WorksheetsECO102 Chap 10
Total questions: 50
Worksheet time: 25mins
In a market economy, government intervention
will always improve market outcomes.
reduces efficiency in the presence of externalities.
may improve market outcomes in the presence of externalities.
is necessary to control individual greed.
In the absence of externalities, the "invisible hand" leads a market to maximize
producer profit from that market.
total benefit to society from that market.
both equality and efficiency in that market.
output of goods or services in that market.
The term market failure refers to
a market that fails to allocate resources efficiently.
an unsuccessful advertising campaign which reduces demand.
ruthless competition among firms.
a firm that is forced out of business because of losses.
An externality is an example of
a corrective tax.
a tradable pollution permit.
a market failure.
Both a and b are correct.
An externality is the impact of
society's decisions on the well-being of society.
a person's actions on that person's well-being.
one person's actions on the well-being of a bystander.
society's decisions on the poorest person in the society.
An externality is
the costs that parties incur in the process of agreeing and following through on a bargain.
the uncompensated impact of one person's actions on the well-being of a bystander.
the proposition that private parties can bargain without cost over the allocation of resources.
a market equilibrium tax.
An externality arises when a person engages in an activity that influences the well-being of
buyers in the market for that activity and yet neither pays nor receives any compensation for that effect.
sellers in the market for that activity and yet neither pays nor receives any compensation for that effect.
bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
Both (a) and (b) are correct.
A negative externality arises when a person engages in an activity that has
an adverse effect on a bystander who is not compensated by the person who causes the effect.
an adverse effect on a bystander who is compensated by the person who causes the effect.
a beneficial effect on a bystander who pays the person who causes the effect.
a beneficial effect on a bystander who does not pay the person who causes the effect.
A positive externality arises when a person engages in an activity that has
an adverse effect on a bystander who is not compensated by the person who causes the effect.
an adverse effect on a bystander who is compensated by the person who causes the effect.
a beneficial effect on a bystander who pays the person who causes the effect.
a beneficial effect on a bystander who does not pay the person who causes the effect.
When externalities are present in a market, the well-being of market participants
and market bystanders are both directly affected.
and market bystanders are both indirectly affected.
is directly affected, and market bystanders are indirectly affected.
is indirectly affected, and market bystanders are directly affected.
Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to prevent their dogs from barking. Local governments address this problem by
making it illegal to "disturb the peace."
having a well-funded animal control department.
subsidizing local animal shelters.
encouraging people to adopt cats.
All externalities
cause markets to fail to allocate resources efficiently.
cause equilibrium prices to be too high.
benefit producers at the expense of consumers.
cause equilibrium prices to be too low.
When an externality is present, the market equilibrium is
efficient, and the equilibrium maximizes the total benefit to society as a whole.
efficient, but the equilibrium does not maximize the total benefit to society as a whole.
inefficient, but the equilibrium maximizes the total benefit to society as a whole.
inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
When externalities exist, buyers and sellers
neglect the external effects of their actions, but the market equilibrium is still efficient.
do not neglect the external effects of their actions, and the market equilibrium is efficient.
neglect the external effects of their actions, and the market equilibrium is not efficient.
do not neglect the external effects of their actions, and the market equilibrium is not efficient.
Dioxin emission that results from the production of paper is a good example of a negative externality because
self-interested paper firms are generally unaware of environmental regulations.
there are fines for producing too much dioxin.
self-interested paper producers will not consider the full cost of the dioxin pollution they create.
toxic emissions are the best example of an externality.
Which of the following is an example of an externality?
cigarette smoke that permeates an entire restaurant
a flu shot that prevents a student from transmitting the virus to her roommate
a beautiful flower garden outside of the local post office
All of the above are correct.
Which of the following statements is not correct?
Government policies may improve the market's allocation of resources when negative externalities are present.
Government policies may improve the market's allocation of resources when positive externalities are present.
A positive externality is an example of a market failure.
Without government intervention, the market will tend to undersupply products that produce negative externalities.
Research into new technologies provides a
negative externality, and too few resources are devoted to research as a result.
negative externality, and too many resources are devoted to research as a result.
positive externality, and too few resources are devoted to research as a result.
positive externality, and too many resources are devoted to research as a result.
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, and William compensates the bystander accordingly.
The impact of William's activity on the bystander is adverse, but William fails to compensate the bystander.
The impact of William's activity on the bystander is beneficial and the bystander compensates William accordingly.
Externalities arise in all of the above cases.
In a certain city, the local government regulates the destruction of historic buildings and provides tax breaks to owners of historic buildings who restore them. These government policies
reflect the fact that restored historic buildings convey a positive externality.
reflect the fact that the destruction of historic buildings conveys a positive externality.
are likely to worsen the market failure that is associated with historic buildings and the restoration of such buildings.
are likely to decrease the well-being of society as a whole.
Since almost all forms of transportation produce some type of pollution,
the government should ban all transportation.
the government should ban all pollution.
society has to weigh the cost and benefits when deciding how much pollution to allow.
refrain from intervening because the market can best solve this problem.
Some environmentalists argue that we should protect the environment as much as possible, regardless of cost. Which of the following is not a likely outcome of pursuing such a course of action?
lower levels of nutrition, health care, and housing
a lower standard of living
slowing or reversing technological advancement
the elimination of all pollution
A command-and-control policy is another term for a
pollution permit.
government regulation.
corrective tax.
