Micro Chapter 3, Microeconomics Chapter 10

In Virginia, the state taxes automobiles. In Northern Virginia, there is ample public transportation, and many neighborhoods are very walkable. In the rest of the state, there is less public transportation, and neighborhoods are more spread out. Other things equal, which of the following is likely to be an effect of the car tax? A) The car tax will raise relatively more money in Northern Virginia. B) The deadweight loss of the tax will be higher in Northern Virginia. C) The deadweight loss of the tax will be higher in the rest of the state. D) The deadweight loss will be the same throughout the state.

B

Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers? A) $0.60 B) $0.40 C) $0.75 D) $0.67

B

Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers? A. $0.67 B. $0.40 C. $0.75 D. $0.60

B

The difference between what buyers pay for a unit of a good and what sellers receive is known as the: A) cost of production. B) tax. C) brokerage fee. D) overhead.

B

The supply of financial capital is very internationally mobile. People can move their bank and brokerage accounts around the world and invest in foreign corporations with a click of the mouse. The supply of labor is less internationally mobile. People have strong ties to the countries in which they live. Assuming that the demand for labor and for financial capital have similar elasticities, which of the following is TRUE? A) Taxes on financial capital will raise more revenue than similar taxes on labor. B) Taxes on labor will have less deadweight loss than similar taxes on financial capital. C) Taxes on labor and financial capital are interchangeable. D) Taxes on labor will have no deadweight loss at all.

B

Which of the following statements is NOT true regarding subsidies? A) Similar to a tax, a subsidy also creates a deadweight loss. B) The main beneficiary of a subsidy is the party that directly receives the check from the government. C) Subsidies create inefficient increases in trade. D) When a subsidy is present, the price received by sellers exceeds the price paid by buyers.

B

Which of the following statements is TRUE? I. Subsidizing buyers is no different than subsidizing sellers. II. Unlike taxes, subsidies do not create deadweight losses. III. Subsidies are payments the government makes to either producers or consumers. IV. Taxpayers pay for subsidies. A) I and II only B) I, III, and IV only C) II and III only D) I, II, III, and IV

B

(Figure: Deadweight Loss) Which of the areas in this figure represents the lost consumer surplus resulting from a $2 tax? A) A B) B C) B + E D) B + C

C

(Figure: Imposition of a Tax) Refer to the figure. With a $4 tax, the deadweight loss is: A) $10. B) $35. C) $20. D) $40.

C

(Figure: Tax on supply and Demand): According to the figure, if the tax is placed on sellers, the equilibrium is at Point: A. C, and the equilibrium price and quantity are P1 and Q2. B. A, and the equilibrium price and quantity are P3 and Q2. C. B, and the equilibrium price and quantity are P3 and Q2. D. A, and the equilibrium price and quantity are P4 and Q3.

C

. (Figure: Supply and Demand with Subsidy) Refer to the figure. With a $2-per-unit subsidy, the price received by sellers is ________ and the price paid by consumers is ________. A) $3; $2 B) $2; $4 C) $4; $2 D) $3; $

C

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax? A) No, workers should pay the whole tax. B) No, employers should pay the whole tax. C) Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other. D) Economics cannot answer such a question.

C

Consider the market for gasoline, a good with a relatively low elasticity of demand. Who will bear the majority of a tax imposed on gasoline? A) It depends on the tax rate at the time the gasoline is sold. B) Sellers will bear the majority of the tax, as long as supply is more elastic than demand. C) Buyers will bear the majority of the tax, as long as demand is less elastic than supply. D) No one will bear the majority of the tax; the tax burden will be borne equally by both buyers and sellers

C

In Free Market Environmentalism, economists Terry Anderson and Donald Leal write, "Subsidized irrigation . . . encourages farmers to break prairie sod and plant crops in arid regions. Rather than choosing drought-resistant crops that might be more appropriate in an environment undergoing global warming, farmers intensify the use of pesticides and chemical fertilizers to increase their yields. . ." (pp. 163-164). Which of the following explains the deadweight loss from irrigation subsidies? A) Farmers are using methods that do not match their incentives. B) Farmers are using methods that do not result in the highest crop yield. C) Farmers are using methods for which the social cost of growing food exceeds the social benefit. D) Farmers are using methods without considering the methods' opportunity cost.

