with externalities in the price of their product. c. decisionmakers in the market fail to include the costs of their behavior to third parties. d. the government cannot easily estimate the optimal quantity of pollution.

d

Altering incentives so that people take account of the external effects of their actions a. is called internalizing the externality. b. can be done by imposing a corrective tax. c. is the role of government in markets with externalities. d. all of the above.

b

When the government intervenes in markets with externalities, it does so in order to a. increase production when negative externalities are present. b. protect the interests of bystanders. c. make certain all benefits are received by market participants. d. reduce production when positive externalities are present.

b

All remedies for externalities share the goal of a. moving the allocation of resources toward the market equilibrium. b. moving the allocation of resources toward the socially optimal equilibrium. c. increasing the allocation of resources. d. decreasing the allocation of resources.

a

At any given quantity, the willingness to pay in the market for gasoline is reflected in the a. height of the demand curve at that quantity. b. height of the supply curve at that quantity. c. value to the producer of the last unit of gasoline sold. d. total quantity of gasoline exchanged in the market.

c

The supply curve for a product reflects the a. willingness to pay of the marginal buyer. b. quantity buyers will ultimately purchase of the product. c. cost to sellers of producing the product. d. seller’s profit from producing the product.

a

Since air pollution creates a negative externality, a. social 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 private firms to consider only private costs. d. the free market result maximizes social welfare.

b

The difference between social cost and private cost is a measure of the a. loss in profit to the seller as the result of a negative externality. b. cost of an externality. c. cost reduction when the negative externality is eliminated. d. cost incurred by the government when it intervenes in the market.

c

When a market is characterized by an externality, the government a. can correct the market failure only in the case of positive externalities. b. can correct the market failure only in the case of negative externalities. c. can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize the externality. d. cannot correct for externalities due to the existence of patents.

b

Which of the following statements is correct? a. Government should tax goods with either positive or negative externalities. b. Government should tax goods with negative externalities and subsidize goods with positive externalities. c. Government should subsidize goods with either positive or negative externalities. d. Government should tax goods with positive externalities and subsidize goods with negative externalities.

d

Negative externalities occur when one person’s actions a. cause another person to lose money in a stock market transaction. b. cause his or her employer to lose business. c. reveal his or her preference for foreign-produced goods. d. adversely affect the well-being of a bystander who is not party to the action.

a

A negative externality a. is an adverse impact on a bystander. b. causes the product in a market to be under-produced. c. is an adverse impact on market participants. d. is present in markets where the good or service does not have any impact on bystanders.

a

A negative externality a. is a cost to a bystander. b. is a cost to the buyer. c. is a cost to the seller. d. exists with all market transactions.

c

Which of the following illustrates the concept of a negative externality? a. A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. b. A flood wipes out a farmer’s corn crop. c. A college student plays loud music on his new stereo system at 2:00 a.m. d. A janitor eats a hamburger during his lunch break.

c

When a negative externality exists in a market, the cost to producers a. is greater than the cost to society. b. will be the same as the cost to society. c. will be less than the cost to society. d. will differ from the cost to society, regardless of whether an externality is present.

b

When negative externalities are present in a market a. private costs will be greater than social costs. b. social costs will be greater than private costs. c. only government regulation will solve the problem. d. the market will not be able to reach any equilibrium.

a

Negative externalities lead markets to produce a. greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels. b. smaller than efficient output levels and positive externalities lead markets to produce greater than efficient output levels. c. greater than efficient output levels and positive externalities lead markets to produce efficient output levels. d. efficient output levels and positive externalities lead markets to produce greater than efficient output levels.

c

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.

c

Markets are often inefficient when negative externalities are present because a. private costs exceed social costs at the private market solution. b. externalities cannot be corrected without government regulation. c. social costs exceed private costs at the private market solution. d. production externalities lead to consumption externalities.

b

When the social cost curve is above a product’s supply curve, a. the government has intervened in the market. b. a negative externality exists in the market. c. a positive externality exists in the market. d. the distribution of resources is unfair.

c

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality, a. the supply curve would adequately reflect the marginal social cost of production. b. consumers will be required to pay a higher price for steel than they would have if the externality were internalized. c. the market equilibrium quantity will not be the socially optimal quantity. d. producers will produce less steel than they otherwise would if the externality were internalized.

a

When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will a. give sellers the incentive to account for the external effects of their actions. b. increase demand. c. increase the amount of the commodity exchanged in market equilibrium. d. restrict the producers’ ability to take the costs of the externality into account when deciding how much to supply.

a

When Lisa drives to work every morning, she drives on a congested highway. What Lisa does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Lisa’s highway trip a. increases the social cost above the private cost. b. lowers the social cost below the private cost. c. increases the social value above the private benefit. d. decreases the social value below the private benefit.

b

An optimal tax on pollution would result in which of the following? a. Producers will choose not to produce any pollution. b. Producers will internalize the cost of the pollution. c. Producers will maximize production. d. The value to consumers at market equilibrium will exceed the social cost of production.

