Question 1

Dioxin emission that results from the production of paper is a good example of a negative externality because

Accepted Answer

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

Question 2

Figure 10-19 
-Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Accepted Answer

A)   the private cost of the good
B)   the social cost of the good
C)   the private value of the good
D)   the external benefit of the goodE) B) and C)
F) A) and D)

Question 3

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Accepted Answer

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

Question 4

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Accepted Answer

A) True 
 B)False

Question 5

Regulations to reduce pollution

Accepted Answer

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

Question 6

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

Question 7

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?

Accepted Answer

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) All of the above
F) B) and D)

Question 8

Figure 10-11 
-Refer to Figure 10-11. Which of the following statements is correct?

Accepted Answer

A)   The private value of the 420th unit of output is $15.
B)   The social value of the 420th unit of output is $42.
C)   The external benefit of the 420th unit of output is $27.
D)   All of the above are correct.E) A) and C)
F) None of the above

Question 9

Figure 10-19 
-Refer to Figure 10-19. The social optimum can be reached if

Accepted Answer

A)   a subsidy of $36 is applied to each unit of the good.
B)   a subsidy of $23 is applied to each unit of the good.
C)   a tax of $23 is applied to each unit of the good.
D)   a tax of $15 is applied to each unit of the good.E) B) and D)
F) A) and D)

Question 10

If education produces positive externalities and the government does not intervene in the market, we would expect

Accepted Answer

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

Question 11

Which of the following statements is true of both pollution permits and corrective taxes?

Accepted Answer

A)   Both policies internalize the externality of pollution.
B)   Both policies require firms to pay for their pollution.
C)   Both policies lead to the establishment of an equilibrium price of pollution.
D)   All of the above are correct.E) B) and C)
F) A) and C)

Question 12

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

Accepted Answer

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

Question 13

Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then

Accepted Answer

A)   less than the socially optimal quantity.
B)   greater than the socially optimal quantity.
C)   equal to the socially optimal quantity.
D)   There is not enough information to answer the question.E) A) and C)
F) C) and D)

Question 14

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 D)
F) C) and D)

Question 15

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.
 
-Refer to Table 10-1. Which of the following statements is correct?

Accepted Answer

A)   If the external benefit per unit of output were $0 instead of $2, then the socially efficient quantity of output would be 4 units.
B)   A tax of $4 per unit would enable this market to move from the equilibrium quantity of output to the socially optimal level of output.
C)   Taking the external cost into account, total surplus declines when the 3rd unit of output is produced and consumed.
D)   The market for flu shots is a market to which the concepts in this table apply very well.E) A) and B)
F) A) and C)

Question 16

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

Accepted Answer

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

Question 17

Which of the following policies is not an example of a command-and-control policy?

Accepted Answer

A)   subsidies
B)   Pigovian taxes
C)   tradable pollution permits
D)   None of the above is an example of a command-and-control policy.E) B) and C)
F) None of the above

Question 18

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

Question 19

Table 10-1
The following table shows the private value, private cost, and external cost for various quantities of output in a market.
 
-Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Accepted Answer

A)   $2
B)   $3
C)   $9
D)   $10E) A) and B)
F) None of the above

Question 20

Scenario 10-2
The demand curve for restored historic buildings slopes downward and the supply curve for restored historic buildings slopes upward. The production of the 50S1U1P1tS1S1P0S1U1P1hS1S1P0S1U1P1 S1S1P0restored historic building entails the following:
-a private cost of $800,000;
-a private value of $650,000;
-a social value of $800,000.
-Refer to Scenario 10-2. Is the socially optimal quantity of restored historic buildings less than, equal to, or greater than 50?

Accepted Answer

The socially optimal...

Exam 10: Externalities

Figure 10-19 -Refer to Figure 10-19. The social optimum can be reached if

Correct Answer
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Correct Answer
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The socially optimal...
View Answer

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

Correct Answer
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Regulations to reduce pollution

Correct Answer
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Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Correct Answer
verified

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

Correct Answer
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Which of the following policies is not an example of a command-and-control policy?

Correct Answer
verified

Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then

Correct Answer
verified

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Correct Answer
verified

Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Correct Answer
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Correct Answer
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Correct Answer
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If education produces positive externalities and the government does not intervene in the market, we would expect

Correct Answer
verified

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

Correct Answer
verified

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

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Correct Answer
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Figure 10-11 -Refer to Figure 10-11. Which of the following statements is correct?

Correct Answer
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Which of the following statements is true of both pollution permits and corrective taxes?

Correct Answer
verified

Dioxin emission that results from the production of paper is a good example of a negative externality because

Correct Answer
verified

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. Which of the following statements is correct?

Correct Answer
verified

Exam 10: Externalities

Figure 10-19 -Refer to Figure 10-19. The social optimum can be reached if

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe socially optimal...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Regulations to reduce pollution

Correct AnswerverifiedShow Answer

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following policies is not an example of a command-and-control policy?

Correct AnswerverifiedShow Answer

Suppose planting flowering shrubs creates a positive externality equal to $7 per shrub. Further suppose that the local government offers a $7 per-shrub subsidy to planters. The number of shrubs that are planted is then

Correct AnswerverifiedShow Answer

Private markets fail to reach a socially optimal equilibrium when negative externalities are present because

Correct AnswerverifiedShow Answer

Figure 10-19 -Refer to Figure 10-19. Which of the following quantities decreases as the quantity of the good is increased?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If education produces positive externalities and the government does not intervene in the market, we would expect

Correct AnswerverifiedShow Answer

Suppose that a negative externality is created by the production of good X. Which of the following statements is correct?

Correct AnswerverifiedShow 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

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially-optimal outcome?

Correct AnswerverifiedShow Answer

Figure 10-11 -Refer to Figure 10-11. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is true of both pollution permits and corrective taxes?

Correct AnswerverifiedShow Answer

Dioxin emission that results from the production of paper is a good example of a negative externality because

Correct AnswerverifiedShow Answer

Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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The socially optimal...
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