tut10

In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole.

• True

• False

Even if possible, it would be inefficient to prohibit all polluting activity.

• True

• False

Social welfare can be enhanced by allowing firms to trade their rights to pollute.

• True

• False

The free-rider problem arises when the number of beneficiaries is large and exclusion of any of them is impossible.

• True

• False

Economists argue that we can calculate the value of a human life by observing voluntary risks that people take every day.

• True

• False

One possible solution to the problem of protecting a common resource is to convert that resource to a private good.

• True

• False

If a sawmill creates too much noise for local residents,

• noise restrictions will force residents to move out of the area.

• a sense of social responsibility will cause owners of the mill to reduce noise levels.

• the government can raise economic well-being through noise-control regulations.

• the government should avoid intervening because the market will allocate resources efficiently.

Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market, then

• the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.

• the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.

• the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.

• There is not enough information to answer the question.

Positive externalities

• result in a larger than efficient equilibrium quantity.

• result in smaller than efficient equilibrium quantity.

• result in an efficient equilibrium quantity.

• can be internalized with a corrective tax.