Chapter 10

When a policy succeeds in giving buyers and sellers in a market an incentive to take into account the external effects of their actions, the policy is said to

internalize the externality.

Externalities tend to cause markets to be

inefficient.

Which of the following statements is correct?

Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced.

An optimal tax on pollution would result in which of the following?

Producers will internalize the cost of the pollution.

William engages in an activity that influences the well-being of a bystander. In which of the following instances does an externality arise?

The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander.

Two types of private solutions to the problem of externalities are

charities and the Golden Rule.

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

government intervention.

In a market economy, government intervention

may improve market outcomes in the presence of externalities.

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the

social value exceeds the private value at the private market solution.

Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?

technology spillover