b

Which of the following statements is correct? a. Internalizing a negative 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 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 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 externality will cause an industry to increase the quantity it supplies to the market and increase the price of the good produced.

b

A negative externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. exactly the quantity that is socially desirable. d. less than the same market would produce in the presence of a positive externality.

c

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because a. social costs equal private costs at the private market solution. b. private costs exceed social costs at the private market solution. c. social costs exceed private costs at the private market solution. d. they internalize externalities.

b

When negative externalities are present in a market, a. producers will be affected but consumers will not. b. producers will supply too much of the product. c. demand will be too high. d. the market will still maximize total benefits.

c

Which of the following would not be considered a negative externality? a. Smelter, Inc. creates steel and pollution. b. Your friend buys a new puppy that barks every night. c. You have an adverse reaction to a medication your doctor prescribed for you. d. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.

b

Suppose that meat producers create a negative externality. What is the relationship between the equilibrium quantity and the socially optimal quantity of meat to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

b

Suppose that electricity producers create a negative externality equal to $5 per unit. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

b

Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market, then a. the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. b. the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked. c. the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked. d. There is not enough information to answer the question.

a

Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of air pollution. If the firm does not internalize the cost of the externality, it will produce where a. the value of electricity to consumers equals the private cost of producing electricity. b. the value of electricity to consumers equals the social cost of producing electricity. c. the cost of the externality is maximized. d. the transaction costs of private bargaining are minimized.

a

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct? a. The social cost of producing good X includes the private cost plus the cost to bystanders of the externality. b. The increased social cost can be graphed as a decrease in demand. c. The market equilibrium quantity will be the socially optimal quantity as long as the government does not interfere. d. Both a and b are correct.

d

Which of the following is NOT an example of a negative externality? a. air pollution from a manufacturing plant. b. disrupted sleep from a neighbor’s loud music. c. an illness caused by secondhand cigarette smoke. d. a decrease in your property value from neglecting your lawn and garden.

b

A paper plant produces water pollution during the production process. If the government forces the plant to internalize the negative externality, then the a. supply curve for paper would shift to the right. b. supply curve for paper would shift to the left. c. demand curve for paper would shift to the right. d. demand curve for paper would shift to the left.

b

Which of the following is an example of a positive externality? a. A college student buys a new car when she graduates. b. The mayor of a small town plants flowers in the city park. c. Local high school teachers have pizza delivered every Friday for lunch. d. An avid fisherman buys new fishing gear for his next fishing trip.

c

Which of the following is an example of a positive externality? a. air pollution b. a person littering in a public park c. a nice garden in front of your neighbor’s house d. the pollution of a stream

a

Internalizing a positive externality will cause the demand curve to a. shift to the right. b. shift to the left. c. become more elastic. d. remain unchanged.

b

Positive externalities a. result in a larger than efficient equilibrium quantity. b. result in smaller than efficient equilibrium quantity. c. result in an efficient equilibrium quantity. d. can be internalized with a corrective tax.

c

A positive externality a. is a benefit to the producer of the good. b. is a benefit to the consumer of the good. c. is a benefit to someone other than the producer and consumer of the good. d. results in an optimal level of output.

c

If a market is characterized by a positive externality that is not the result of a technology spillover, a. the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater than the equilibrium price. b. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. c. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is greater than the equilibrium price. d. the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is less than the equilibrium price.

c

To enhance the well-being of society, a social planner will encourage firms to increase production when a. the firms are producing basic goods. b. there is a shortage in the market. c. technology spillovers are associated with production. d. negative externalities "spill over" into production.

b

When the production of a good results in a positive externality, the social value curve is: a. below the demand curve, indicating the total value to society is less than the private benefit. b. above the demand curve, indicating the total value to society is greater than the private benefit. c. identical to the demand curve, indicating the total cost to society is the equal to the private benefit. d. above the supply curve, indicating the total cost to society exceeds the private cost.

b

A positive externality will cause a market to produce a. more than is socially desirable. b. less than is socially desirable. c. the socially optimal equilibrium amount. d. more than the same market would produce in the presence of a negative externality.

d

A positive externality a. causes the product to be overproduced. b. provides an additional benefit to market participants. c. benefits consumers because it results in a lower equilibrium price. d. is a benefit to a market bystander.

a

A positive 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 receives a loss from John’s consumption of a certain good.

a

When a market experiences a positive externality, a. the demand curve does not reflect the value to society of the good. b. too much of the good is being produced. c. the government can internalize the externality by imposing a tax on the product. d. the private value is greater than the social value.

c

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the a. private benefit equals the social benefit at the private market solution. b. private cost exceeds the private benefit at the private market solution. c. social value exceeds the private value at the private market solution. d. private cost exceeds the social benefit at the private market solution.

c

Which of the following policies is the government most inclined to use when faced with a positive externality? a. taxation b. permits c. subsidies d. usage fees

b

If education produces positive externalities, we would expect a. the government to tax education. b. the government to subsidize education. c. people to realize the benefits, which would increase the demand for education. d. colleges to relax admission requirements.

