Ch. 10 - Externalities

Which of the following is a transaction cost? → The cost of drawing up a contract → The cost of bargaining → All of these choices are correct. → The cost of identifying and bringing buyers and sellers together

All of these choices are correct. → Transaction costs sometimes also include the costs of ensuring compliance with the contract.

Which of the following is not true of externalities? → Externalities can be costs or benefits. → Externalities cause the market equilibrium to be inefficient. → Externalities fall on third parties who are external to the market. → Externality problems have only private solutions.

Externality problems have only private solutions. → There are also government solutions to externalities.

Which of the following statements concerning externalities is not true? → Both markets with external benefits and those with external costs have a deadweight loss. → If there are low transaction costs and well defined property rights, private bargaining can result in an efficient market equilibrium, even when there are externalities. → In a market that generates external costs, the market equilibrium price is higher and the market equilibrium quantity is lower than the efficient equilibrium price and quantity. → In a market that generates external benefits, the efficient equilibrium price and the efficient equilibrium quantity are higher than the market equilibrium price and quantity.

In a market that generates external costs, the market equilibrium price is higher and the market equilibrium quantity is lower than the efficient equilibrium price and quantity. → In the presence of negative externalities, the market quantity will be too high.

A(n) ______ is a tax on a good with external costs. → Pigouvian tax → ad valorem tax → specific tax → Orwellian tax

Pigouvian tax

Suppose R's market activity generates $50 worth of benefits for R but imposes a $75 cost on S, who is external to the market. If S has a clearly defined right to demand that R discontinue the activity and transaction costs are sufficiently low, what will be the result of private bargaining? → S will successfully offer to pay R to discontinue the activity. → S will unsuccessfully offer to pay R to discontinue the activity. → R will unsuccessfully offer to pay S for the right to continue the activity. → R will successfully offer to pay S for the right to continue the activity.

R will unsuccessfully offer to pay S for the right to continue the activity. → The cost is greater than the benefits, so the activity is inefficient and should not continue.

You are considering planting a garden of beautiful flowers in your front yard. It would cost you $45 in time and materials to plant it. You would get $40 worth of benefits from the garden and your neighbor, who walks by your front yard every day, would get $10 worth of benefits from it. Which of the following is TRUE? → The efficient equilibrium is to not plant the garden, but you would do so anyway since the social benefits exceed your private costs. → The external benefits are not significant enough to affect the efficiency of this equilibrium. → Your private benefits exceed your private costs, so you would plant the garden. → The efficient equilibrium is to plant the garden, but you would not do so since your private costs exceed your private benefits.

The efficient equilibrium is to plant the garden, but you would not do so since your private costs exceed your private benefits.

Which of the following is an example of an external benefit? → Researchers at Johnson & Johnson are working on a cure for cancer. → You get a raise that increases your pay 20 percent. → Your neighbors fix up their homes, which raises property values on the entire street. → Your neighbor's rooster wakes you up every morning before your alarm clock goes off, reducing the amount of sleep you get at night.

Your neighbors fix up their homes, which raises property values on the entire street.

Markets tend to be inefficient when it comes to public goods because: → the government tends to overproduce the good → free riders lead to an underproduction of the good → the rival nature of the good makes it hard to collect payment from consumers → consumers tend to value these goods less than private goods

free riders lead to an underproduction of the good → free riders can use and enjoy public goods without paying to support financing the good → the good is non-excludable, so can't collect usage fees

Property rights must be clearly defined if private bargains are to solve problems of externalities so that: → the costs of reaching an agreement are not so great as to offset the benefits of reaching an agreement. → it is clear who ought to pay whom. → the government can correctly calculate the appropriate size of the Pigouvian tax or subsidy. → compliance with government rules is likely.

it is clear who ought to pay whom. → Otherwise, it will be impossible for bargaining to begin.

If the price of a good does not take into account all of the relevant costs of its production, then the price of that good is too → low and the product will be underproduced. → low and the product will be overproduced. → high and the product will be underproduced. → high and the product will be overproduced.

low and the product will be overproduced.

The ____________ is the private cost plus the external cost. The ____________ is the private cost plus the external cost. → total cost → market cost → social cost → global cost

social cost → The social value is the private value plus the external value.

→ An efficient equilibrium occurs when → private costs equals social benefits. → social costs equals social benefits. → private costs equals private benefits. → social costs equals private benefits.

social costs equals social benefits.

If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, the government could correct the odorous externality and achieve an efficient outcome by → taxing sardine tins at a rate of $1 per tin. → subsidizing sardines tins at a rate of $1 per tin. → banning sardines. → capping total sardine consumption at 1000 tins per day.

taxing sardine tins at a rate of $1 per tin. subsidizing sardines tins at a rate of $1 per tin. banning sardines. capping total sardine consumption at 1000 tins per day.

For command-and-control to be the best approach to controlling an externality, it ought to be true that: → flexibility is desired. → the problem is well understood. → strict compliance is not necessary for success. → Pigouvian subsidies are insufficient to control the negative externality.

the problem is well understood. → It also must be true that strict compliance is necessary.