Chapter 10: Externalities Test Prep

A tax on a good with a negative externality can internalize the externality by a. adding the external cost to the private cost so the market accounts for the social cost. b. subtracting the external cost from the social cost so the market accounts for the private cost. c. adding the social cost to the private cost so the market accounts for the external cost. d. subtracting the social cost from the private cost so the market accounts for the external cost.

a

An example of a command-and-control policy is government restrictions on the emissions from a paper mill. a. true b. false

a

Because pollution permits and corrective taxes typically reduce the cost of environmental protection relative to command-and-control policies, the public's desire for a clean environment should increase when permits and taxes replace command-and-control policies. a. true b. false

a

Consider the market for vaccines. When one person is vaccinated, other people are protected from illness because the vaccinated person will not transmit the illness. We would expect that in this market, the a. social value curve lies above the private value curve. b. private value curve lies above the social value curve. c. social cost curve lies above the private cost curve. d. external cost exceeds the external benefit.

a

If the government subsidizes a good, the market demand curve shifts up. a. true b. false

a

If the social cost of a good is greater than the private cost of the good, the market produces too much of the good. a. true b. false

a

In a market with no externalities, supply is also called a. private cost and demand is also called private benefit. b. private benefit and demand is also called private cost. c. social cost and demand is also called public benefit. d. public cost and demand is also called public benefit.

a

In a market with no externalities, the height of the supply curve at any given quantity shows the a. cost to the producer of the last unit sold. b. public cost of the last unit sold. c. benefit to consumers from the last unit sold. d. cost to bystanders of the last unit sold.

a

When the private value is less than the social value, the market equilibrium quantity is less than the socially-optimal quantity. a. true b. false

a

Which of the following is not an example of a private solution to the problem of externalities? a. taxes b. private contracts between parties with mutual interests c. the Coase theorem d. moral codes and social sanctions

a

__________ is an example of __________. a. An emissions control on automobiles; a regulation b. A gasoline tax; a regulation c. A regulation on carbon emission; a corrective tax d. A tradable pollution permit; the Coase theorem

a

A corrective tax sets the quantity of pollution while a pollution permit program sets the price of pollution. a. true b. false

b

An ideal corrective subsidy equals the external ____________ from an activity with a _____________. a. benefit; negative externality b. benefit; positive externality c. cost; positive externality d. cost; negative externality

b

Doris bakes homemade bread and cookies in her bakery. Darren rents an apartment above Doris's bakery. The odor of the baking bread and cookies is a a. positive externality if Darren pays $50 per month in rent less than market value because he enjoys the odor. b. positive externality if Darren likes the odor yet pays market value for his monthly rent. c. negative externality if Darren pays $50 per month in rent less than market value because he enjoys the odor. d. negative externality if Darren pays an extra $50 per month in rent above market value to put up with the odor.

b

Government regulation is also called a. a negative externality. b. command-and-control policy. c. a technology spillover. d. a positive externality.

b

If it costs Firm A $1,000 to reduce pollution by 10 units, yet it costs Firm B $800 to reduce pollution by 10 units, then a corrective tax will affect both firms equally. a. true b. false

b

Markets are often __________ when negative externalities are present because __________. a. inefficient; private costs exceed social costs at the private market solution b. inefficient; social costs exceed private costs at the private market solution c. efficient; social costs exceed private costs at the private market solution d. efficient; private costs exceed social costs at the private market solution

b

Private solutions produce efficient solutions to the problem of externalities, whereas public solutions do not. a. true b. false

b

Rich countries usually have cleaner environments than poor countries because a clean environment is an inferior good. a. true b. false

b

Supply and demand curves contain important information about a. interest rates and GDP. b. costs and benefits. c. negative but not positive externalities. d. the uncompensated impact of one person's actions on the well-being of a bystander.

b

When a market experiences a positive externality, the government can internalize the externality by imposing a tax on the product. a. true b. false

b

A fuel economy standard that would require all vehicles to achieve at least 20 miles per gallon is an example of a. the Golden Rule. b. a market-based policy. c. a command-and-control policy. d. the Coase Theorem.