d

If education produces positive externalities and the government does not intervene in the market, we would expect a. the equilibrium price to be higher than the optimal price. b. the equilibrium quantity to be lower than the optimal level. c. the equilibrium quantity to be higher than the optimal level. d. both a and b are correct

c

Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that elementary education creates a positive externality. If the government does not subsidize education, then a. the equilibrium quantity of education will be equal the socially optimal quantity of education. b. the equilibrium quantity of education will be greater than the socially optimal quantity of education. c. the equilibrium quantity of education will be less than the socially optimal quantity of education. d. There is not enough information to answer the question.

b

Which of the following is an example of a positive externality? a. Sue not catching the flu because she got a flu vaccine. b. Mary not catching the flu from Sue because Sue got a flu vaccine. c. Sue catching the flu because she did not get a flu vaccine.. d. Mary catching the flu from Sue because Sue did not get a flu vaccine.

c

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven’t contributed to the research costs. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

d

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct? a. At the current output level, the marginal social benefit exceeds the marginal private benefit. b. The current output level is inefficiently low. c. A per-shot subsidy could turn an inefficient situation into an efficient one. d. All of the above are correct.

a

Because there are positive externalities from higher education, a. private markets will under-supply college classes. b. private markets will over-supply college classes. c. the government should impose a tax on college students. d. government intervention cannot improve the market for college classes.

c

Which of the following is true of markets characterized by positive externalities? a. Social value exceeds private value, and market quantity exceeds the socially optimal quantity. b. Social value is less than private value, and market quantity exceeds the socially optimal quantity. c. Social value exceeds private value, and market quantity is less than the socially optimal quantity. d. Social value seldom exceeds private value; therefore, social quantity is less than private quantity.

a

In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to a. shift to the right. b. shift to the left. c. become more elastic. d. remain unchanged.

d

Which of the following statements is not correct? a. A patent is a way for the government to encourage the production of a good with technology spillovers. b. A tax is a way for the government to reduce the production of a good with a negative externality. c. A tax that accurately reflects social costs produces the socially optimal outcome. d. Government policies cannot improve upon private market outcomes.

b

Technology spillover is one type of a. negative externality. b. positive externality. c. subsidy. d. producer surplus.

d

Which of the following best defines the situation where one firm’s research yields knowledge that is used by society as a whole? a. social cost b. opportunity cost of technology c. internalization of an externality d. technology spillover

d

Government intervention that aims to promote technology-enhancing industries is called a. assisted technology. b. intervention policy. c. industrial technology assistance. d. industrial policy.

b

Technology spillover occurs when a. 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.

b

When technology spillover occurs, a. it is the government’s responsibility to own firms that are engaged in high-tech research. b. a firm’s research yields technological knowledge that can then be used by society as a whole. c. those firms engaged in technology research should be taxed by the government. d. when firms invest in the latest production technology, the cost of that technology "spills over" to the prices consumers must pay for the product.

a

Research into new technologies a. provides positive externalities because it creates knowledge others can use. b. results in negative externalities because government funding for research causes less government spending in other areas. c. is protected by patent laws, which eliminates the need for government intervention. d. should only be funded by the corporations that will receive the profits from the research.

c

If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a technology spillover, it should a. impose a corrective tax on any firm producing a technology spillover. b. offer tax credits to consumers who are adversely affected by the new technology. c. subsidize producers by an amount equal to the value of the technology spillover. d. provide research grants to those firms not currently engaging in research to increase competition in the industry.

c

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium? a. Impose a tax greater than the value of the technology spillover. b. Not allow production of any product that causes a technology spillover. c. Provide a subsidy equal to the value of the technology spillover. d. Require producers to "clean up" any spillover that results from their production process.

d

In the case of a technology spillover, the government can encourage firms to internalize a positive externality by a. taxing production, which would decrease supply. b. taxing production, which would increase supply. c. subsidizing production, which would decrease supply. d. subsidizing production, which would increase supply.

c

In the case of a technology spillover, internalizing a positive externality through a government subsidy will cause the industry’s supply curve to a. shift up by an amount equal to the subsidy. 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.

d

Which of the following is NOT a way of internalizing technology spillovers? a. subsidies b. patent protection c. industrial policy d. taxes

a

If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should a. encourage the production of computer chips with subsidies. b. discourage the production of potato chips with taxes. c. encourage the production of potato chips with subsidies. d. discourage the production of computer chips with taxes.

b

One drawback to industrial policy is that a. technology spillovers are too expensive to control. b. measuring the size of spillovers from different markets is difficult. c. spillovers often occur in industries that produce undesirable products for society. d. positive side effects are often outweighed by negative side effects.

a

The goal of industrial policy should be that a. industries yielding the largest positive externalities should receive the biggest subsidies. b. any industry that produces negative externalities should be heavily taxed. c. any production process that produces negative externalities should be shut down. d. all industries that produce positive externalities should be equally subsidized.