Both a and b are correct.
Which of the following statements is correct?
Gasoline taxes are an example of an EPA regulation.
Gasoline taxes are higher in many European countries than in the United States.
Gasoline taxes contribute to global warming.
Gasoline taxes are an example of a command-and-control policy.
Which of the following is not an advantage of corrective taxes?
They raise revenues for the government.
They enhance economic efficiency.
They subsidize the production of goods with positive externalities.
They move the allocation of resources closer to the social optimum.
A corrective tax
allocates pollution to those factories that face the highest cost of reducing it.
is a form of regulation.
works well for all types of externalities.
is inferior to regulatory policy according to most economists.
Suppose that alcohol consumption creates a negative externality. What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
impose a tax on alcohol that is equal to the per-unit externality
offer a subsidy on alcohol that is equal to the per-unit externality
impose a regulation limiting the amount of alcohol that each consumer can purchase
nothing
Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then
the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.
the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.
the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
There is not enough information to answer the question.
Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer
externalize the positive externality.
externalize the negative externality.
internalize the positive externality.
internalize the negative externality.
Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then
the equilibrium quantity of education will equal the socially optimal quantity of education.
the equilibrium quantity of education will be greater than the socially optimal quantity of education.
the equilibrium quantity of education will be less than the socially optimal quantity of education.
There is not enough information to answer the question.
University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?
tax university researchers
offer grants to university researchers
eliminate subsidized student loans
nothing
Which of the following statements is not correct?
Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level.
Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution.
Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution.
Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.
Regulations to reduce pollution
cause pollution levels to drop below the regulated amount.
are typically a more costly solution to society than a corrective tax.
allow firms with the lowest cost to reduce pollution by more than those with the highest costs.
are a better solution for the environment than a corrective tax.
What is the difference between command-and-control policies and market-based policies toward externalities?
Command-and-control policies provide incentives for private decision makers to solve the problems on their own, whereas market-based policies regulate behavior directly.
Command-and-control policies rely on taxes, whereas market-based policies rely on quotas.
Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives for private decision makers to change their behavior.
Command-and-control policies are efficient, whereas market-based policies are inefficient.
The difference between a corrective tax and a tradable pollution permit is that
a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
a corrective tax creates a more efficient outcome than a permit.
a corrective tax sets the quantity of pollution and a permit sets the price of pollution.
a permit creates a more efficient outcome than a corrective tax.
With pollution permits, the supply curve for pollution rights is
perfectly elastic.
perfectly inelastic.
upward sloping.
downward sloping.
Tradable pollution permits
have prices that are set by the government.
will be more valuable to firms that can reduce pollution only at high costs.
are likely to create a higher level of total pollution.
are less desirable than command-and-control policies to reduce pollution.
Which of the following is an advantage of tradable pollution permits?
Each firm is allowed to pollute exactly the same amount.
Revenue from the sale of permits is greater than revenue from a corrective tax.
The initial allocation of permits to firms does not affect the efficiency of the market.
Firms will engage in joint research efforts to reduce pollution.
Which of the following require firms to pay to pollute?
(i) corrective taxes
(ii) tradable pollution permits
(iii) pollution regulations
(i) only
both (i) and (ii)
(iii) only
both (ii) and (iii)
Which of the following policies is an example of a command-and-control policy?
subsidies to education
maximum levels of pollution that factories may emit
tradable pollution permits
None of the above is an example of a command-and-control policy.
In terms of their economic effects, which of the following policies toward pollution are most similar to one another?
regulation and corrective taxes
regulation and tradable pollution permits
corrective taxes and tradable pollution permits
All of these policies produce the same economic effects.
Externalities can be corrected by each of the following except
self-interest.
moral codes and social sanctions.
charity.
normal market adjustments.
When externalities cause markets to be inefficient,
government action is always needed to solve the problem.
private solutions can be developed to solve the problem.
given enough time, externalities can be solved through normal market adjustments.
there is no way to eliminate the problem of externalities in a market.
Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of
an opportunity cost.
an implicit cost.
a sunk cost.
a transaction cost.
Transaction costs
can keep private parties from solving externality problems.
are incurred in the production process due to externalities.
increase when taxes are imposed to correct negative externalities.
are eliminated when the government intervenes in a market with externalities.
Which of the following is a problem that keeps people from privately solving externality problems?
Each party involved holds out for a better deal.
The externality is large.
Only problems with a sufficiently large number of parties can be solved.
There is a lack of government intervention.
According to the Coase theorem, private parties can solve the problem of externalities if
the cost of bargaining is small.
the initial distribution of legal rights favors the person being adversely affected by the externality.
the number of parties involved is sufficiently large.
All of the above are correct.
In many cases the Coase theorem does not work well because
there are too few parties at the negotiation table.
the government does not know about the Coase theorem.
transaction costs are too high.
transaction costs are too low.
The Coase theorem asserts that, in the presence of externalities,
private economic actors sometimes can reach a bargain that produces an efficient outcome.
private economic actors always can reach a bargain that makes everyone better off.
private solutions cannot be very effective.
corrective taxes cannot be very effective.
When the government reduces my income tax by $0.30 for every $1.00 that I contribute to a charity, the government is effectively
alleviating the negative externalities that are associated with charitable giving.
imposing a negative externality on those who do not pay income taxes.
encouraging a private solution to a positive-externality problem.
encouraging a private solution to a negative-externality problem.
