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Figure 10-10 Figure 10-10 -Refer to Figure 10-10. Which of the following statements is correct? A) The private cost of producing the 160th unit of output is $16. B) The social cost of producing the 160th unit of output is $22. C) The external cost of producing the 160th unit of output is $6. D) All of the above are correct. -Refer to Figure 10-10. Which of the following statements is correct?


A) The private cost of producing the 160th unit of output is $16.
B) The social cost of producing the 160th unit of output is $22.
C) The external cost of producing the 160th unit of output is $6.
D) All of the above are correct.

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

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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.

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

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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 Canadb.
C) Polluted water runoff from farms is making residents of a nearby town sick.
D) Industrialization around the world is causing global warming.

E) All of the above
F) B) and C)

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

A) True
B) False

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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.

E) C) and D)
F) B) and C)

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Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity A) an inefficiency. B) the extent of the negative externality that pertains to the market for education. C) the amount of the tax that would be required to correct the negative externality that pertains to the market for education. D) the amount of the subsidy that would be required to correct the positive externality that pertains to the market for education.


A) an inefficiency.
B) the extent of the negative externality that pertains to the market for education.
C) the amount of the tax that would be required to correct the negative externality that pertains to the market for education.
D) the amount of the subsidy that would be required to correct the positive externality that pertains to the market for education.

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

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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.

E) C) and D)
F) B) and C)

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If we know that the demand curve for good x fails to reflect the total value to society of that good, then we know that


A) the market for good x is characterized by an externality, but we cannot determine whether the externality is positive or negative from this fact alone.
B) the market for good x is characterized by a positive externality.
C) the market for good x is characterized by a negative externality.
D) the supply curve for good x fails to reflect the cost to society of producing that good.

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

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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.

E) All of the above
F) C) and D)

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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.

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

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Does research into new technologies create a positive externality or does it create a negative externality?

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Research into new te...

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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.

E) B) and C)
F) All of the above

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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.

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

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Which theorem asserts that private economic actors can often solve the problem of externalities among themselves?

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The Coase ...

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Figure 10-19 Figure 10-19 -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external A) benefit of $15. B) benefit of $36. C) cost of $15. D) cost of $36. -Refer to Figure 10-19. Each additional unit of the good that is produced yields an external


A) benefit of $15.
B) benefit of $36.
C) cost of $15.
D) cost of $36.

E) B) and C)
F) B) and D)

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Figure 10-1 Figure 10-1 -Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are A) $1.90 and 38 units, respectively. B) $1.80 and 35 units, respectively. C) $1.60 and 42 units, respectively. D) $1.35 and 58 units, respectively. -Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are


A) $1.90 and 38 units, respectively.
B) $1.80 and 35 units, respectively.
C) $1.60 and 42 units, respectively.
D) $1.35 and 58 units, respectively.

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

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

A) True
B) False

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When firms internalize a negative externality, the market supply curve shifts to the left.

A) True
B) False

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

A) True
B) False

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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) firms invest in the latest production technology and the cost of that technology "spills over" to the prices consumers must pay for the product.

E) B) and C)
F) C) and D)

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