b

Which of the following is the most effective way to internalize a technology spillover? a. taxes b. patents c. government regulations d. free markets

d

A patent is used to a. disseminate information. b. offset the negative effects of taxes. c. protect inventors for as long as they live. d. assign property rights.

c

Patents do not a. provide firms an incentive to research. b. assign property rights to inventors. c. protect the rights of inventors for their lifetimes. d. internalize externalities.

b

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct? a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. d. There is not enough information to answer the question.

a

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct? a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs. b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs. c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs. d. There is not enough information to answer the question.

c

Since almost all forms of transportation produce some type of pollution, a. the government should ban all transportation. b. the government should ban all pollution. c. society has to weigh the cost and benefits when deciding how much pollution to allow. d. refrain from intervening because the market can best solve this problem.

d

Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action? a. lower levels of nutrition, health care, and housing b. a lower standard of living c. slowing or reversing technological advancement d. the elimination of all pollution

a

The best remedy for market failure is often a. a market-based solution. b. shutdown of the market. c. no government intervention. d. externalizing the externalities.

b

Which of the following statements is correct? a. Because a clean environment is a public good, a feasible goal is to eliminate all pollution, regardless of the cost. b. Rich countries usually have cleaner environments than poor countries because a clean environment is like other normal goods in that it has a positive income elasticity. c. Clean water and clean air are priceless goods. d. All of the above are correct.

b

A command-and-control policy is another term for a a. pollution permit. b. government regulation. c. corrective tax. d. Both a and b are correct.

a

If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million, the policy would be considered a a. regulation. b. corrective tax. c. subsidy. d. market-based policy.

b

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

a

A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. This decision provides an example of a. a direct regulation of an externality. b. corrective taxes. c. a Coase theorem solution to an externality. d. the misuse of a subsidy.

b

Emission controls on automobiles are an example of a a. corrective tax. b. command-and-control policy to increase social efficiency. c. policy that reduces pollution by allocating resources through market mechanisms. d. policy to reduce congestion on urban freeways.

b

If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example of a. a market-based policy. b. a command-and-control policy. c. tradable pollution permits. d. transaction costs.

c

If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy would be considered a. a subsidy. b. a regulation. c. a corrective tax. d. an application of the Coase theorem.

d

A gasoline tax is designed to correct each of the following problems except a. traffic congestion. b. traffic accidents. c. air pollution. d. EPA regulations.

b

Which of the following statements is correct? a. Gasoline taxes are an example of an EPA regulation. b. Gasoline taxes are higher in many European countries than in the United States. c. Gasoline taxes contribute to global warming. d. Gasoline taxes are an example of a command-and-control policy.

b

The tax on gasoline is an example of a. a consumption tax. b. a corrective tax. c. an income tax. d. a command-and-control policy.

b

Which of the following statements is correct? a. Automotive manufacturers prefer stricter fuel economy regulations to higher gasoline taxes. b. Higher gasoline taxes have provided a market-based incentive for Europeans to buy more fuel-efficient vehicles. c. Higher gasoline taxes have had no effect on the U.S. demand for gasoline because the demand for gasoline is perfectly inelastic. d. Fuel efficiency regulations are more effective than gasoline taxes in reducing the demand for gasoline in the United States and Europe.

c

Which of the following is not an advantage of corrective taxes? a. They raise revenues for the government. b. They enhance economic efficiency. c. They subsidize the production of goods with positive externalities. d. They move the allocation of resources closer to the social optimum.

d

Which of the following statements is not correct? a. Corrective taxes can be used to place a price on the right to pollute. b. Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution. c. Corrective taxes provide incentives to develop cleaner technologies. d. Corrective taxes require the government to set a target level of pollution.

b

Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes? a. Corrective taxes apply only to goods that are bad for people’s health, such as cigarettes and alcohol. b. Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders. c. Corrective taxes provide incentives for the conservation of natural resources. d. Corrective taxes do not affect deadweight loss.

a

Corrective taxes differ from most taxes in that corrective taxes a. enhance economic efficiency. b. do not raise revenue for the government. c. cause deadweight loss. d. cannot be divided between the buyer and seller.

a

A corrective tax a. 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 inferior to regulatory policy according to most economists.

d

Corrective taxes are unlike most other taxes because they a. 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.

d

In Singapore, littering fines are strictly enforced. This is an example of a policy that a. relies on moral codes to reduce the pollution externality. b. relies on the Coase Theorem. c. discriminates against foreigners. d. relies on incentives to reduce the pollution externality.

b

Corrective taxes are typically advocated to correct for the effects of a. positive externalities. b. negative externalities. c. patents. d. All of the above are correct.

b

With a corrective tax, the supply curve for pollution is a. perfectly inelastic. b. perfectly elastic. c. upward sloping. d. downward sloping.

c

A corrective tax is also known as: a. a command-and-control regulation. b. a Coase tax. c. a Pigouvian tax. d. a Smithian tax.

