Microecon Chapter 10: Externalities

Transaction Costs

The costs that parties incur in the process of agreeing and following through on a bargain.

Coase Theorem

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.

Social Cost

The sum of private costs and external costs.

Externality

The uncompensated impact of one person's actions on the well-being of a bystander.

A negative externality generates a. a social cost curve that is above the supply curve (private cost curve) for a good. b. a social cost curve that is bellow the supply curve (private cost curve) for a good. c. a social value curve that is above the demand curve (private value curve) for a good. d. none of the above.

a. a social cost curve that is above the supply curve (private cost curve) for a good.

When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of a. an attempt to internalize a positive externality b. an attempt to internalize a negative externality c. a corrective tax d. a command-and-control policy

a. an attempt to internalize a positive externality

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality a. costs incurred to reduce the pollution b. costs incurred due to lawyers fees c. costs incurred to enforce the agreement d. costs incurred due to a large number of parties affected by the externality e. All of the above are considered transaction costs.

a. cost incurred to reduce the pollution

A positive externality (that has not been internalized) causes the a. optimal quantity to exceed the equilibrium quantity b. equilibrium quantity to exceed the optimal quantity c. equilibrium quantity to equal the optimal quantity. d. equilibrium quantity to be either above or below the optimal quantity.

a. optimal quantity to exceed the equilibrium quantity.

A corrective tax on pollution a. sets the price of pollution b. sets the quantity of pollution c. determines the demand for pollution rights d. reduces the incentive for technological innovations to further reduce pollution

a. sets the price of pollution

Bob and Tom live in a university dorm. Bob values playing load music at a value on $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music and if there are no transaction costs? a. Bob will pay Tom $100 and Bob will stop playing load music b. Tom will pay Bob between $100 and $150 and Bob will stop playing loud music c. Bob will pay Tom $150 and Bob will continue to play loud music. d. Tom will pay Bob between $100 and $150 and Bob will continue to play loud music.

b. Tom will pay Bob between $100 and $150 and Bob will stop playing loud music

A positive externality generates a. a social cost curve that is above the supply curve (private cost curve) for a good. b. a social value curve that is above the demand curve (private value curve) for a good. c. a social value curve that is below the demand curve (private value curve) for a good. d. none of the above.

b. a social value curve that is above the demand curve (private value curve) for a good.

A negative externality (that has not been internalized) causes the a. optimal quantity to exceed the equilibrium quantity b. equilibrium quantity to exceed the optimal quantity. c. equilibrium quantity to equal the optimal quantity d. equilibrium quantity to be either above or below the optimal quantity.

b. equilibrium quantity to exceed the optimal quantity.

Tradable pollution permits a. sets the price of pollution b. sets the quantity of pollution c. determine the demand for pollution rights. d. reduce the incentive for technological innovations to further reduce pollution

b. set the quantity of pollution

The most efficient pollution control system would ensure that a. each polluter reduce its pollution an equal amount b. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount c. no pollution of the environment is tolerated d. the regulators decide how much each polluter should reduce its pollution

b. the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

The government engages in an industrial policy a. to internalize the negative externality associated with industrial pollution b. to internalize the positive externality associated with technology-enhancing industries. c. to help stimulate private solutions to the technology externality. d. by allocating tradable technology permits to high technology industry.

b. to internalize the positive externality associated with technology-enhancing industries.

To internalize a positive externality, an appropriate public policy response would be to a. ban the good creating the externality b. have the government produce the good until the value of an additional unit is zero c. subsidize the good. d. tax the good.

c. subsidize the good

An externality is a. the benefit that accrues to the buyer in a market b. the cost that accrues to the seller in a market c. the uncompensated impact of one person's actions on the well-being of a bystander. d. the compensation paid to a firms external consultants. e. none of the above

c. the uncompensated impact of one persons actions on the well-being of a bystander.

According to the Coase theorem, private parties can solve the problem of externalities if a. each affected party has equal power in the negotiations b. the party affected by the externality has the initial property right to be left alone. c. there are no transaction costs. d. the government requires them to negotiate with each other e. there are a large number of affected people.

c. there are no transaction costs.

Suppose an industry emits a negative externality suh as pollution, and the possible methods to internalize the externality are command-and-control policies, corrective taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would likely rank them in the following order (from most favored to least favored): a. corrective taxes, command-and-control policies, tradable pollution permits b. command-and-control policies, tradable pollution permits, corrective taxes. c. tradable pollution permits, corrective taxes, command-and-control policies d. tradable pollution permits, command-and-control policies, corrective taxes e. They would all rank equally high because the same result can be obtained from any one of the policies.

c. tradable polution permits, corrective taxes, command-and-control policies

Which of the following is true regarding tradable pollution permits and corrective taxes? a. Corrective taxes are more likely to reduce pollution to a targeted amount than tradable pollution permits. b. Tradable pollution permits effectively reduce pollution only if they are initially distributed to the firms that can reduce pollution at the lowest cost. c. To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights. d. Corrective taxes and tradable pollution permits create an efficient market for pollution e. All of the above are true

d. Corrective taxes and tradable pollution permits create an efficient market for pollution.

Bob and Tom live in a university dorm. Bob values playing load music at a value of $100. Tom values people and quiet at a value of $150. Which of the following statements is true? a. It is efficient for Bob to continue to play loud music b. It is efficient for Bob to stop playing loud music only if Tom as the property right to peace and quiet. c. It is efficient for Bob to stop playing loud music only if Bob has the property right to play loud music. d. It is efficient for Bob to stop playing loud musical regardless of who has the property right to the level of sound.

d. It is efficient for Bob to stop playing loud musical regardless of who has the property right to the level of sound.

When an individual buys a car in a congested urban area, it generates a. an efficient market outcome b. a technology spillover c. a positive externality d. a negative externality

d. a negative externality

The gas-guzzler tax that is placed on new vehicles that get very poor mileage is an example of a. a tradable pollution permit b. an application of the Coase theorem c. an attempt to internalize a positive externality d. an attempt to internalize a negative extenality

d. an attempt to internalize a negative externality

To internalize a negative externality, an appropriate public policy response would be to a. ban the production of all goods creating negative externalities b. have the government take over the production of the good causing the externality c. subsidize the good. d. tax the good.

d. tax the good.

Positive Externality

A situation when a person's actions have a beneficial impact on a bystander.

Negative Externality

A situation when a person's actions have an adverse impact on a bystander.

Corrective Tax

A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality.

Internalizing an Externality

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