Question 1

Figure 10-7 
-Refer to Figure 10-7.To internalize the externality in this market,the government should

Accepted Answer

A)  impose a tax on this product.
B)  provide a subsidy for this product.
C)  forbid production.
D)  produce the product itself.E) All of the above
F) A) and D)

Question 2

Markets are often inefficient when negative externalities are present because

Accepted Answer

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

Question 3

According to the Coase theorem,in the presence of externalities

Accepted Answer

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

Question 4

Figure 10-4 
-Refer to Figure 10-4.This market is characterized by

Accepted Answer

A)  government intervention.
B)  a positive externality.
C)  a negative externality.
D)  None of the above is correct.E) A) and D)
F) All of the above

Question 5

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

Accepted Answer

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

Question 6

Figure 10-2.The graph depicts the market for plastic. 
-Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.What is the socially optimal quantity of plastic?

Accepted Answer

A)  200 units
B)  450 units
C)  500 units
D)  650 unitsE) A) and B)
F) B) and C)

Question 7

In some circumstances,selling pollution permits may be better than levying a corrective tax.

Accepted Answer

A) True 
 B)False

Question 8

Figure 10-10

-Refer to Figure 10-10.An increase in output from 120 units to 160 units would

Accepted Answer

A)  move the market from a socially efficient outcome to a socially inefficient outcome.
B)  increase the external cost per unit of output.
C)  increase total economic well-being.
D)  be an action of which a benevolent social planner would approve.E) All of the above
F) A) and B)

Question 9

When externalities are present in a market,the well-being of market participants

Accepted Answer

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.E) A) and D)
F) None of the above

Question 10

When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.

Accepted Answer

A) True 
 B)False

Question 11

For the purpose of protecting the environment,upon which of the following approaches do we rely more and more as time goes by?

Accepted Answer

A)  adherence to the notion of the invisible hand
B)  command-and-control policies
C)  the development and enforcement of regulations
D)  the requirement that decision makers bear the full costs of their actionsE) A) and D)
F) A) and C)

Question 12

Which of the following is a way to address an externality problem?

Accepted Answer

A)  command and control solution
B)  corrective tax
C)  corrective subsidy
D)  all of the above.E) All of the above
F) C) and D)

Question 13

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) C) and D)
F) A) and B)

Question 14

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is an advantage of tradable pollution permits?

Accepted Answer

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

Question 16

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

Accepted Answer

A) True 
 B)False

Question 17

A patent is used to

Accepted Answer

A)  disseminate information.
B)  offset the negative effects of taxes.
C)  protect inventors for as long as they live.
D)  assign property rights.E) C) and D)
F) B) and D)

Question 18

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

Accepted Answer

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

Question 19

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 20

Figure 10-10

-Refer to Figure 10-10.The graph represents a market in which

Accepted Answer

A)  there is no externality.
B)  there is a positive externality.
C)  there is a negative externality.
D)  The answer cannot be determined from inspection of the graph.E) A) and C)
F) B) and C)

Exam 10: Externalities

Which of the following is a way to address an externality problem?

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When externalities are present in a market,the well-being of market participants

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Figure 10-7 -Refer to Figure 10-7.To internalize the externality in this market,the government should

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When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.

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Figure 10-2.The graph depicts the market for plastic. -Refer to Figure 10-2.Suppose that the production of plastic creates a social cost which is depicted in the graph above.What is the socially optimal quantity of plastic?

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In some circumstances,selling pollution permits may be better than levying a corrective tax.

Correct AnswerverifiedShow Answer

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

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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 AnswerverifiedShow Answer

For the purpose of protecting the environment,upon which of the following approaches do we rely more and more as time goes by?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 10-10 -Refer to Figure 10-10.The graph represents a market in which

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

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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

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Which of the following is an advantage of tradable pollution permits?

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Figure 10-4 -Refer to Figure 10-4.This market is characterized by

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Figure 10-10 -Refer to Figure 10-10.An increase in output from 120 units to 160 units would

Correct AnswerverifiedShow Answer

Markets are often inefficient when negative externalities are present because

Correct AnswerverifiedShow Answer

A patent is used to

Correct AnswerverifiedShow Answer

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Correct AnswerverifiedShow Answer

According to the Coase theorem,in the presence of externalities

Correct AnswerverifiedShow Answer

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