c

A tax on a producer of a polluting product would shift the private cost curve a. downward by the size of the tax and cause the industry to increase the quantity it supplies to the market. b. downward by the size of the tax and cause the industry to decrease the quantity it supplies to the market. c. upward by the size of the tax and cause the industry to decrease the quantity it supplies to the market. d. upward by the size of the tax and cause the industry to increase the quantity it supplies to the market.

c

Olivia owns a dog whose barking annoys her neighbor, Eric. Suppose that the benefit of owning a dog is worth $400 to Olivia and that Eric bears a cost of $500 from the barking. Assuming that Olivia has the legal right to keep a dog, a private market solution to this problem is that a. The current situation is efficient. b. Olivia pays Eric $500 for his inconvenience. c. Eric pays Olivia $450 to give the dog to her mother who lives on an isolated farm. d. Eric pays Olivia $900 to give the dog to her mother who lives on an isolated farm.

c

When the government intervenes in a market with negative externalities, it does so in order to a. lower the price below the private-market equilibrium. b. increase production. c. protect the interests of bystanders. d. increase funding for research and development.

c

Which of the following statements is correct? a. Private parties are usually more successful in achieving efficient outcomes than government policies. b. Private contracts between parties with mutual interests will necessarily reduce the well-being of society. c. Private markets tend to over-produce products with negative externalities. d. Only government policies can achieve efficient outcomes in the presence of positive externalities.

c

A local factory is required to adopt a specific production technology to comply with local air quality standards. This requirement is an example of a. a market-based policy. b. corrective taxes. c. the Coase Theorem. d. a command-and-control policy.

d

If the production of plastic clothing hangers creates a negative externality, then the a. social value to society is larger than the private value of consuming plastic clothing hangers. b. benefit to society is larger than the private cost to the hanger manufacturers. c. cost to the hanger manufacturers is larger than the cost to society. d. cost to society is larger than the cost to the hanger manufacturers.

d

Suppose a hog farm creates a negative externality equal to $2 per hog. Further suppose that the government imposes a $2 per hog tax on hog farmers. Which of the following is correct? a. The equilibrium quantity is greater than the socially optimal quantity. b. The equilibrium quantity is less than the socially optimal quantity. c. The current tax is less than the ideal corrective tax. d. The current tax is the ideal corrective tax.

d

Suppose that Company A's railroad cars pass through Farmer B's wheat fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $2,000 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,800. Suppose that the farmer has the right to compensation for any damage that her crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The farmer will incur $2,000 in damages to her crops. b. The railroad will spend $1,800 to purchase and apply the grease; the railroad will pay the farmer nothing because no crop damage will occur. c. The railroad will continue to operate but will pay the farmer $2,000 in damages. d. The farmer will pay the railroad $1,800 to purchase and apply the grease so that no crop damage will occur.

d

To economists, a good environmental policy begins by acknowledging a. that trade can make everyone better off. b. the distortion created by corrective taxes. c. the value of the Coase theorem. d. that people face trade-offs.

d

Which of the following is an example of a positive externality? a. Harry does all the cooking for his family because his wife does all the cleaning. b. Diana dislikes the smell of cooking liver and onions that radiates from her neighbor's apartment. c. William pays a higher price for a used bicycle because it is in excellent condition. d. Charles enjoys listening to the music played by his neighbor.

d

Which of the following is not an example of a command-and-control policy? a. a requirement that logging companies plant twice as many trees as they harvest b. a limit on carbon emissions c. a requirement that coal-burning power plants install scrubbers to reduce particulate emissions d. a 50-cents per gallon gasoline tax

d

Which of the following is typically an impediment to the Coase theorem? (i) taxes (ii) transaction costs (iii) the Golden Rule (iv) a large number of affected parties a. (i), (ii), and (iii) only b. (i) and (iii) only c. (i) and (ii) only d. (ii) and (iv) only

d

Which of the following statements is not correct? a. A corrective tax encourages firms to further reduce pollution whereas a regulation provides no incentive to reduce pollution below the target. b. An ideal corrective tax would equal the external cost from an activity with negative externalities. c. Both regulation and corrective taxes can reduce pollution. d. A corrective tax is less efficient than a regulation.

d

Which of the following was used to help reduce sulfur dioxide emissions in the United States? a. corrective subsidies b. corrective taxes c. patents d. tradable pollution permits

d