Econ Assignment #5

Which of the following illustrates the concept of a negative externality?

A college student plays loud music on his new stereo system at 2:00 a.m. (C)

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?

Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders (B)

Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from each other, we would expect that

Firm B will no longer pollute, and Firm A will not reduce its pollution at all (B) NOT ON EXAM

Without government intervention, the equilibrium quantity would be

Q3 (C)

The difference between a corrective tax and a tradable pollution permit is that

a corrective tax sets the price of pollution and a permit sets the quantity of pollution (A)

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 direct regulation of an externality (A)

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

a. At the current output level, the marginal social benefit exceeds the marginal private benefit. b. The current output level is inefficiently low. c. A per-shot subsidy could turn an inefficient situation into an efficient one. (D)

Altering incentives so that people take account of the external effects of their actions

a. is called internalizing the externality. b. can be done by imposing a corrective tax. c. is the role of government in markets with externalities. (D)

When the production of a good results in a positive externality, the social value curve is

above the demand curve, indicating that the total value to society is greater than the private benefit. (B)

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

cost of an externality (B)

The supply curve for a product reflects the

cost to sellers of producing the product (C)

Private markets fail to account for externalities because

decisionmakers in the market fail to include the costs of their behavior to third parties (C)

If an externality is present in a market, economic efficiency may be enhanced by:

government intervention (D)

When Lisa drives to work every morning, she drives on a congested highway. What Lisa 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 Lisa's highway trip

increases the social cost above the private cost (A)

Corrective taxes are typically advocated to correct for the effects of

negative externalities (B)

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

offer grants to university researchers (B)

To internalize the externality in this market, the government should

provide a subsidy for this product (B)

If a sawmill creates too much noise for local residents,

the government can raise economic well-being through noise-control regulations (C)

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,

the market equilibrium quantity will not be the socially optimal quantity (C)

Tradable pollution permits

will be more valuable to firms that can reduce pollution only at high costs (B)