Chapter 10 Externalities

Test B
NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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Externalities occur when a. one persons actions affect the well-being of a bystander. b. the government imposes taxes. c. increases in the price of oil cause gasoline prices to rise. d. higher wages result in increased spending. ANS E!" a. one persons actions affect the well-being of a bystander. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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%rivate mar0ets fail to account for externalities because a. externalities dont occur in private mar0ets. b. sellers include any costs associated with externalities in the price of their product. c. decision ma0ers in the mar0et fail to ta0e into account the external effects of their behavior. d. the government can easily correct any adverse effect externalities may have on the mar0et. ANS E!" c. decision ma0ers in the mar0et fail to ta0e into account the external effects of their behavior. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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A bee0eeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey. As a result2 the bees pollinate the orchard which increases the yield of fruit and also causes a. a positive externality that benefits only the bee0eeper. b. a negative externality since the bees are a ha3ard to the orchard owner. c. a positive externality that benefits only the owner of the orchard. d. positive externalities that benefit both the bee0eeper and the orchard owner. ANS E!" d. positive externalities that benefit both the bee0eeper and the orchard owner. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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hen negative production externalities are present in a mar0et private costs will be greater than social costs. social costs will be greater than private costs. government regulation to resolve the problem is necessary. the mar0et will not be able to reach any e5uilibrium situation. ANS E!" b. social costs will be greater than private costs. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $ a. b. c. d.
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A fertili3er plant emits a very foul odor 7a negative externality8 during the production process. *f the government forces the plant to internali3e the externality2 then the a. supply curve for fertili3er would shift to the right 7down8. b. supply curve for fertili3er would shift to the left 7up8. c. demand curve for fertili3er would shift to the right 7up8. d. demand curve for fertili3er would shift to the left 7down8. ANS E!" b. supply curve for fertili3er would shift to the left 7up8. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $

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11; )hapter 1<=Externalities

hen a mar0et experiences a positive consumption externality2 the demand curve does not reflect the value to society of the good. too much of the good is being produced. the government can internali3e the externality by imposing a tax on the product. the private value is greater than the social value. ANS E!" a. the demand curve does not reflect the value to society of the good. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $ a. b. c. d.

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#he graph shown illustrates a mar0et that is experiencing a a. negative production externality. b. positive production externality. c. negative consumption externality. d. positive consumption externality. ANS E!" c. negative consumption externality. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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According to the graph shown2 which price and 5uantity combination represents the social optimum for this mar0et@ a. %12 A1. b. %12 A1. c. %12 A/. d. %/2 A/. ANS E!" a. %12 A1. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
B

According to the graph shown2 to internali3e the externality in this mar0et the government should a. impose a tax on this product. b. provide a subsidy for this product. c. encourage firms to supply more of this product by offering tax incentives. d. produce the product itself. ANS E!" a. impose a tax on this product. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $

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)hapter 1<=Externalities 11> NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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*nternali3ing an externality refers to a. the fact that sellers only consider their private costs when ma0ing a decision. b. the fact that buyers only consider their private benefits when ma0ing a decision. c. altering incentives so people consider the external effects of their actions when ma0ing a decision. d. government establishing agencies such as the Environmental %rotection Agency to enforce regulations. ANS E!" c. altering incentives so people consider the external effects of their actions when ma0ing a decision. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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#he government can internali3e a positive production externality by a. taxing production which would decrease supply. b. taxing production which would increase supply. c. subsidi3ing production which would decrease supply. d. subsidi3ing production which would increase supply. ANS E!" d. subsidi3ing production which would increase supply. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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#echnology spillover means that a. it is the governments responsibility to subsidi3e firms which are engaged in high-tech research. b. a firms research yields technological 0nowledge that can then be used by society as a whole. c. those firms engaged in technology research may be taxed by the government if that research causes negative externalities in the mar0et. d. when firms invest in the latest production technology2 the cost of that technology Cspills over to the prices consumers must pay for the product. ANS E!" b. a firms research yields technological 0nowledge that can then be used by society as a whole. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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hen a mar0et experiences a positive production externality2 we can expect a smaller mar0et output and a higher mar0et price than optimal. greater mar0et output and lower mar0et price than optimal. greater mar0et output and higher mar0et price than optimal. smaller mar0et output and lower mar0et price than optimal. ANS E!" a. smaller mar0et output and a higher mar0et price than optimal. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $ a. b. c. d.
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*f the government wanted to ensure the mar0et reaches the social optimum in the presence of a technology spillover2 it should a. impose a %igovian tax on any firm producing a technology spillover. b. offer tax credits to consumers that are adversely affected by the new technology. c. subsidi3e producers by an amount e5ual to the value of the technology spillover. d. provide research grants to those firms not currently engaging in research to increase competition in the industry. ANS E!" c. subsidi3e producers by an amount e5ual to the value of the technology spillover. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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hen production externalities exist2 policyma0ers can sometimes improve mar0et outcomes by taxing both positive and negative externalities. subsidi3ing both positive and negative externalities. taxing negative externalities and subsidi3ing positive externalities. taxing positive externalities and subsidi3ing negative externalities. ANS E!" c. taxing negative externalities and subsidi3ing positive externalities. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $ a. b. c. d.