C

In the figure, demand curve _____ is the least elastic demand curve, and the lost gains from trade because of a tax are greater with demand curve _____. A) D1; D1 B) D2; D2 C) D1; D2 D) D2; D1

C

The government subsidizes driving by building roadways, but it also taxes driving through gasoline taxes. Which of the following is TRUE? A) Road-building expenditures must be less than gasoline tax revenues. B) Deadweight losses from road subsidies exceed deadweight losses from gasoline taxes. C) These policies at least partially offset each other because a subsidy is a negative tax. D) These policies compound each other because a subsidy is the same thing as a tax.

C

The supply of financial capital is very mobile. People can move their bank and brokerage accounts around the world and invest in foreign corporations with a click of the mouse. Therefore, taxes on financial capital: A) are profitable for the government. B) will not be a significant source of deadweight loss. C) will not raise very much revenue from suppliers of financial capital. D) are a good idea.

C

Which of the following statements is NOT true for a case in which the demand for labor is more elastic than the supply of labor? A) Firms can substitute capital for labor if the health insurance on labor gets too costly. B) Most workers would continue to work even if their wages were lower because of the cost of health insurance. C) Firms cannot escape the cost of health insurance for labor by employing fewer workers. D) Firms can move overseas if the tax on labor gets too high.

C

people usually perceive that the private cost of getting flu shots is higher than their private benefit.

Fewer people get flu shots than is efficient because: A) people usually perceive that the private cost of getting flu shots is higher than their private benefit. B) people usually perceive that the private benefit of getting flu shots is higher than their private cost. C) the cost of producing flu shots is too high in relation to profits. D) there are always more people getting flu shots than the amount of flu shots available.

command and control, tax on electricity, tax on the pollutants generated from electricity production

Rank economists' LEAST favorite to MOST favorite method of reducing electricity consumption. A) tax on electricity, command and control, tax on the pollutants generated from electricity production B) command and control, tax on electricity, tax on the pollutants generated from electricity production C) tax on electricity, tax on the pollutants generated from electricity production, command and control D) tax on the pollutants generated from electricity production, command and control, tax on electricity

$4.00

Refer to the figure. What is the deadweight loss in this figure at the market equilibrium? A) $25.00 B) $4.00 C) $8.33 D) $11.25

Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301.

Refer to the table. Which statement is FALSE? A) Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons. B) Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301. C) If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100. D) Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500.

I, II, and III (ALL) I. Market prices do not correctly signal the true costs and benefits to society when external costs are present. II. Market prices do not correctly signal the true costs and benefits to society when external benefits are present. III. Taxes and subsidies can adjust prices so that they do send the correct signals.

Which of the following statements are TRUE? I. Market prices do not correctly signal the true costs and benefits to society when external costs are present. II. Market prices do not correctly signal the true costs and benefits to society when external benefits are present. III. Taxes and subsidies can adjust prices so that they do send the correct signals. A) I and III only B) II and III only C) I only D) I, II, and III

II, III, and IV only

Which of the following statements is TRUE? I. If an activity creates an external cost of $15, the government should subsidize the activity by $15. II. Social surplus is maximized when the private marginal benefit equals the social cost. III. External costs result in markets producing too much output. IV. Someone pays external costs other than the producer or consumer. A) I and III only B) II, III, and IV only C) III only D) II and IV only

I and III only I. Taxes may reduce consumption by exactly the same amount as government regulations. III. Command and control policies effectively reduce consumption, but they may not be the lowest cost method for doing so.

