Principles of Economics - Chapter 10

Refer to Figure 10-12. Suppose, on the figure, Q represents the quantity of education and P represents the price of education. Then the quantity represents a. The amount by which consumption of education is below the efficient level. b. the extent of the negative externality that pertains to the market for education. c. the amount of the tax that would be required to correct the negative externality that pertains to the market for education. d. the amount of the subsidy that would be required to correct the positive externality that pertains to the market for education.

a. The amount by which consumption of education is below the efficient level.

Josiah installed a metal sculpture in his front yard. A positive externality arises if the sculpture a. increases the value of other properties in the neighborhood. b. increases the value of Josiah's home. c. is visually unappealing to Josiah's neighbors. d. creates a safety hazard for neighborhood children. Feedback

a. increases the value of other properties in the neighborhood.

According to the Coase theorem, in the presence of externalities a. private parties can bargain to reach an efficient outcome. b. government assistance is necessary to reach an efficient outcome. c. the assignment of legal rights can prevent externalities. d. the initial distribution of property rights will determine the efficient outcome.

a. private parties can bargain to reach an efficient outcome.

Which of the following statements is not correct? a. Patents help internalize the externalities associated with technological advances. b. Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution. c. Allowing firms to trade pollution permits will lower the total cost of reducing pollution. d. A big impediment to implementing the Coase theorem in many cases is high transactions costs.

b. Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution.

A negative externality will cause a private market to produce a. less than is socially desirable. b. more than is socially desirable. c. exactly the quantity that is socially desirable. d. less than the same market would produce in the presence of a positive externality.

b. more than is socially desirable.

The following table shows the private value, private cost, and social value for a market with a positive externality. Refer to Table 10-2. What is the socially-optimal level of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units

c. 5 units

Karen's potted plant causes Danny to sneeze. Karen values her potted plant at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem, a. Karen should pay Danny $400 so that she may keep her potted plant. b. Karen should pay Danny $350 for tissues and allergy medication. c. Danny should pay Karen $325 to give away her potted plant. d. Danny should move.

c. Danny should pay Karen $325 to give away her potted plant.

If only a few people are affected by an externality, then it is likely that a. the government will play a role in collective action. b. command-and-control regulation will provide the most efficient solution to the externality. c. a private solution to the inefficiency will occur. d. a private solution will be very difficult to negotiate.

c. a private solution to the inefficiency will occur.

A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome? a. The radio station puts up a shield, which it pays for. b. The radio station puts up a shield, which the dentist pays for. c. Neither the radio station nor the dentist purchase additional equipment. d. The dentist gets a new drill; it does not matter who pays for it.

d. The dentist gets a new drill; it does not matter who pays for it.