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11? )hapter 1<=Externalities

hen action is ta0en to remedy externalities2 the goal is to increase total production in the economy. move the allocation of resources closer to the social optimum. eliminate the externalities without affecting mar0et outcomes. hold the government accountable for eliminating these mar0et failures. ANS E!" b. move the allocation of resources closer to the social optimum. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 6 !AN(+&" $ a. b. c. d.
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#he )oase theorem suggests that private mar0ets may not be able to solve the problem of externalities a. when the number of interested parties is large and costs are high. b. if government does not become actively involved in the process. c. if the firm in the mar0et is a monopoly. d. when mar0et participants do not want the externality to be eliminated. ANS E!" a. when the number of interested parties is large and costs are high. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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!oger enDoys an oa0 tree in his yard2 but its leaves blow onto his neighbor Nancys yard each fall which she must clean up. *f the benefit of the tree is worth E4<< to !oger and the cost to Nancy of the tree is E;<<2 which of the following statements would be true@ a. Nancy can pay !oger E/<< to get rid of the tree. b. !oger can pay Nancy E6<< for her inconvenience. c. Nancy can pay !oger E6<< to get rid of the tree. d. #here is no private solution that would improve this situation. ANS E!" c. Nancy can pay !oger E6<< to get rid of the tree. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
1B

%rivate solutions may not always be possible if negotiating and enforcing these solutions involve high a. %igovian taxes. b. opportunity costs. c. deadweight losses. d. transaction costs. ANS E!" d. transaction costs. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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*f only a few people are affected by an externality2 then it is li0ely that a. %igovian taxes will provide the most efficient solution to the externality. b. command-and-control regulation will provide the most efficient solution to the externality. c. a private solution to the inefficiency will occur. d. a private solution will be very difficult to negotiate. ANS E!" c. a private solution to the inefficiency will occur. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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Emission controls on automobiles is an example of a a. %igovian tax on automobiles2 based on how much they pollute. b. command-and-control policy to increase social efficiency. c. policy that reduces pollution by allocating resources through mar0et mechanisms. d. policy to reduce congestion on urban freeways. ANS E!" b. command-and-control policy to increase social efficiency. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $

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)hapter 1<=Externalities 11B NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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A %igovian tax is a tax a. that will move the mar0et away from the optimum 5uantity. b. on pollution regulations. c. that is enacted to correct the effects of a negative externality. d. that special interest groups lobby for in order to decrease the cost of producing goods and services. ANS E!" c. that is enacted to correct the effects of a negative externality. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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A comparison between a %igovian tax and tradable pollution permits shows that a. both policies will effectively eliminate a positive externality in a mar0et. b. a %igovian tax sets the price of pollution where pollution permits set the 5uantity of pollution. c. levying a %igovian tax is always preferable to issuing pollution permits. d. a %igovian tax fixes the acceptable pollution 5uantity where pollution permits allow for increases in pollution levels. ANS E!" b. a %igovian tax sets the price of pollution where pollution permits set the 5uantity of pollution. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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hen one firm sells its pollution permit to another firm2 each of the following will occur EF)E%# both firms benefit. social welfare is enhanced. government revenue increases. the total amount of pollution remains the same. ANS E!" c. government revenue increases. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $ a. b. c. d.
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hat should policyma0ers do if they wish to encourage production 7such as medical research8 that provides a positive externality@ a. place taxes on the sale of prescription drugs b. provide subsidies to firms engaged in medical research c. impose years of trials and testing on selected medical procedures d. ensure only the most 5ualified researchers are employed by issuing licenses to wor0 at these firms ANS E!" b. provide subsidies to firms engaged in medical research #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $

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ANS E!" a. one persons actions affect the well-being of a bystander. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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ANS E!" c. decision ma0ers in the mar0et fail to ta0e into account the external effects of their behavior. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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ANS E!" d. positive externalities that benefit both the bee0eeper and the orchard owner. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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ANS E!" b. social costs will be greater than private costs. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" b. supply curve for fertili3er would shift to the left 7up8. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" a. the demand curve does not reflect the value to society of the good. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" c. negative consumption externality. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" a. %12 A1. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
B

ANS E!" a. impose a tax on this product. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
1<

ANS E!" c. altering incentives so people consider the external effects of their actions when ma0ing a decision. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" d. subsidi3ing production which would increase supply. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" b. a firms research yields technological 0nowledge that can then be used by society as a whole. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 1 !AN(+&" $
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ANS E!" a. smaller mar0et output and a higher mar0et price than optimal. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" / !AN(+&" $
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ANS E!" c. subsidi3e producers by an amount e5ual to the value of the technology spillover. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $

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ANS E!" c. taxing negative externalities and subsidi3ing positive externalities. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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ANS E!" b. move the allocation of resources closer to the social optimum. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 6 !AN(+&" $
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ANS E!" a. when the number of interested parties is large and costs are high. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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ANS E!" c. Nancy can pay !oger E6<< to get rid of the tree. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
1B

ANS E!" d. transaction costs. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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ANS E!" c. a private solution to the inefficiency will occur. #$%E" & 'E$1" ( SE)#*+N" / +,-E)#*.E" 1 !AN(+&" $
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ANS E!" b. a command-and-control policy to increase social efficiency. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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ANS E!" c. that is enacted to correct the effects of a negative externality. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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ANS E!" b. a %igovian tax sets the price of pollution where pollution permits set the 5uantity of pollution. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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ANS E!" c. government revenue increases. #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $
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ANS E!" b. provide subsidies to firms engaged in medical research #$%E" & 'E$1" ( SE)#*+N" 1 +,-E)#*.E" 6 !AN(+&" $