Which of the following statements is TRUE? I. Taxes may reduce consumption by exactly the same amount as government regulations. II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity. III. Command and control policies effectively reduce consumption, but they may not be the lowest cost method for doing so. A) I and II only B) I and III only C) II only D) II and III only

Command and control policies require all firms to reduce pollutants by a specific quantity, whereas tradable allowances allow some firms to pollute more than others by trading for pollution rights.

Which statement explains the difference between command and control policies and tradable allowances? A) Command and control policies are a government solution to externalities, whereas tradable allowances are a type of private market solution. B) Tradable allowances allow for less flexibility than command and control policies. C) Command and control policies require all firms to reduce pollutants by a specific quantity, whereas tradable allowances allow some firms to pollute more than others by trading for pollution rights. D) Tradable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control.

a paper mill polluting a stream that only flows into a single farm

Which would be the MOST likely place to find an internalized externality? (Keep transaction costs in mind.) A) a factory polluting the air surrounding a large suburb B) a wind farm slightly disturbing the mountain view of a nearby city C) a paper mill polluting a stream that only flows into a single farm D) roadwork operating on a major highway, but only operating at night

would prohibit a private solution to the external cost.

Your neighbor has a tree that blocks your view of a distant hill. Your neighbor values the tree at $100. You value the tree's removal at $150. Tree removal costs $60. In this case, property rights are clear. Your neighbor owns the airspace extending above his house for some distance. Transaction costs in this case: A) would allow for a private solution to the external cost. B) would prohibit a private solution to the external cost. C) would be equal to zero. D) are unknown.

$1,200

(Figure: ABC Company) Refer to the figure. The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. If the users of the cleaner were given a subsidy to compensate them for the benefit they are creating for the ecological system, how much deadweight loss is removed from this market? A) $2,400 B) $3,000 C) $3,600 D) $1,200

9; 6

(Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains phosphates that harm marine life. In this figure, the market equilibrium quantity is ______ units, and the efficient quantity is ______. A) 6; 9 B) 12; 6 C) 9; 6 D) 12; 9

$45

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market? A) $90 B) $180 C) $45 D) $255

85

(Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market for cans of a bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market? A) 100 B) 85 C) 15 D) 9

benefit; $5

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________. A) cost; $15 B) cost; $10 C) benefit; $20 D) benefit; $5

deadweight loss of approximately $750.

(Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n): A) deadweight loss of approximately $750. B) shortage of 1,800 vaccines. C) equilibrium price of $20. D) All of the answers are correct.

$100,000,000

(Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical rainforests to grow the plants that excrete the oil. With this externality, what is the deadweight loss (if any) of producing palm oil? A) $100,000,000 B) $200,000,000 C) $400,000,000 D) There is no deadweight loss.

$800

(Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what is the dollar amount of deadweight loss that would be removed from this market? A) $1,600 B) $2,800 C) $5,600 D) $800

added a $10 tax per unit.

(Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could be eliminated if the government: A) outlawed the production of the good. B) added a $10 tax per unit. C) equated marginal benefit with external cost. D) subsidized consumption by $5 per unit.

3; 2

(Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is ________ and the efficient equilibrium quantity is ________. A) 5; 1 B) 3; 4 C) 3; 2 D) 2; 5

(Figure: Tax on Sellers) In the diagram, sellers receive _____ without the tax and _____ with the tax. A) $4; $3 B) $4; $7 C) $7; $3 D) $6; $4

A

(Figure: Wage Subsidy) Refer to the figure. If a minimum wage of $8 had been implemented instead of a wage subsidy, how many workers would have been unemployed? A) 60 B) 30 C) 180 D) 120

A

. (Figure: Soda Market) Suppose the U.S. Congress passes a tax of $0.70 on each can of soda. Using the diagram and the "wedge shortcut," determine how much deadweight loss this would create. A) $10,500 B) $21,000 C) $35,000 D) $70,000

A

A mandate that requires employers to provide health insurance will cause the price of physical capital to: A) increase. B) decrease. C) remain the same. D) change, but it's uncertain how.

