Question 1

Market failure can be caused by

Accepted Answer

A)   too much competition.
B)   externalities.
C)   low consumer demand.
D)   scarcity.E) A) and D)
F) B) and D)

Question 2

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

Accepted Answer

A)   an opportunity cost.
B)   an implicit cost.
C)   a sunk cost.
D)   a transaction cost.E) None of the above
F) A) and B)

Question 3

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

Question 4

Which of the following is not a necessary condition for the Coase theorem?

Accepted Answer

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

Question 5

Private contracts between parties with mutual interests

Accepted Answer

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

Question 6

Figure 10-15 
-Refer to Figure 10-15.The supply of pollution permits is

Accepted Answer

A)   elastic and represented by line A.
B)   inelastic and represented by line A.
C)   elastic and represented by line F
D)   inelastic and represented by line F.E) A) and B)
F) B) and C)

Question 7

Table 10-2
The following table shows the private value,private cost,and social value for a market with a positive externality.
 
-Refer to Table 10-2.How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?

Accepted Answer

A)   $3
B)   $5
C)   $7
D)   $9E) B) and D)
F) A) and D)

Question 8

Which of the following statements is correct?

Accepted Answer

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

Question 9

A corrective tax

Accepted Answer

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

Question 10

Which of the following policies is the government most inclined to use when faced with a positive externality?

Accepted Answer

A)   taxation
B)   permits
C)   subsidies
D)   usage feesE) C) and D)
F) All of the above

Question 11

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?

Accepted Answer

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

Question 12

When producers operate in a market characterized by negative externalities,a tax that forces them to internalize the externality will

Accepted Answer

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

Question 13

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 14

Externalities tend to cause markets to be

Accepted Answer

A)   inefficient.
B)   unequal.
C)   unnecessary.
D)   overwhelmed.E) All of the above
F) A) and D)

Question 15

Table 10-2
The following table shows the private value,private cost,and social value for a market with a positive externality.
 
-Refer to Table 10-2.What is the equilibrium quantity of output in this market?

Accepted Answer

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

Question 16

Why can't private individuals always internalize an externality without the help of government?

Accepted Answer

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

Question 17

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Accepted Answer

A) True 
 B)False

Question 18

The tax on gasoline is an example of

Accepted Answer

A)   a consumption tax.
B)   a corrective tax.
C)   an income tax.
D)   a command-and-control policy.E) B) and C)
F) B) and D)

Question 19

Figure 10-10 th unit of output is $12. B)  The social cost of producing the 120th unit of output is $22. C)  The external cost of producing the 120th unit of output is $2. D)  All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 10-10.Which of the following statements is correct?

Accepted Answer

A)   The private cost of producing the 120th unit of output is $12.
B)   The social cost of producing the 120th unit of output is $22.
C)   The external cost of producing the 120th unit of output is $2.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 20

Figure 10-9   
-Refer to Figure 10-9.The overuse of antibiotics leads to the development of antibiotic-resistant diseases.Therefore,the market for antibiotics is shown in

Accepted Answer

A)   Panel (a) .
B)   Panel (b) .
C)   Panel (c) .
D)   Both (b) and (c) are correct.E) B) and C)
F) B) and D)

Exam 10: Externalities

Market failure can be caused by

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Which of the following is not a necessary condition for the Coase theorem?

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Which of the following statements is correct?

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Private contracts between parties with mutual interests

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Figure 10-9 -Refer to Figure 10-9.The overuse of antibiotics leads to the development of antibiotic-resistant diseases.Therefore,the market for antibiotics is shown in

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The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

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Table 10-2 The following table shows the private value,private cost,and social value for a market with a positive externality. -Refer to Table 10-2.How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output?

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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?

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When producers operate in a market characterized by negative externalities,a tax that forces them to internalize the externality will

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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

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A corrective tax

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Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

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Table 10-2 The following table shows the private value,private cost,and social value for a market with a positive externality. -Refer to Table 10-2.What is the equilibrium quantity of output in this market?

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Externalities tend to cause markets to be

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Why can't private individuals always internalize an externality without the help of government?

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Which of the following policies is the government most inclined to use when faced with a positive externality?

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Figure 10-10 -Refer to Figure 10-10.Which of the following statements is correct?

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The tax on gasoline is an example of

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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.

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Figure 10-15 -Refer to Figure 10-15.The supply of pollution permits is

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