Econ chap 10

when externalities exist, buyers and sellers

C. neglect the external effects of their actions, and the market equilibrium is not efficient

in order to reach the social optimum, the government could

C. impose a tax of $8 per unit on plastics

private contracts between parties with mutual interests

C. can solve some inefficiencies associated with positive externalities

a positive externality

C. is a benefit to someone other than the producer and consumer of the good

this gray shows the market for pollution when permits are issued to firms and traded in the marketplace. the equilibrium number of permits is

A. 50

suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. bill dislikes the smell of cigarette smoke. he notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. in order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. which f the following represents an efficient solution?

A. Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15).

suppose that an MBA degree creates no externalities because the benefits of an MBA are internalized by the student in the form of higher wages. if there is no government subsidies for MBA's, then which of the following statements is correct?

A. The equilibrium quantity of the MBA's will equal the socially optimal quantity of MBA's.

a local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. this decision provides an example of

A. a direct regulation of an externality

the term market failure refers to

A. a market that fails to allocate resources efficiently

Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. if Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement?

A. an amount less than $100

transaction costs

A. can keep private parties from solving externality problems

when producers operate in a market characterized by negative externalities, a tax that forces them to internalize the externality will

A. give sellers the incentive to account for the external effect of their actions

a negative externality

A. is an adverse impact on a bystander

Gretchen is a writer who works from her home. Gretchen lives next door to Randall, the trumpet player for a local band. Randall needs lots of practice to earn his share of the band's profit, which will amount to $350. Gretchen gets distracted by Randall's trumpet playing but she needs to get her writing done to earn $570 for her current article. if Randall owns the right to play his music and Gretchen needs to hire a lawyer to help her reach an agreement with Randall, then what price is Gretchen wiling to pay the lawyer?

A. less than $220

according to the coase theorem, private parties can solve the problem of externalities if

A. the cost of bargaining is small

suppose that flu shots create a positive externality equal $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?

A. they are equal

which of the following statements is correct?

A. to induce firms to internalize the externality in this market, the government should impose a tax measure by P2 - P0

private solutions may not be possible due to the costs of negotiating and enforcing these solutions. such costs are called

A. transitions costs

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to require a pollution permit for each ton of pollution dumped into the river. it costs firm A $100 for each ton of pollution that it eliminated before it reaches the river, and it costs firm B $50 for each ton of pollution that it eliminates before it reaches the river. the government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. what is the total cost of reducing pollution if firms are not allowed to buy and see pollution permits from each other? what is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

B. $4,500; $3,500

what is the equilibrium quantity of output in the market?

B. 3 units

the tax on cigarettes is an example of

B. a corrective tax

if the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a

C. command-and-control policy

most taxes distort incentives and move the allocation of resources away from the social optimum, why do corrective taxes avoid the disadvantages of most other taxes?

B. because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders

the difference between social cost and private cost is a measure of the

B. cost of an externality

market failure can be caused by

B. externalities

which of the following policies is an example of a command-and-control policy?

B. maximum levels of pollution that factories may emit

corrective taxes are typically advocated to correct for the effects of

B. negative externalities

this graph represents the tobacco industry. the industry creates

B. negative externalities

reaching an efficient bargain is difficult when the

B. number of interested parties is large

a rain barrel is a container that captures a stores rainwater for landscape and garden use during dry periods. rain barrels provide an external benefit to the community through water conservation. hat can the government do to equate the equilibrium quantity of rain barrels and the socially optimal quantity of rain barrels?

B. offer a subsidy on rain barrels that is equal to the per-unit externality

an externality

B. results in an equilibrium that does not maximize the total benefits to society

a paper plant produces water pollution during the production process. if the government forces the plant to internalize the negative externality, then the

B. supply curve for paper would shift to the left

suppose that beef producers create a negative externality. what is the relationship between the equilibrium quantity of beef and the socially optimal quantity of beef?

B. the equilibrium quantity is greater than the socially optimal quantity

which of the following is an example of a positive externality

B. the mayor of a small town plants flowers in the city park

which graph illustrates a pollution permit program?

B. the right graph

in markets, the invisible hand allocates resources efficiently

B. when the buyers and sellers are the only interested parties

this graph represents the tobacco industry. without any government intervention, the equilibrium price and quantity are

C. $1.60 and 42 units, respectively

Karen's cat causes Danny to sneeze. Karen values her. cat's companionship at $300 per year. the cost to Danny of tissues and her allergy medication is $350 per year. based on the coase theorem

C. Danny should pay Karen $325 to give away her cat

Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears the cost of $400 from the barking. assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

C. Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm

Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil needs a lot of practice to earn $250, which is his share of the band's profit. Thurman gets distracted by Phil's drumming but he needs to get his writing done to earn $500 for his current article. which of the following is an efficient solution?

C. Thurman offers Phil $251 to stop practicing his drumming, Phil agrees and both are better off

an externality is an example of

C. a market failure

which of the following statements about well-maintained yard best conveys the general nature of the externality?

C. a well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood

according to the coase theorem, private markets will solve externality problems and allocate resources efficiently as long as

C. private parties can bargain with sufficiently low transaction costs

which of the following is an appropriate label for line 2?

C. private value plus external benefit

which of the following policies is the government most inclined to use when faced with a positive externality?

C. subsidies

honey producers provide a positive externality to orchids because

C. the Chad owner does not have to purchase bees to pollinate his flowers

suppose that flu shots create a positive externality equal to $8 per shot. further suppose that the government offers a $6-per-shot subsidy to producers. what is the relationship between the equilibrium quantity and the social optimal quantity of flu shots produced?

C. the equilibrium quantity is less than the socially optimal quantity.

which of the following is not a necessary condition for the coase theorem

C. the government intervenes to internalize the externality

the graph represents a market in which

C. there is a negative externality

this graph shows the market for pollution when permits are issued to firms and traded in the marketplace. in the absence of a pollution permit system, the quantity of pollution would be

D. 100

which of the following statements is correct?

D. All the above are correct the private value of the 420th unit of output is $15 the social value of the 420th unit of output is $42 the external benefit of the 420th unit of output is $27

which of the following is NOT an example of a negative externality?

D. a decrease in your property value from neglecting your lawn and garden

employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

D. a transaction cost

which of the following is a way to address an externality problem?

D. all the above command and control solution corrective tax corrective subsidy

the graph, as drawn, could apply to the market for

D. all the above fire extinguishers immunizations such as flu shots education

When one firm sells its pollution permit to another firm

D. both A and B are correct both firms benefit the total amount of pollution remains the same

a cost imposed on someone who is neither the consumer nor the producer is called a

D. negative externality

externalities can be corrected by each of the following except

D. normal market adjustments

suppose the socially optimal quantity of good x is 2,500 units and the market equilibrium quantity of a good x is 3,000 units. when 2,500 units of good x are produce the

D. social cost of good x equals the private value of good x

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

D. the coase theorem