A

As demand becomes more elastic, ceteris paribus, the deadweight loss from a tax: A) increases. B) remains the same. C) decreases. D) changes unpredictably.

A

If there is a tax on both medicine and sugar, ceteris paribus, how will the deadweight losses in each market compare? A) Medicine has a larger deadweight loss. B) Sugar has a larger deadweight loss. C) The deadweight losses are equal. D) Neither has a deadweight loss due to the tax.

B

By law, workers pay half the Social Security tax and employers pay the other half. However, the price of labor (wages) does not adjust very quickly. If the government wanted to temporarily create a shortage of labor (or combat a surplus of labor), what should it do? A) Move the whole tax onto workers (suppliers of labor). B) Move the whole tax onto employers (demanders of labor). C) Neither because this change would have a long run effect on who pays the Social Security tax. D) Increase the tax on both parties.

A

Every summer, Matt travels by air to see his grandmother. Matt's maximum willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax? A) $160 B) $150 C) $10 D) $260

A

If the elasticity of supply is 1, and the elasticity of demand is 3 (in absolute value), then for a tax of $1 buyers will pay: A) an extra 25 cents and sellers will receive 75 cents less. B) an extra 75 cents and sellers will receive 25 cents less. C) an extra 50 cents and sellers will receive 50 cents less. D) nothing extra since this is the special case where demand is unit elastic.

A

In the market for Good X—a necessity good without any good substitutes—the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: A) more heavily on buyers, given that demand is more inelastic than supply. B) evenly between buyers and sellers. C) more heavily on sellers, given that supply is more inelastic than demand. D) more heavily on buyers, given that demand is more elastic than supply.

A

In this figure, the benefits of a subsidy will be greater for sellers facing demand curve ______, the ______ demand. A) D2; more elastic B) D2; least elastic C) D1; more elastic D) D1; least elastic

A

Legislators impose a tax of $0.70 on soda that reduces the quantity of soda sold from 130,000 cans of soda to 100,000, cans. How much of the $0.70 tax per can will producers pay? A) $0.10 B) $0.35 C) $0.60 D) $0.70

A

Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax, the price of the motor increases from $230 to $280. The deadweight loss of the tax attributable to Martin is: A) $20. B) $250. C) $50. D) $30.

A

If instead of a per-unit subsidy, the government offered to pay for half the good's price, no matter the price: A) the wedge method would no longer work. B) instead of a parallel shift in demand, the subsidy should be modeled as a demand curve that is twice as steep. C) demand would be perfectly elastic. D) there would be no change in how we model the subsidy

B

permit; efficient

A number of cities and states have banned smoking in bars because of secondhand smoke. In cities without the ban, the bar owner decides whether smoking is permitted. If smokers have a greater willingness to pay to smoke than nonsmokers have to avoid smoke, then bar owners will ______ smoking, which is an ______ outcome. A) ban; efficient B) ban; inefficient C) permit; efficient D) permit; inefficient

positive; killed rats regardless of who those rats would infect

A plague called The Black Death swept Medieval Europe. At the time, people believed cats spread the plague (cats were associated with the Devil) and started killing them to prevent the spread of disease. In reality, rats spread the plague and the slaughter of their natural predators only hastened the disease's proliferation. With this in mind, a market for cats would have had a ______ externality because the cats ______. A) positive; prevented rats from eating their owners' grain B) positive; killed rats regardless of who those rats would infect C) negative; spread disease to everyone regardless of who owned them D) negative; made everyone sicker through their association with the Devil

I and III only I. levy taxes on the coal factory's production of pollutants III. create a market for tradable allowances

Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)? I. levy taxes on the coal factory's production of pollutants II. levy taxes on the consumers' consumption of fish III. create a market for tradable allowances IV. subsidize firms that produce clean fish A) I and III only B) II and IV only C) III and IV only D) I, III, and IV only

