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Exam 10: Externalities

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Question 71

Multiple Choice

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Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

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) B) and D)

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Question 72

Multiple Choice

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Figure 10-8 -Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the socially-optimal level of output, it would

A) introduce a subsidy of $2 per unit.
B) impose a tax of $2 per unit.
C) introduce a subsidy of $4 per unit.
D) impose a tax of $4 per unit.

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

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Question 73

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

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. Multiple Choice - Section 02: Public Policies toward Externalities -Refer to Figure 10-13. If the government imposed a corrective tax that successfully moved the market from the market equilibrium to the social optimum, then tax revenue for the government would amount to

Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500^th fire extinguisher entails the following: -a private cost of $10; -an external cost of $0; -a private value of $9; -an external benefit of $3. - -Refer to Scenario 10-4. In order to maximize the total benefit of fire extinguishers to society as a whole, should the number of fire extinguishers produced be less than, equal to, or greater than 500? Explain.

Table 10-3 -Refer to Table 10-3. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is

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?

Government intervention is necessary to correct all externalities.

Because there are positive externalities from higher education,

Sheryl sits on her patio and plays her guitar while her neighbors are outside. Sheryl neither pays nor receives any compensation for playing her guitar. Under what condition does her guitar-playing give rise to a positive externality?

Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action

Since almost all forms of transportation produce some type of pollution,

Figure 10-2. The graph depicts the market for plastic. -Refer to Figure 10-2. A benevolent social planner would like to see

An externality is

Scenario 10-1 The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000^th gallon of gasoline entails the following: -a private cost of $3.10; -a social cost of $3.55; -a value to consumers of $3.70. -Refer to Scenario 10-1. Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?

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

Suppose that flu shots create a positive externality equal to $9 per shot. Further suppose that the government offers a $9-per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

When the social cost curve is above a product's supply curve,

Figure 10-13. On the graph, Q represents the quantity of plastics and P represents the price of plastics. Multiple Choice - Section 02: Public Policies toward Externalities -Refer to Figure 10-13. Each unit of plastics that is produced results in an external