CH 10 Externalities

What is a negative externality?

• The uncompensated impact of a person's actions on the well-being of a bystander
• A subsidy provided to encourage positive behavior
• A tax levied on imported goods
• An efficient market outcome

What is a corrective tax?

• A tax designed to induce private decision makers to take into account social costs
• A tax on all market transactions
• A tariff on imported goods
• A subsidy for goods with positive externalities

What does the Coase Theorem state?

• Private parties can solve externalities without cost if they can bargain effectively
• The government must always intervene in externality cases
• Taxes are the only solution to externalities
• All externalities are negative and unavoidable

What does it mean to internalize an externality?

• Altering incentives so people account for external effects of their actions
• Ignoring externalities in economic decisions
• Increasing the market price for luxury goods
• Providing subsidies for all goods

What do negative externalities typically cause?

• Markets to produce more than is socially desirable
• Markets to collapse entirely
• Governments to provide unlimited subsidies
• Increased private investment

What do positive externalities typically cause?

• Markets to produce less than is socially desirable
• Governments to ban the good
• Reduced social value
• Oversupply of harmful goods

What are the two main government responses to externalities?

• Command-and-control and market-based policies
• Subsidies and taxes only
• Tariffs and quotas
• Price ceilings and floors

Which of the following is an example of a positive externality?

• Dev’s newly cut lawn makes his neighborhood more attractive.
• Myra mows Dev’s lawn and is paid $100 for the service.
• Myra’s lawnmower emits smoke that Xavier breathes.
• Xavier offers to pay Dev to keep the lawn neat.

If the production of a good yields a negative externality, the social-cost curve lies [ ] the supply curve, and the socially optimal quantity is [ ] than the equilibrium quantity.

• above; less
• above; greater
• below; greater
• below; less

When the government levies a tax equal to the external cost, it [ ] the price paid by consumers and makes the market outcome [ ] efficient.

• increases; more
• increases; less
• decreases; more
• decreases; less