d

Corrective taxes a. encourage consumers to avoid sales taxes by shopping online. b. are frequently used to discourage imports. c. are less efficient than direct regulation. d. give factory owners an economic incentive to reduce pollution.

a

Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

a

Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol? a. impose a tax on alcohol that is equal to the per-unit externality b. offer a subsidy on alcohol that is equal to the per-unit externality c. impose a regulation limiting the amount of alcohol that each consumer can purchase d. nothing

c

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then a. the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked. b. the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked. c. the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. d. There is not enough information to answer the question.

a

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

d

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer a. externalize the positive externality. b. externalize the negative externality. c. internalize the positive externality. d. internalize the negative externality.

b

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

a

Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then a. the equilibrium quantity of education will equal the socially optimal quantity of education. b. the equilibrium quantity of education will be greater than the socially optimal quantity of education. c. the equilibrium quantity of education will be less than the socially optimal quantity of education. d. There is not enough information to answer the question.

b

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven’t contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced? a. tax university researchers b. offer grants to university researchers c. eliminate subsidized student loans d. nothing

b

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven’t contributed to the research costs. Suppose that the federal government gives grants to these researchers equal to the their per-unit production externality. What is the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced? a. The equilibrium quantity is greater than the socially optimal quantity. b. They are equal. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that planting trees creates a positive externality equal to $25 per tree. Further suppose that the local government offers a $25 per-tree subsidy to planters. What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted? a. The equilibrium quantity is less than the socially optimal quantity. b. The equilibrium quantity is greater than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question.

c

Suppose that cookie producers create a positive externality equal to $2 per dozen. Further suppose that the government offers a $2 per-dozen subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced? a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. They are equal. d. There is not enough information to answer the question.

a

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $12 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

b

Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c

Which of the following statements is not correct? a. Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level. b. Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution. c. Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution. d. Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public’s demand for a clean environment.

a

Which of the following statements is correct? a. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost. b. Corrective taxes distort economic incentives. c. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate. d. Both a and b are correct.

b

Regulations to reduce pollution a. cause pollution levels to drop below the regulated amount. b. are a more costly solution to society than a corrective tax. c. allow firms with the lowest cost to reduce pollution by more than those with highest costs. d. are a better solution for the environment than a corrective tax.

c

A corrective tax a. causes each factory to reduce pollution by the same amount. b. assigns a legal pollution limit for firms. c. places a price on the right to pollute. d. costs society more than pollution regulations.

d

A corrective tax a. can be used to internalize a negative externality. b. imposed on sellers shifts the supply curve to the left. c. imposed on buyers shifts the demand curve to the left. d. All of the above.

d

Most economists prefer corrective taxes to regulation to correct the pollution problem because: a. the market-based solution is less costly to society. b. the market-based solution can result in a greater reduction in pollution. c. the market-based solution raises revenue for the government. d. all of the above.

b

Which of the following statements is correct? a. Taxes are more difficult to administer than regulations. b. Taxes provide incentives for firms to adopt new methods to reduce negative externalities. c. Command-and-control policies provide incentives for private decisionmakers to solve their problems on their own. d. Corrective taxes distort incentives.

a

Which of the following is not an effective method to reduce negative externalities? a. relying on voluntary compliance b. taxing the output of industries that pollute c. creating legal environmental standards d. increasing public spending on cleanup and reduction of pollution

c

What is the difference between command-and-control policies and market-based policies toward externalities? a. Command-and-control policies provide incentives for private decisionmakers to solve the problems on their own, whereas market-based policies regulate behavior directly. b. Command-and-control policies rely on taxes, whereas market-based policies rely on quotas. c. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decisionmakers to change their behavior. d. Command-and-control policies are efficient, whereas market-based policies are inefficient.

b

Which of the following statements is not correct? a. Patents help internalize the externalities associated with technological advances. b. Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution. c. Allowing firms to trade pollution permits will lower the total cost of reducing pollution. d. A big impediment to implementing the Coase theorem in many cases is high transactions costs.

a

In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because a. it is hard to estimate the market demand curve and thus charge the "right" corrective tax. b. selling pollution permits create a net increase in pollution. c. Corrective taxes distort incentives. d. Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.

a

The difference between a corrective tax and a tradable pollution permit is that a. a corrective tax sets the price of pollution and a permit sets the quantity of pollution. b. a corrective tax creates a more efficient outcome than a permit. c. a corrective tax sets the quantity of pollution and a permit sets the price of pollution. d. a permit creates a more efficient outcome than a corrective tax.

d

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

d

Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain? (i) corrective taxes (ii) tradable pollution permits (iii) amendments to the Clean Air Act a. (i) only b. both (i) and (ii) c. (iii) only d. both (ii) and (iii)

b

With pollution permits, the supply curve for pollution rights is a. perfectly elastic. b. perfectly inelastic. c. upward sloping. d. downward sloping.

