Question 1

When positive externalities exist in a market, if a subsidy is imposed:

Accepted Answer

A)  those who interact in the market will lose surplus.
B)  those who interact in the market will gain surplus.
C)  those who do not interact in the market, but are affected by the externality, will gain surplus.
D)  None of these are necessarily true.E) B) and C)
F) A) and D)

Question 2

When tradable allowances are used to correct a negative externality in a market, the outcome:

Accepted Answer

A)  limits the quantity bought and sold to the efficient level.
B)  maximizes surplus.
C)  is efficient.
D)  All of these are true.E) None of the above
F) B) and C)

Question 3

Under the Coase theorem, a private solution to an externality yields a(n) _______ efficient outcome compared to a government solution.

Accepted Answer

A)  more
B)  less
C)  equally
D)  None of these are true.E) A) and C)
F) None of the above

Question 4

The effect that an additional user of a good or participant in an activity has on the value of that good or activity for others is called a _______ externality.

Accepted Answer

A)  network
B)  social
C)  negative
D)  privateE) B) and D)
F) B) and C)

Question 5

A market with a negative externality will reach an efficient outcome when resources are allocated to those with the greatest willingness to pay. To help a market reach efficiency, the government can:

Accepted Answer

A)  tax consumers.
B)  offer consumers a subsidy.
C)  place a quota at the efficient level.
D)  All of these are options the government can take to help a market reach efficiency.E) A) and B)
F) None of the above

Question 6

If the revenues from a Pigovian tax are not directed to those who are affected by the externality, the outcome will _______ and will _______ surplus.

Accepted Answer

A)  be efficient; maximize
B)  not be efficient; not maximize
C)  be efficient; not maximize
D)  not be efficient; maximizeE) B) and C)
F) A) and D)

Question 7

Any cost that is imposed without compensation on someone other than the person who caused it is called a(n) _______ cost.

Accepted Answer

A)  private
B)  social
C)  external
D)  networkE) B) and C)
F) B) and D)

Question 8

The graph shown displays a market with an externality.  Which of the following statements is true? A tax of $12 per unit would eliminate deadweight loss.The government should use a subsidy to counteract this externality.If the government does not intervene, deadweight loss will be $0.

Accepted Answer

A)  I and II only
B)  I only
C)  II only
D)  II and III onlyE) All of the above
F) B) and D)

Question 9

The Coase theorem will hold only if: people can make enforceable agreements. there are very low or no transactions costs. people are altruistic.

Accepted Answer

A)  I only
B)  II and III only
C)  I and II only
D)  I, II, and IIIE) C) and D)
F) A) and B)

Question 10

When a negative production externality is present in a market:

Accepted Answer

A)  private costs are less than social costs.
B)  private costs are less than external costs.
C)  social costs are less than external costs.
D)  external costs are equal to social costs.E) A) and C)
F) A) and B)

Question 11

When a positive externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

Accepted Answer

A)  higher; private
B)  lower; private
C)  lower; social
D)  unchanged; socialE) None of the above
F) A) and B)

Question 12

The graph shown displays a market with an externality.  Which of the following statements is true?This shows a negative consumption externality.The efficient quantity is 7 units.The size of the externality is $12 per unit.

Accepted Answer

A)  I and III only
B)  III only
C)  II only
D)  I, II, and IIIE) A) and B)
F) A) and C)

Question 13

Economists propose that a tax intended to correct for the presence of an externality should be based on:

Accepted Answer

A)  the action that creates the externality, rather than the externality itself.
B)  the externality itself, rather than the action that creates it.
C)  what is simplest to implement.
D)  what will likely generate the most revenue.E) C) and D)
F) B) and C)

Question 14

The graph shown displays a market with an externality.  Which of the following statements is true?The efficient quantity is 6 units.This shows a negative production externality.The size of the externality is $4 per unit.