(Figure: Taxes and Deadweight Loss) In the diagram, the deadweight loss is ______ and government tax revenue is ______. A) C + E; B B) C + E; B + D C) C; E D) D + F; B + D

B

(Table: Unit Taxes) Because of the $4 tax in the accompanying table, buyers are paying ______ per unit and sellers are receiving _______ per unit. A) $4 more; $4 less B) $2.50 more; $1.50 less C) $4 less; $4 more D) $2 more; $2 less

B

With a $4 subsidy in the figure, buyers pay _____ and sellers receive _____. A) $5; $9 B) $7; $3 C) $9; $7 D) $3; $7

D

taxing the pollutants directly caused by washing machines

Which best creates incentives to reduce the pollution generated by washing machines? A) regulating the capacity of washing machines B) requiring appropriate filtering mechanisms on washing machines C) taxing the pollutants directly caused by washing machines D) allowing the Coase theorem to effectively reach an efficient market equilibrium

(Figure: Consumer and Producer Surplus) According to the figure, what is the value of the deadweight loss? A) The deadweight loss cannot be calculated. B) $900 C) $100 D) $50

D

. (Figure: Tax on Sellers of Gadgets) According to the figure, what is the amount of the deadweight loss caused by the imposition of the tax on gadgets? A) $100 B) $1 C) $0.50 D) $50

D

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax? A. No, employers should pay the whole tax. B. No, workers should pay the whole tax. C. Economics cannot answer such a question. D. Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other.

D

In the diagram, the demand curve that incorporates a $2 tax per unit is: A) D1. B) D2. C) D3. D) D4.

D

The typical teen-age smoker has a more elastic demand for cigarettes than does a typical older smoker. We expect a given cigarette tax to ______ a teen-age smoker's consumption by______ than an older smoker's consumption. A) increase; less B) increase; more C) reduce; less D) reduce; more

D

Which of the following statements is TRUE regarding cigarette taxes? A) Cigarette manufacturers bear almost all of the cigarette taxes. B) Cigarette manufacturers tend to ship their product from low-tax states to high-tax states. C) The elasticity of cigarette supply in all states is very small so cigarette manufacturers receive higher after-tax prices in higher-tax states. D) After-tax prices received by cigarette manufacturers are about the same in all states

D

Which of the following statements is TRUE? I. Buyers bear the majority of the tax burden if the tax is originally imposed on buyers. II. Buyers bear the majority of the tax burden if the tax is originally imposed on sellers. III. Buyers and sellers will always bear equal amounts of the tax burden. IV. Buyers and sellers will jointly bear the tax. A) I only B) II only C) III only D) IV only

D

I only - Lack of running water in part of the country is exacerbating the spread of cholera in the population.

If you are a government official, under which of the following situations would you opt for a command and control solution to an externality problem? I. Lack of running water in part of the country is exacerbating the spread of cholera in the population. II. Foreign ships are dumping toxic wastes in the waters off your country's shores. III. A large number of banks fail due to excessive risk taking. A) I only B) I and II only C) II and III only D) I, II, and III

lower than the efficient price.

In a market with external costs, the market price is: A) higher than the efficient price. B) lower than the efficient price. C) equal to the efficient price. D) regulated by the government.

is less than marginal social cost for all quantity levels.

In the case of an external cost, marginal private cost: A) is equal to marginal social cost for all quantity levels. B) is less than marginal social cost for all quantity levels. C) is greater than marginal social cost for all quantity levels. D) and marginal social cost cannot be compared at any quantity.

the costs of reaching an agreement are low and property rights are well defined.

Market solutions to externality problems are more likely to occur when: A) the costs of reaching an agreement are low and property rights are well defined. B) the transaction costs are low and property rights are nonexistent. C) transaction costs are high and property rights are well defined. D) the costs of reaching an agreement are high and property rights are nonexistent.

