Question 1

Government intervention is necessary to correct all externalities.

Accepted Answer

A) True 
 B)False

Question 2

Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

Accepted Answer

A) True 
 B)False

Question 3

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Accepted Answer

A) True 
 B)False

Question 4

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

Accepted Answer

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

Question 5

Internalizing a positive externality will cause the demand curve to

Accepted Answer

A)   shift to the right.
B)   shift to the left.
C)   become more elastic.
D)   remain unchanged.E) All of the above
F) A) and B)

Question 6

Positive externalities

Accepted Answer

A)   result in a larger than efficient equilibrium quantity.
B)   result in smaller than efficient equilibrium quantity.
C)   result in an efficient equilibrium quantity.
D)   can be internalized with a corrective tax.E) C) and D)
F) A) and B)

Question 7

Two types of private solutions to the problem of externalities are

Accepted Answer

A)   charities and the Golden Rule.
B)   charities and subsidies.
C)   the Golden Rule and taxes.
D)   taxes and subsidies.E) A) and D)
F) B) and C)

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) All of the above
F) None of the above

Question 9

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?

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

Question 10

When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Accepted Answer

A)   Impose a tax greater than the value of the technology spillover.
B)   Not allow production of any product that causes a technology spillover.
C)   Provide a subsidy equal to the value of the technology spillover.
D)   Require producers to "clean up" any spillover that results from their production process.E) A) and B)
F) B) and C)

Question 11

Markets are often inefficient when negative externalities are present because

Accepted Answer

A)   private costs exceed social costs at the private market solution.
B)   externalities cannot be corrected without government regulation.
C)   social costs exceed private costs at the private market solution.
D)   production externalities lead to consumption externalities.E) A) and D)
F) B) and C)

Question 12

Table 10-4
 
-Refer to Table 10-4. The social cost of the 2nd unit of output that is produced is

Accepted Answer

A)   $7.
B)   $23.
C)   $30.
D)   $38.E) C) and D)
F) B) and C)

Question 13

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Accepted Answer

A) True 
 B)False

Question 14

Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities?

Accepted Answer

Pigovian taxes allow markets to coordina...

Question 15

Assuming education results in a positive externality, which of the following statements is correct?

Accepted Answer

A)   The social cost of producing education exceeds the private cost of producing education.
B)   The positive externality can be depicted on a graph by the vertical distance between the supply curve and the social-cost curve.
C)   The socially optimal quantity of education will exceed the market equilibrium quantity of education.
D)   All of the above are correct.E) A) and B)
F) B) and C)

Question 16

Figure 10-5 
-Refer to Figure 10-5. Which of the following statements is correct?

Accepted Answer

A)   The marginal benefit of the positive externality is measured by P3 - P1.
B)   The marginal cost of the negative externality is measured by P3 - P2.
C)   The marginal cost of the negative externality is measured by P3 - P1.
D)   The marginal cost of the negative externality is measured by P3 - P0.E) A) and C)
F) B) and C)

Question 17

Assume the production of a good causes a negative externality. In the market equilibrium, the marginal consumer values the good at

Accepted Answer

A)   less than the social cost of producing it.
B)   less than the private cost of producing it.
C)   more than the social cost of producing it.
D)   more than the private cost of producing it.E) All of the above
F) A) and C)

Question 18

If a sawmill creates too much noise for local residents,

Accepted Answer

A)   noise restrictions will force residents to move out of the area.
B)   a sense of social responsibility will cause owners of the mill to reduce noise levels.
C)   the government can raise economic well-being through noise-control regulations.
D)   the government should avoid intervening because the market will allocate resources efficiently.E) A) and D)
F) A) and C)

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Figure 10-9
 
-Refer to Figure 10-9, Panel b)  and Panel c) . The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Accepted Answer

A)   Q2 to point Q3.
B)   Q3 to point Q2.
C)   Q4 to point Q5.
D)   Q5 to point Q4.E) B) and C)
F) C) and D)

Exam 10: Externalities

Positive externalities

Correct AnswerverifiedShow Answer

If a sawmill creates too much noise for local residents,

Correct AnswerverifiedShow Answer

Government intervention is necessary to correct all externalities.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

Correct AnswerverifiedShow Answer

Assume the production of a good causes a negative externality. In the market equilibrium, the marginal consumer values the good at

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Internalizing a positive externality will cause the demand curve to

Correct AnswerverifiedShow Answer

Table 10-4 -Refer to Table 10-4. The social cost of the 2nd unit of output that is produced is

Correct AnswerverifiedShow Answer

Markets are often inefficient when negative externalities are present because

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Assuming education results in a positive externality, which of the following statements is correct?

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Which of the following statements is correct?

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Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative externalities?

Correct AnswerverifiedPigovian taxes allow markets to coordina...View AnswerShow Answer

Two types of private solutions to the problem of externalities are

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When an industry is characterized by technology spillover, what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Correct AnswerverifiedShow Answer

Figure 10-5 -Refer to Figure 10-5. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Correct AnswerverifiedShow Answer

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct?

Correct AnswerverifiedShow Answer

Figure 10-9 -Refer to Figure 10-9, Panel b) and Panel c) . The overuse of antibiotics leads to the development of antibiotic- resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

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The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Correct AnswerverifiedShow Answer

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Pigovian taxes allow markets to coordina...
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