d

Tradable pollution permits a. are widely viewed as a cost-effective way to reduce pollution. b. have helped reduce carbon emissions. c. have helped reduce sulfur dioxide emissions. d. All of the above are correct.

b

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 will be lower than the market value of a pollution permit. d. the Coase theorem is no longer applicable as a solution to reducing pollution.

b

Tradable pollution permits a. have prices that are set by the government. b. will be more valuable to firms that can reduce pollution only at high costs. c. are likely to create a higher level of total pollution. d. are less desirable than corrective taxes in reducing pollution.

b

Which of the following is not a characteristic of pollution permits? a. Prices are set by supply and demand. b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. c. Real-world markets for pollution permits include sulfur dioxide and carbon. d. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive.

d

When one firm sells its pollution permit to another firm, a. both firms benefit. b. the total amount of pollution remains the same. c. the total amount of pollution decreases. d. Both a and b are correct.

c

Which of the following is an advantage of tradable pollution permits? a. Each firm is allowed to pollute exactly the same amount. b. Revenue from the sale of permits is greater than revenue from a corrective tax. c. The initial allocation of permits to firms does not affect the efficiency of the market. d. Firms will engage in joint research efforts to reduce pollution.

d

Which of the following is a way to address an externality problem? a. command and control solution b. corrective tax c. corrective subsidy d. all of the above.

b

Which of the following is a difference between corrective taxes and tradable pollution permits? a. Corrective taxes are a market-based solution while tradable pollution permits are a command-and-control policy. b. With a corrective tax the government sets the price of pollution; with tradable pollution permits, demand and supply set the price of pollution. c. With corrective taxes firms pay for pollution; with tradable pollution permits firms do not. d. Corrective taxes internalize the pollution externality while tradable pollution permits do not.

a

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit a. 20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air. b. 100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air. c. 50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air. d. 20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

a

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that a. Firm A will buy all of Firm B’s pollution permits. Each one will cost between $100 and $200. b. Firm B will buy all of Firm A’s pollution permits. Each one will cost between $100 and $200. c. Both firms will use their own pollution permits. d. Firm A will buy some of Firm B’s pollution permits. Each one will cost less than $100.

b

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? a. $3,000; $1,500 b. $4,500; $3,500 c. $4,500; $4,000 d. $4,500; $2,500

b

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that a. Firm A will no longer pollute, and Firm B will not reduce its pollution at all. b. Firm B will no longer pollute, and Firm A will not reduce its pollution at all. c. Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river. d. Firm A will increase its pollution and Firm B will reduce its pollution.

b

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement, a. Firm B will spend $3,500. b. Firm A will spend $4,000. c. Firm A will spend $4,500. d. Firm B will spend $3,000.

b

Which of the following require firms to pay to pollute? (i) corrective taxes (ii) tradable pollution permits (iii) pollution regulations a. (i) only b. both (i) and (ii) c. (iii) only d. both (ii) and (iii)

b

Which of the following is not an argument for imposing a carbon tax to address global warming? a. Revenue from a carbon tax could be used to reduce payroll taxes leaving the total tax burden unchanged while reducing carbon emissions. b. A carbon tax would allow the government to set the quantity of carbon dioxide pollution. c. A carbon tax would be less costly to consumers and result in greater carbon reduction than regulations requiring increased fuel efficiency. d. A global carbon tax would be easier to negotiate with foreign governments than the terms of a tradable pollution permit system.

d

Externalities can be corrected by each of the following except a. self-interest. b. moral codes and social sanctions. c. charity. d. normal market adjustments.

b

The Golden Rule is an example of a private solution for a. subsidizing higher education. b. internalizing externalities. c. increasing production. d. reducing scarcity.

a

Two types of private solutions to the problem of externalities are a. charities and the Golden Rule. b. charities and subsidies. c. the Golden Rule and taxes. d. taxes and subsidies.

b

When externalities cause markets to be inefficient, a. government action is always needed to solve the problem. b. private solutions can be developed to solve the problem. c. given enough time, externalities can be solved through normal market adjustments. d. there is no way to eliminate the problem of externalities in a market.

c

Honey producers provide a positive externality to orchards because a. the honey producers get more honey. b. the orchard owner frequently gets stung by the honey producer’s bees. c. the orchard owner does not have to purchase bees to pollinate his flowers. d. the honey producers have to rent access to the orchard grounds.

b

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action a. 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 externalities. d. will be needed only to correct for negative externalities.

b

Firms that are involved in more than one type of business could be evidence of an attempt to a. increase private profit at the expense of consumers. b. internalize some forms of positive externalities. c. reduce the impact of government regulations on their business. d. increase the private marginal cost of production.

c

Private contracts between parties with mutual interests a. will reduce the well-being of society. b. will lead to market outcomes in which the public interest is sacrificed for personal gain. c. can solve some inefficiencies associated with positive externalities. d. will create negative externalities.