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

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the: A) social value exceeds the private value at the private market solution. B) private cost exceeds the social benefit at the private market solution. C) private benefit equals the social benefit at the private market solution. D) None of the answers is correct. Private markets DO achieve a socially optimal equilibrium when external benefits are present.

well-defined property rights and low transaction costs.

Private solutions to externalities are MOST likely to occur when there are: A) well-defined property rights and low transaction costs. B) communal property rights and large numbers of sellers. C) private property rights and high transaction costs. D) communal property rights and large numbers of buyers and sellers with equal bargaining power.

underconsumed because consumers only consider the private benefits of consumption.

Products that create external benefits are: A) overconsumed because the private benefits exceed the private costs. B) underconsumed because consumers only consider the private benefits of consumption. C) neither overconsumed nor underconsumed because the marginal benefits equal the marginal costs. D) underconsumed because the social costs exceed the social benefits.

Yes, it would lower the cost of pollution abatement.

Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade? A) No, it would raise the cost of pollution abatement. B) Yes, it would lower the cost of pollution abatement. C) It is impossible to say whether this would or would not be an efficient trade. D) There is no incentive for Alex and Tyler to trade.

Different people have different costs of emissions abatement.

Suppose there will be global catastrophe unless we hold total carbon dioxide emissions at or below 35 million tons per year. As a result, each person on Earth is allocated 10 pounds of untradable emissions permits per year. Why would this be an inefficient solution? A) Flexibility is not desirable. B) Transaction costs are very high. C) Everybody has the same cost of emissions abatement. D) Different people have different costs of emissions abatement.

the external benefits of vaccination likely decrease as more and more people are vaccinated.

The Centers for Disease Control and Prevention (CDC) wants at least 90% of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that: A) the external benefits of vaccination likely decrease as more and more people are vaccinated. B) the private benefits of vaccination increase with vaccine coverage. C) vaccines create a negative externality once the vaccine covers 90% of the population. D) vaccines create a positive externality once the vaccine covers 90% of the population.

when transaction costs are low and property rights are clearly defined.

The Coase theorem posits that externality problems can be solved without government intervention: A) when transaction costs are low and property rights are clearly defined. B) when trading in tradable allowances occurs. C) if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market. D) only rarely, that in general, markets cannot maximize social surplus.

I and II only I. implement a tax equal to the level of the external cost. II. create a system of tradable allowances to reduce output to the efficient quantity.

To ensure an efficient equilibrium outcome when external costs are present in the market, the government could: I. implement a tax equal to the level of the external cost. II. create a system of tradable allowances to reduce output to the efficient quantity. III. institute command and control policies to reduce output to the efficient quantity. A) I and II only B) II and III only C) II only D) I, II, and III

can keep private parties from solving externality problems.

Transaction costs: A) are incurred in the production process due to externalities. B) are eliminated when the government intervenes in a market with externalities. C) can keep private parties from solving externality problems. D) increase when taxes are imposed to correct negative externalities.

Under this act, the EPA distributes pollution allowances to electricity producers.

What is the importance of the Clean Air Act of 1990? A) Under this act, the EPA distributes pollution allowances to electricity producers. B) Under this act, the EPA sets the maximum amount of pollution that each firm may emit. C) The act lists the pollutants that are deemed harmful to the environment. D) The act delineates which firms are allowed to emit more than 1 ton of sulfur dioxide.

market output is too low.

When external benefits are significant: A) market output is too low. B) market output is too high. C) market output is at the efficient level. D) social surplus is maximized.

it is equivalent to a tax set equal to the level of the external cost.

When the number of tradable allowances is set equal to the efficient market quantity: A) it is equivalent to a tax set equal to the level of the external cost. B) the outcome will be more efficient than a tax on pollution. C) it is equivalent to a government regulation set equal to the efficient market quantity. D) the price of the allowances will equal the social cost of pollution.