Question 1

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Accepted Answer

A) True 
 B)False

Question 2

Tradeable allowances:

Accepted Answer

A)   are typically hard to pass through the Environmental Protection Agency (EP
A)   since they allow firms to legally pollute.
B)   are an efficient way to reduce pollution at lower costs.
C)   decrease the profitability of firms since now they have to pay for the rights to pollute.
D)   are equal to the social surplus in the market.E) B) and D)
F) All of the above

Question 3

Reference: Ref 10-7 (Figure: Softella)  The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. What is the dollar amount of the external benefit (per box)  that is created by the use of this product?

Accepted Answer

A)   $24
B)   $12
C)   $8
D)   $16E) A) and B)
F) A) and C)

Question 4

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is TRUE?

Accepted Answer

A)   The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus.
B)   It is easy to internalize the benefits of getting a flu shot because only two companies produce flu vaccines.
C)   The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot.
D)   To internalize the costs of getting a flu shot, people who receive the vaccine should pay other people to be vaccinated.E) All of the above
F) C) and D)

Question 6

Which of the following statements is TRUE?

Accepted Answer

A)   Mandating that every firm emit no more than X amount of pollutants is the most efficient method of reducing pollution.
B)   A system of tradeable allowances increases pollution because firms can pay for the right to pollute.
C)   To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry.
D)   If the EPA cares about the sum of consumer and producer surplus, they should ignore the impact of pollution reduction on the profitability of firms.E) B) and D)
F) All of the above

Question 7

Which of the following statements is INCORRECT?

Accepted Answer

A)   When external benefits exist in a market, Qmarket 
B)   When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of production.
C)   When external costs exist in a market, Qmarket > Qefficient.
D)   Through taxation, government action can result in Qmarket = Qefficient.E) A) and B)
F) None of the above

Question 8

Government can be used to solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False

Question 9

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?

Accepted Answer

A)   The companies who are taxed are also simultaneously subject to the allowances of pollutants.
B)   They both reduce pollution of exactly the same types of pollutants.
C)   They both bring markets closer to the efficient quantity.
D)   Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts.E) A) and B)
F) B) and C)

Question 10

Which of the following answers correctly identifies social cost?

Accepted Answer

A)   market price + external cost = social cost
B)   external cost - market price = social cost
C)   market price + cost of production = social cost
D)   negative externality + positive externality = social costE) A) and D)
F) C) and D)

Question 11

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

Accepted Answer

A)   too low; too high
B)   equal to the efficient price; too low
C)   too high; too low
D)   equal to the efficient price; too highE) All of the above
F) A) and D)

Question 12

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Accepted Answer

A)   a tax of $5 in Market X and a subsidy of $10 in Market Y.
B)   subsidizing both markets.
C)   taxing Market Y and subsidizing Market X.
D)   taxing both markets.E) None of the above
F) A) and C)

Question 13

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Accepted Answer

A) True 
 B)False

Question 14

Antibiotics may be ________, since people consider only the ________.

Accepted Answer

A)   underused; private and not the social costs of consumption
B)   overused; private and not the social costs of consumption
C)   underused; external and not the private costs of consumption
D)   overused; external and not the private costs of consumptionE) C) and D)
F) A) and C)

Question 15

Accepted Answer

A)   Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons.
B)   Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301.
C)   If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100.
D)   Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500.E) All of the above
F) A) and B)

Question 16

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Accepted Answer

A) True 
 B)False

Question 17

The Coase theorem posits that externality problems can be solved without government intervention

Accepted Answer

A)   when transaction costs are low and property rights are clearly defined.
B)   when trading in tradeable allowances occurs.
C)   if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market.
D)   only rarely, that in general markets cannot maximize social surplus.E) A) and D)
F) B) and C)

Question 18

The Clean Air Act of 1990:

Accepted Answer

A)   established a tradeable allowances program for sulfur dioxide.
B)   is an application of the Coase theorem.
C)   allows firms to profit by selling their unused pollution allowances.
D)   All of the answers are correct.E) None of the above
F) All of the above

Question 19

Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Accepted Answer

The answer of Using a demand and supply diagram demonstrate...

Question 20

Private solutions to externalities are most likely to occur when there are:

Accepted Answer

A)   well-defined property rights and low transaction costs.
B)   communal property rights and large numbers of sellers.
C)   private property rights and high transaction costs.
D)   communal property rights and large numbers of buyers and sellers with equal bargaining power.E) A) and C)
F) A) and D)

Exam 10: Externalities: When the Price Is Not Right

Correct Answer
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Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Correct Answer
verified

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?

Correct Answer
verified

Which of the following statements is TRUE?

Correct Answer
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Antibiotics may be , since people consider only the .

Correct Answer
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Which of the following statements is INCORRECT?

Correct Answer
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The Coase theorem posits that externality problems can be solved without government intervention

Correct Answer
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Tradeable allowances:

Correct Answer
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Which of the following statements is TRUE?

Correct Answer
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Correct Answer
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When external benefits are present, the market price is , however when external costs are present, the market price is .

Correct Answer
verified

Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Correct Answer
verified

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Correct Answer
verified

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Correct Answer
verified

Private solutions to externalities are most likely to occur when there are:

Correct Answer
verified

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Correct Answer
verified

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

Correct Answer
verified

Which of the following answers correctly identifies social cost?

Correct Answer
verified

Government can be used to solve externality problems that are too costly for private parties to solve.

Correct Answer
verified

The Clean Air Act of 1990:

Correct Answer
verified

Exam 10: Externalities: When the Price Is Not Right

Correct AnswerverifiedShow Answer

Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use.

Correct AnswerverifiedShow Answer

Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems?

Correct AnswerverifiedShow Answer

Which of the following statements is TRUE?

Correct AnswerverifiedShow Answer

Antibiotics may be ________, since people consider only the ________.

Correct AnswerverifiedShow Answer

Which of the following statements is INCORRECT?

Correct AnswerverifiedShow Answer

The Coase theorem posits that externality problems can be solved without government intervention

Correct AnswerverifiedShow Answer

Tradeable allowances:

Correct AnswerverifiedShow Answer

Which of the following statements is TRUE?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

Correct AnswerverifiedShow Answer

Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Correct AnswerverifiedShow Answer

External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.

Correct AnswerverifiedShow Answer

In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

Correct AnswerverifiedShow Answer

Private solutions to externalities are most likely to occur when there are:

Correct AnswerverifiedShow Answer

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Correct AnswerverifiedShow Answer

The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution.

Correct AnswerverifiedShow Answer

Which of the following answers correctly identifies social cost?

Correct AnswerverifiedShow Answer

Government can be used to solve externality problems that are too costly for private parties to solve.

Correct AnswerverifiedShow Answer

The Clean Air Act of 1990:

Correct AnswerverifiedShow Answer

Correct Answer
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Antibiotics may be , since people consider only the .

Correct Answer
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When external benefits are present, the market price is , however when external costs are present, the market price is .

Correct Answer
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