PRINCIPLES OF ECONOMIC (CHAPTER 10)

4. Refer to Table 10-1. How large would a corrective tax need to be to move this market from the equilibrium outcome to the socially optimal outcome? a. $4 b. $5 c. $24 d. $20

a. $4

6. Refer to Table 10-2. What is the equilibrium quantity of output in this market? a. 3 units b. 2 units c. 4 units d. 5 units

a. 3 units

8. Refer to Figure 10-4. Which graph represents a market with no externality? a. Graph (a) b. Graph (b) only c. Graph (c) only d. Graphs (b) and (c)

a. Graph (a)

5. When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip a. increases the social cost above the private cost. b. lowers the social cost below the private cost. c. increases the social value above the private benefit. d. decreases the social value below the private benefit.

a. increases the social cost above the private cost.

2. Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are a. $9.00 and 60 units, respectively. b. $8.40 and 48 units, respectively. c. $6.21 and 76 units, respectively. d. $4.50 and 100 units, respectively.

b. $8.40 and 48 units, respectively.

17. Which of the following is not a characteristic of pollution permits? a. Prices are set by supply and demand. b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation. c. Real-world markets for pollution permits include sulfur dioxide and carbon. d. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom pollution reduction is less expensive.

b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.

20. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 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 $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The railroad will continue to operate but will pay the farmer $1,500 in damages. b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c. The farmer will incur $1,500 in damages to his crops. d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.

19. Two types of private solutions to the problem of externalities are a. charities and the Golden Rule. b. charities and subsidies. c. the Golden Rule and taxes. d. taxes and subsidies.

b. charities and subsidies.

15. Refer to Figure 10-6. If 325 units of plastics are produced and consumed, then the a. social optimum has been reached. b. market equilibrium has been reached. c. government must have imposed a corrective tax to guide the market to this outcome. d. government must have offered a corrective subsidy to guide the market to this outcome.

b. market equilibrium has been reached.

13. Refer to Scenario 10-1. From the given information, it is apparent that a. the production of gasoline involves a negative externality, so the market will produce a smaller quantity of gasoline than is socially desirable. b. the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable. c. the production of gasoline involves a positive externality, so the market will produce a smaller quantity of gasoline than is socially desirable. d. the production of gasoline involves a positive externality, so the market will produce a larger quantity of gasoline than is socially desirable.

b. the production of gasoline involves a negative externality, so the market will produce a larger quantity of

11. Refer to Figure 10-5. The graph represents a market in which a. there is no externality. b. there is a positive externality. c. there is a negative externality. d. The answer cannot be determined from inspection of the graph.

b. there is a positive externality.

3. Refer to Figure 10-2. This market a. has no need for government intervention. b. would be more efficient with a tax on the product. c. would be more efficient with a subsidy for the product. d. would maximize total well-being at Q3.

b. would be more efficient with a tax on the product.

10. Refer to Table 10-3. The social value of the 4th unit of output that is produced is a. $10. b. $16. c. $26. d. $30.

c. $26.

18. Refer to Table 10-5. If the government charged a fee of $80 per unit of pollution, how many units of pollution would the firms eliminate altogether? a. 8 b. 9 c. 10 d. 11

c. 10

9. Refer to Figure 10-4. The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack. Therefore, the market for smokestack scrubbers is shown in a. Graph (a). b. Graph (b) only. c. Graph (c) only. d. Graphs (b) and (c).

c. Graph (c) only.

16. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced? a. They are equal. b. The after-tax equilibrium quantity is greater than the socially optimal quantity. c. The after-tax equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

c. The after-tax equilibrium quantity is less than the socially optimal quantity.

7. Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced? 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.

c. The equilibrium quantity is less than the socially optimal quantity.

14. Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were a. provided a subsidy of $0.11 per gallon of gasoline sold. b. provided a subsidy of $0.29 per gallon of gasoline sold. c. required to pay a tax of $0.29 per gallon of gasoline sold. d. required to pay a tax of $0.11 per gallon of gasoline sold.

c. required to pay a tax of $0.29 per gallon of gasoline sold.

12. Refer to Table 10-4. The table represents a market in which a. there is no externality. b. there is a positive externality. c. there is a negative externality. d. The answer cannot be determined from inspection of the table.

c. there is a negative externality.

1. Which of the following statements is not correct? a. Government policies may improve the market's allocation of resources when negative externalities are present by taxing these goods. b. A positive externality is an example of a market failure. c. Markets allocate scarce resources with the forces of supply and demand. d. Externalities cannot be positive.

d. Externalities cannot be positive.