Econ Ch 10

Which of the following statements is true regarding externalities? *a.* Both negative and positive externalities lead to inefficient outcomes in markets. *b.* Negative externalities lead to inefficiencies in markets, but positive externalities do not. *c.* Negative externalities occur when a good harms those who consume it. *d.* Positive externalities occur when a good benefits those who consume it.

*a.* Both negative and positive externalities lead to inefficient outcomes in markets.

Which of the following is false regarding Pigovian subsidies? *a.* Pigovian subsidies can only be applied effectively in situations with negative externalities. *b.* Applying Pigovian subsidies can lead a market with positive externalities to trade an optimal quantity. *c.* A Pigovian subsidy has to be exactly equal to a positive externality to yield the optimal outcome. *d.* A Pigovian subsidy can be given to either sellers or buyers of the good with the externality.

*a.* Pigovian subsidies can only be applied effectively in situations with negative externalities.

Negative externalities cause the market to trade a quantity: *a.* greater than the optimal quantity. *b*. smaller than the optimal quantity. *c.* that is exactly the optimal quantity. *d.* of zero.

*a.* greater than the optimal quantity.

The Coase Theorem states that: *a.* it is impossible to solve externality problems without the aid of government. *b.* efficient outcomes can be accomplished by private parties even when externalities are present, as long as there are no bargaining costs. *c.* there are costs to negotiating externalities. *d.* the government cannot solve externality problems without the intervention of private parties. *e.* the Coase of true love never did run smooth ;D

*b.* efficient outcomes can be accomplished by private parties even when externalities are present, as long as there are no bargaining costs.

Markets with negative externalities do not trade the optimal quantity because: *a.* the government fails to provide markets with all the information needed for an efficient outcome. *b.* producers fail to consider the external cost in their decision making process. *c.* consumers fail to consider the external benefit in their decision making process. *d.* bystanders are not important members of society.

*b.* producers fail to consider the external cost in their decision making process.

Positive externalities cause the market to trade a quantity: *a.* greater than the optimal quantity. *b.* smaller than the optimal quantity. *c.* that is exactly equal to the optimal quantity. *d.* of zero.

*b.* smaller than the optimal quantity.

Which of the following is false regarding Pigovian taxes? *a.* Applying a Pigovian tax can lead a market with negative externalities to trade an optimal quantity. *b.* A Pigovian tax has to be exactly equal to a negative externality to yield an efficient outcome. *c.* A Pigovian tax must be placed on buyers of the good with the externality. *d.* A Pigovian tax can only be applied effectively in situations with negative externalities.

*c.* A Pigovian tax must be placed on buyers of the good with the externality.

Markets with positive externalities do not trade the optimal quantity because: *a.* the government fails to provide markets with all the information needed for an efficient outcome. *b.* producers fail to consider the external cost in their decision making process. *c.* consumers fail to consider the external benefit in their decision making process. *d.* bystanders are not important members of society.

*c.* consumers fail to consider the external benefit in their decision making process.

Private solutions to externalities are not always possible because: *a.* the government has a vested interest in the outcome and will always intervene. *b.* private parties are simply not good at negotiating problems related to externalities. *c.* there are sometimes too many people involved for them to be able to reach a negotiated solution. *d.* externalities affect other people who are not participating in the market.

*c.* there are sometimes too many people involved for them to be able to reach a negotiated solution.

Which of the following statements is true about regulating externalities? *a.* Regulation only works if the government does not get involved. *b.* Regulation only works in dealing with positive externalities. *c.* Regulation is a method used by the government to let the market reach its own efficient outcome. *d.* Regulation is a command and control policy that can be used to deal with externalities.

*d.* Regulation is a command and control policy that can be used to deal with externalities.