d

Which of the following statements is not correct? a. Private markets tend to over-produce products with negative externalities. b. Private markets tend to under-produce products with positive externalities. c. Private parties can bargain to efficient outcomes even in the presence of externalities. d. Private parties are usually more successful in achieving efficient outcomes than government policies.

a

Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are called a. transaction costs. b. corrective costs. c. input costs. d. private costs.

d

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

d

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called a. the Pigouvian theorem. b. a corrective tax. c. the externality theorem. d. the Coase theorem.

c

Which of the following suggests that private markets can be effective in dealing with externalities? a. the "invisible hand" b. the law of diminishing social returns c. the Coase theorem d. technology policy

b

The Coase theorem suggests that private markets may not be able to solve the problem of externalities a. if the government does not become involved in the process. b. when the number of interested parties is large and bargaining costs are high. c. if the firm in the market is a monopoly. d. if some people benefit from the externality.

a

Transaction costs a. can keep private parties from solving externality problems. b. are incurred in the production process due to externalities. c. increase when taxes are imposed to correct negative externalities. d. are eliminated when the government intervenes in a market with externalities.

c

One reason that private solutions to externalities do not always work is that a. government intervention negates the benefits of positive externalities. b. some people benefit from externalities. c. interested parties incur costs in the bargaining process. d. charities are not well organized.

d

Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems? a. One neighbor lets his dog run through another neighbor’s garden, damaging her flowers. b. One neighbor doesn’t mow her yard. c. One neighbor plays his music loudly. d. All of the above are correct.

c

If only a few people are affected by an externality, then it is likely that a. corrective 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.

b

Reaching an efficient bargain is difficult when the a. externality is large. b. number of interested parties is large. c. externality is negative. d. government becomes involved.

a

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

c

In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly. This is an example of an attempt to a. maximize attorney fees. b. reduce the incentive of attorneys to file class action lawsuits. c. reduce the transaction costs of finding a private solution to an externality. d. regulate attorney fees.

c

Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee’s grass is neglected and gets long, Nancy will mow it for Lee. This is an example of a. a situation in which the Coase theorem fails to explain the lawn mowing arrangement. b. an improper allocation of resources. c. a private solution to a negative externality problem. d. an exploitation of a common resource.

b

The Coase theorem suggests that private solutions to an externality problem a. are effective under all conditions. b. will usually allocate resources efficiently if private parties can bargain without cost. c. are only efficient when there are negative externalities. d. may not be possible because of the distribution of property rights.

a

In which of the following cases is the Coase theorem most likely to solve the externality? a. Ed is allergic to his roommate’s cat. b. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada. c. Polluted water runoff from farms is making residents of a nearby town sick. d. Industrialization around the world is causing global warming.

a

According to the Coase theorem, private parties can solve the problem of externalities if a. the cost of bargaining is small. b. the initial distribution of legal rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. All of the above are correct.

c

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as a. the externalities that are present are positive, not negative. b. government assigns property rights to the harmed party. c. private parties can bargain with sufficiently low transaction costs. d. businesses determine an appropriate level of production.

a

The Coase theorem states that a. under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present. b. government intervention is always required to reach an efficient outcome when an externality is present. c. government intervention cannot lead to an efficient outcome when an externality is present. d. only negative externalities can be resolved using government intervention.

c

Which of the following is not a necessary condition for the Coase theorem? a. Property rights are clearly defined. b. There are no bargaining costs. c. The government intervenes to internalize the externality. d. There are only a few parties involved.

c

In many cases the Coase theorem does not work well because a. there are too few parties at the negotiation table. b. the government does not know about the Coase theorem. c. transaction costs are too high. d. transaction costs are too low.

b

Why can’t private individuals always internalize an externality without the help of government? a. Legal restrictions prevent side payments between individuals. b. Transactions costs may be too high. c. Side payments between individuals are inefficient. d. Side payments between individuals are insufficient.

a

What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically efficient regardless of how property rights are distributed? a. the Coase theorem b. the laws of supply and demand c. the law of comparative advantage d. the law of externalities

d

The Coase theorem states that a. taxes are an efficient way for governments to remedy negative externalities. b. subsidies are an efficient way for governments to remedy positive externalities. c. industrial policies encourage technology spillovers. d. in the absence of transaction costs, private parties can solve the problem of externalities on their own.

b

Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem? a. Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke. b. Mary pays Cathy $16 so that Mary can smoke. c. Mary pays Cathy $14 so that Mary can smoke. d. Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.

d

A dentist shares an office building with a radio station. The electrical current from the dentist’s drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station’s lost profits. What is the economically efficient outcome? a. The radio station puts up a shield, which it pays for. b. The radio station puts up a shield, which the dentist pays for. c. Neither the radio station nor the dentist purchase additional equipment. d. The dentist gets a new drill; it does not matter who pays for it.

