econ 160 chapter 10

corrective taxes

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

Which of the following statements about corrective taxes is generally NOT true? a. They cause deadweight losses. b. They reduce the quantity sold in a market. c. They raise government revenue. d. They increase what consumers pay for the good.

a. They cause deadweight losses.

According to the Coase theorem, a. private actors can reach agreement to solve the problem of externalities without the government. b. corrective subsidies are the best policy to solve the problem of positive externalities. c. negative externalities are a problem for society but positive externalities are not. d. when two private actors amicably solve the problem of externalities, they shift the problem to a third party.

a. private actors can reach agreement to solve the problem of externalities without the government.

Which of the following is an example of a positive externality? a. Dev mows Myra's lawn and is paid $100 for the service. b. Myra's newly cut lawn makes her neighborhood more attractive. c. Myra's neighbor Xavier offers to pay her if she keeps her lawn well groomed. d. Dev's lawnmower emits smoke that Myra's neighbor Xavier has to breathe.

b. Myra's newly cut lawn makes her neighborhood more attractive.

When the government levies a tax on a good equal to the external cost associated with the good's production, it ________ the price paid by consumers and makes the market outcome ________ efficient. a. decreases, more b. increases, more c. decreases, less d. increases, less

b. increases, more

The Coase theorem does NOT apply if a. there is a significant externality between two parties. b. the court system vigorously enforces all contracts. c. transaction costs make negotiation difficult. d. both parties understand the externality fully. Hide Feedback

c. transaction costs make negotiation difficult.

The government auctions off 500 units of pollution rights. The rights sell for $50 per unit, raising $25,000 of revenue for the government. This policy is equivalent to a corrective tax of _____ per unit of pollution. a. $500 b. $10 c. $450 d. $50

d. $50

If the production of a good yields a negative externality, the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity. a. below, less b. above, greater c. below, greater d. above, less

d. above, less

Command-and-control regulation may be better than a corrective tax if a. some polluters can reduce emissions more cheaply than others. b. knowledge about the cost of pollution abatement is dispersed and hard to obtain. c. a corrective tax would have differential effects on different industries. d. the negative externality is so large that the optimal quantity is zero.

d. the negative externality is so large that the optimal quantity is zero.

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

Coarse Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own