Question 1

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?

Accepted Answer

A)  $3,000; $1,500
B)  $4,500; $3,500
C)  $4,500; $4,000
D)  $4,500; $2,500E) A) and C)
F) All of the above

Question 2

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?

Accepted Answer

A)  They are equal.
B)  The equilibrium quantity is greater than the socially optimal quantity.
C)  The equilibrium quantity is less than the socially optimal quantity.
D)  There is not enough information to answer the question.E) None of the above
F) All of the above

Question 3

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

Accepted Answer

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.E) None of the above
F) All of the above

Question 4

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. 
-Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the

Accepted Answer

A)  social optimum has been reached.
B)  market equilibrium has been reached.
C)  negative externality associated with plastics has been eliminated.
D)  positive externality associated with plastics has been eliminated.E) A) and B)
F) None of the above

Question 5

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Accepted Answer

When there is a large number o...

Question 6

Firms that are involved in more than one type of business could be evidence of an attempt to

Accepted Answer

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.E) B) and C)
F) None of the above

Question 7

Which of the following is NOT a way of internalizing technology spillovers?

Accepted Answer

A)  subsidies
B)  patent protection
C)  industrial policy
D)  taxesE) A) and D)
F) A) and C)

Question 8

Table 10-3 
-Refer to Table 10-3. The market equilibrium quantity of output is

Accepted Answer

A)  3 units.
B)  4 units.
C)  5 units.
D)  6 units.E) None of the above
F) C) and D)

Question 9

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Accepted Answer

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.E) A) and C)
F) A) and B)

Question 10

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

Accepted Answer

A)  externalize the positive externality.
B)  externalize the negative externality.
C)  internalize the positive externality.
D)  internalize the negative externality.E) All of the above
F) A) and B)

Question 11

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Accepted Answer

A) True 
 B)False

Question 12

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Accepted Answer

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.E) A) and D)
F) A) and C)

Question 13

Figure 10-11 
-Refer to Figure 10-11. "The social value of the last unit produced exceeds the private cost of the last unit produced by $13.50." This statement is correct at which quantity of output?

Accepted Answer

A)  210 units
B)  270 units
C)  330 units
D)  390 unitsE) All of the above
F) B) and C)

Question 14

Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander 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 Alexander and Mary would benefit from the agreement?

Accepted Answer

A)  an amount less than $100
B)  an amount between $100 and $250
C)  an amount between $250 and $350
D)  Any amount could result in both parties benefiting from the agreement.E) None of the above
F) C) and D)

Question 15

Figure 10-15 
-Refer to Figure 10-15. Which graph illustrates a corrective tax?

Accepted Answer

A)  the left graph
B)  the right graph
C)  both graphs
D)  neither graphE) A) and D)
F) None of the above

Question 16

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that

Accepted Answer

A)  Wally pays Corrine $600 for her inconvenience.
B)  Corrine pays Wally $400 to give the dog to his parents who live on an isolated farm.
C)  Corrine pays Wally $550 to give the dog to his parents who live on an isolated farm.
D)  The current situation is efficient.E) None of the above
F) A) and B)

Question 17

​Figure 10-20. ​ 
-​Refer to Figure 10-20. This market is characterized by a negative externality.

Accepted Answer

A) True 
 B)False

Question 18

In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to

Accepted Answer

A)  shift to the right.
B)  shift to the left.
C)  become more elastic.
D)  remain unchanged.E) A) and B)
F) A) and C)

Question 19

Figure 10-12 
-Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?

Accepted Answer

A)  social cost
B)  social value
C)  private cost
D)  private valueE) C) and D)
F) None of the above

Question 20

​Figure 10-20. ​ 
-Refer to Figure 10-20. The graph depicts the market for fertilizer. This market would benefit from a

Accepted Answer

A)  subsidy on fertilizer equal to $100.
B)  tax on fertilizer equal to $100.
C)  tax on fertilizer equal to $50.
D)  subsidy on fertilizer equal to $50.E) B) and C)
F) All of the above

Exam 10: Externalities

Figure 10-20. -Refer to Figure 10-20. This market is characterized by a negative externality.

Correct Answer
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When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Correct Answer
verified

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Correct Answer
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Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?

Correct Answer
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Correct Answer
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Firms that are involved in more than one type of business could be evidence of an attempt to

Correct Answer
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Which of the following is NOT a way of internalizing technology spillovers?

Correct Answer
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Figure 10-15 -Refer to Figure 10-15. Which graph illustrates a corrective tax?

Correct Answer
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In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to

Correct Answer
verified

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that

Correct Answer
verified

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

Correct Answer
verified

Figure 10-20. -Refer to Figure 10-20. The graph depicts the market for fertilizer. This market would benefit from a

Correct Answer
verified

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the

Correct Answer
verified

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Correct Answer
verified

Correct Answer
verified

Figure 10-11 -Refer to Figure 10-11. "The social value of the last unit produced exceeds the private cost of the last unit produced by $13.50." This statement is correct at which quantity of output?

Correct Answer
verified

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

Correct Answer
verified

Table 10-3 -Refer to Table 10-3. The market equilibrium quantity of output is

Correct Answer
verified

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Correct Answer
verified
When there is a large number o...
View Answer

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?

Correct Answer
verified

Exam 10: Externalities

​Figure 10-20. ​ -​Refer to Figure 10-20. This market is characterized by a negative externality.

Correct AnswerverifiedShow Answer

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Correct AnswerverifiedShow Answer

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

Correct AnswerverifiedShow Answer

Figure 10-12 -Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Firms that are involved in more than one type of business could be evidence of an attempt to

Correct AnswerverifiedShow Answer

Which of the following is NOT a way of internalizing technology spillovers?

Correct AnswerverifiedShow Answer

Figure 10-15 -Refer to Figure 10-15. Which graph illustrates a corrective tax?

Correct AnswerverifiedShow Answer

In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry to

Correct AnswerverifiedShow Answer

Wally owns a dog whose barking annoys Wally's neighbor, Corrine. Suppose that the benefit of owning the dog is worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep the dog, a possible private solution to this problem is that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

​Figure 10-20. ​ -Refer to Figure 10-20. The graph depicts the market for fertilizer. This market would benefit from a

Correct AnswerverifiedShow Answer

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. -Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the

Correct AnswerverifiedShow Answer

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Figure 10-11 -Refer to Figure 10-11. "The social value of the last unit produced exceeds the private cost of the last unit produced by $13.50." This statement is correct at which quantity of output?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Table 10-3 -Refer to Table 10-3. The market equilibrium quantity of output is

Correct AnswerverifiedShow Answer

The likelihood of successful private solutions to problems caused by externalities depends, in part, upon the number of interested parties. Briefly explain.

Correct AnswerverifiedWhen there is a large number o...View AnswerShow Answer

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?

Correct AnswerverifiedShow Answer

Figure 10-20. -Refer to Figure 10-20. This market is characterized by a negative externality.

Correct Answer
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Figure 10-20. -Refer to Figure 10-20. The graph depicts the market for fertilizer. This market would benefit from a

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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When there is a large number o...
View Answer

Correct Answer
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