c

Dick owns a dog whose barking annoys Dick’s neighbor Jane. Suppose that the benefit of owning the dog is worth $200 to Dick and that Jane bears a cost of $400 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that a. Jane pays Dick $150 to give the dog to his parents who live on an isolated farm. b. Dick pays Jane $350 for her inconvenience. c. Jane pays Dick $300 to give the dog to his parents who live on an isolated farm. d. There is no private transaction that would improve this situation.

d

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 that a. Dick pays Jane $600 for her inconvenience. b. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm. c. Jane pays Dick $800 to give the dog to his parents who live on an isolated farm. d. The current situation is efficient.

b

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 correct? 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 the legal right to peace and quiet, no further transactions will be mutually beneficial.

c

Betty’s cat causes Suzy to sneeze. Betty values her cat’s companionship at $300 per year. The cost to Suzy of tissues and her allergy medication is $350 per year. Based on the Coase theorem, a. Betty should pay Suzy $400 so that she may keep her cat. b. Betty should pay Suzy $350 to purchase her tissues and allergy medication. c. Suzy should pay Betty $325 to give away her cat. d. Suzy should move.

a

According to the Coase theorem, in the presence of externalities a. private parties can bargain to reach an efficient outcome. b. government assistance is necessary to reach an efficient outcome. c. the assignment of legal rights can prevent externalities. d. the initial distribution of property rights will determine the efficient outcome.

a

Assume that your roommate is very messy. Suppose she gets a $50 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for you to a. pay your roommate at least $50 but no more than $100 to clean up after herself. b. pay your roommate at least $101 to clean up after herself. c. charge your roommate at least $50 to have you clean up after her. d. charge your roommate at least $100 but no more than $200 to keep you from complaining about the mess.

b

Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to a. stop her messy habits or else move out. b. pay you at least $100 but less than $200 to live with the clutter. c. continue to be messy and force you to move out. d. demand payment of at least $100 but no more than $200 to clean up after herself.

b

Suppose that Company A’s railroad cars pass through Farmer B’s corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer’s crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The railroad will continue to operate but will pay the farmer $1,500 in damages. b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c. The farmer will incur $1,500 in damages to his crops. d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

d

Suppose that Company A’s railroad cars pass through Farmer B’s corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer’s crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The railroad will continue to operate but will pay the farmer $1,500 in damages. b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c. The farmer will incur $1,500 in damages to his crops. d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

b

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $5. Which of the following represents an efficient solution in the absence of transaction costs? a. Peter continues to smoke because he has a right to smoke in the smoking section. b. Bill offers Peter between $5 and $15 not to smoke. Peter accepts, and both parties are better off. c. Bill offers Peter between $5 and $15 not to smoke. Peter declines because he has a right to smoke in the smoking section. d. Only a government policy banning smoking in restaurants will solve this problem.

a

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution? a. Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). b. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. c. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section. d. Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.

c

John lives in an apartment building and gets a $700 benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the music coming from John’s stereo, bears a $1,000 cost from the noise. At which of the following offers from Mary could both Mary and John benefit from the silencing of John’s stereo? a. $200 b. $600 c. $900 d. $1,100

a

John lives in an apartment building and gets a $500 benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the loud music coming from John’s stereo, bears a $700 cost from the noise. Mary would like to offer John some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both John and Mary would benefit from the agreement? a. An amount less than $200. b. An amount between $200 and $500. c. An amount between $500 and $700. d. Any amount could result in both parties benefitting from the agreement.

b

John lives in an apartment building and gets a benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the loud music coming from John’s stereo, bears a cost from the noise. Mary is threatening to call the police to force John to turn down his stereo. Under which of the following conditions would John be able to offer Mary some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly? a. The cost of the noise to Mary must exceed the benefit of the music to John. b. The benefit of the music to John must exceed the cost of the noise to Mary. c. The Coase Theorem guarantees that Mary and John will always be able to come to an agreement that keeps Mary from calling the police regardless of the individual benefits and costs. d. The cost of the noise to Mary must exceed the benefit of the music to John by an amount greater than the transaction costs associated with the agreement.

c

Ed is a writer who works from his home. Ed lives nextdoor to Ricky, the drummer for a local band. Ricky needs lots of practice to earn his share of the bands profits, $250. Ed gets distracted by Ricky’s drumming but needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution? a. Ricky offers Ed $499 to allow Ricky to continue drumming. Ed accepts and both are better off. b. Ricky offers Ed $249 to allow Ricky to continue drumming. Ed accepts and both are better off. c. Ed offers Ricky $251 to stop practicing his drumming. Ricky agrees and both are better off. d. Ed offers Ricky $501 to stop practicing his drumming. Ricky agrees and both are better off.

c

Ed is a writer who works from his home. Ed lives nextdoor to Ricky, the drummer for a local band. Ricky needs lots of practice to earn his share of the bands profits, $250. Ed gets distracted by Ricky’s drumming but needs to get his writing done to earn $500 for his current article. If Ed needs to hire a lawyer to help him reach an agreement with Ricky, what price is Ed willing to pay the lawyer? a. less than $250 b. less than $450 c. less than $550 d. less than $750