Accepted Answer

A)  I and III only
B)  II only
C)  I only
D)  I, II, and IIIE) All of the above
F) A) and B)

Question 15

When a tax is imposed on a market with a negative externality, the market is:

Accepted Answer

A)  inefficient, because the net benefit of buying another unit is zero for all market participants.
B)  efficient, because the net benefit of buying another unit is zero for all market participants.
C)  efficient, because the government mandates the efficient quantity without regard for net benefits.
D)  inefficient, because the government mandates the tax without regard for net benefits.E) A) and B)
F) All of the above

Question 16

The distribution of surplus gained when private parties solve an externality problem on their own, under the Coase theorem, is dependent on:

Accepted Answer

A)  which party has more power to enforce the solution.
B)  which party has more negotiating power or wealth.
C)  where the initial rights of the parties lie.
D)  None of these are true.E) None of the above
F) All of the above

Question 17

If a positive consumption externality were present in a market, the social benefit curve would be:

Accepted Answer

A)  below the private demand curve.
B)  above the private demand curve.
C)  identical to the private demand curve.
D)  The social benefit curve's location cannot be determined without more information.E) All of the above
F) B) and D)

Question 18

The graph shown displays a market with an externality.  The external _______ is _______.

Accepted Answer

A)  cost; $3
B)  cost; $5
C)  benefit; $3
D)  benefit; $5E) A) and B)
F) A) and C)

Question 19

External benefits accrue:

Accepted Answer

A)  directly to the decision maker of a market exchange.
B)  indirectly to the decision maker of a market exchange.
C)  without compensation to someone other than the person who caused them.
D)  to the government without its direct intervention.E) B) and D)
F) B) and C)

Question 20

The graph shown displays a market with an externality.  This is a _______ externality, and the optimal quantity is _______ units.

Accepted Answer

A)  positive; 6
B)  positive; 8
C)  negative; 6
D)  negative; 8E) B) and C)
F) None of the above

Exam 18: Externalities

A market with a negative externality will reach an efficient outcome when resources are allocated to those with the greatest willingness to pay. To help a market reach efficiency, the government can:

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Under the Coase theorem, a private solution to an externality yields a(n) _______ efficient outcome compared to a government solution.

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The graph shown displays a market with an externality. This is a _______ externality, and the optimal quantity is _______ units.

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If the revenues from a Pigovian tax are not directed to those who are affected by the externality, the outcome will _______ and will _______ surplus.

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The graph shown displays a market with an externality. Which of the following statements is true? A tax of $12 per unit would eliminate deadweight loss.The government should use a subsidy to counteract this externality.If the government does not intervene, deadweight loss will be $0.

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External benefits accrue:

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If a positive consumption externality were present in a market, the social benefit curve would be:

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When tradable allowances are used to correct a negative externality in a market, the outcome:

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The distribution of surplus gained when private parties solve an externality problem on their own, under the Coase theorem, is dependent on:

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When a positive externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

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The Coase theorem will hold only if: people can make enforceable agreements. there are very low or no transactions costs. people are altruistic.

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When positive externalities exist in a market, if a subsidy is imposed:

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The graph shown displays a market with an externality. Which of the following statements is true?The efficient quantity is 6 units.This shows a negative production externality.The size of the externality is $4 per unit.

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The graph shown displays a market with an externality. Which of the following statements is true?This shows a negative consumption externality.The efficient quantity is 7 units.The size of the externality is $12 per unit.

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When a tax is imposed on a market with a negative externality, the market is:

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When a negative production externality is present in a market:

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The graph shown displays a market with an externality. The external _______ is _______.

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The effect that an additional user of a good or participant in an activity has on the value of that good or activity for others is called a _______ externality.

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Economists propose that a tax intended to correct for the presence of an externality should be based on:

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Any cost that is imposed without compensation on someone other than the person who caused it is called a(n) _______ cost.

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The graph shown displays a market with an externality. This is a _ externality, and the optimal quantity is _ units.

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If the revenues from a Pigovian tax are not directed to those who are affected by the externality, the outcome will _ and will _ surplus.

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When a positive externality is present in a market, total surplus will be _ if buyers only consider _ costs.

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The graph shown displays a market with an externality. The external _ is _.

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