Chapter 10 Externalities Test Bank - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 10 – Externalities
TRUE/FALSE
1. Market outcomes cannot be improved by government policies.
DIF: Easy TOP: Introduction
2. The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.
DIF: Easy TOP: Introduction
3. Education has negative externalities for society.
DIF: Easy TOP: Negative externalities in production
4. The size and scope of technology spillovers is easy for governments to measure.
DIF: Easy TOP: Externalities in consumption
5. Internalising a negative consumption externality will cause the market supply curve to shift to the left.
DIF: Easy TOP: Negative externalities in production
6. Externalities can be solved if parties are able to bargain without cost.
DIF: Easy TOP: The types of private solutions
7. Negative consumption externalities will have a socially optimal quantity that is smaller than the quantity determined by the private market.
DIF: Easy TOP: Externalities in consumption
8. According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.
DIF: Easy TOP: The Coase theorem
9. The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.
DIF: Moderate TOP: The types of private solutions
10. Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.
DIF: Easy TOP: The types of private solutions
11. The externality associated with the production of electricity will lead the market to produce a larger quantity than socially desirable.
DIF: Easy TOP: Externalities in consumption
12. If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.
DIF: Easy TOP: Externalities in consumption
13. The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.
DIF: Easy TOP: Externalities in consumption
14. Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.
DIF: Easy TOP: Public policies on externalities
15. Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
16. Government can solve externality problems that are too costly for private parties to solve.
DIF: Easy TOP: Why private solutions do not always work
17. Government can accurately measure the social value of an externality.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
18. When weighing the costs and benefits of pollution, the costs always exceed the benefits because the benefit equals zero.
DIF: Easy TOP: Objections to the economic analysis of pollution
19. Taxation is often able to correct market externalities at a lower cost than regulations designed to achieve the same goal.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
20. When regulating a market in which an externality arises, the government can only command how much of the good companies are allowed to produce.
DIF: Easy TOP: Command-and-control policies: regulation
21. In essence, the Pigovian tax places a price on the right to pollute.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
22. Pigovian taxes enhance efficiency but the cost of administering such taxes frequently exceeds the revenue they raise for the government.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
23. Social welfare can be enhanced by allowing firms to trade their carbon credits.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
24. The main goal of a tax on pollution is to raise revenue for the government.
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
25. A market for pollution permits can efficiently allocate the right to pollute through the forces of supply and demand.
DIF: Easy TOP: Market-based policy 2: Tradeable pollution permits
26. When there are transaction costs to resolving an externality, the distribution of rights does not matter.
DIF: Moderate TOP: Why private solutions do not always work
27. Firms that can reduce pollution easily will be willing to sell their emissions permits.
DIF: Easy TOP: Market-based policy 2: Tradeable pollution permits
28. Policies aimed at reducing an externality sometimes have unintended consequences.
DIF: Easy TOP: Case study: Taking out the garbage
29. Because a driver’s private motoring costs do not completely reflect the costs he imposes on others, he is likely to use the car more than is socially desirable.
DIF: Easy TOP: Externalities in consumption
30. Government policies to encourage technology spillovers may go to industries with the most political clout rather than industries with the largest spillovers.
DIF: Easy TOP: Positive externalities in production
31. Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.
DIF: Easy TOP: In the news: Children as Externalities
32. When a tax is used to give buyers and sellers in a market the incentive to take into account the external effects of their actions, it is said to be ‘internalising an externality’.
DIF: Moderate TOP: Negative externalities in production
33. Vaccinations are heavily subsidised in order to get the optimal number of people vaccinated.
DIF: Easy TOP: Externalities in consumption
34. All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.
DIF: Moderate TOP: The types of private solutions
35. Private parties can negotiate a solution to an externality in all cases.
DIF: Easy TOP: Why private solutions do not always work
36. When Jake takes into account how his actions affect Jill, and then changes his behaviour, an externality is solved.
DIF: Easy TOP: Negative externalities in production
37. Charities are an example of a private solution to an externality.
DIF: Easy TOP: The types of private solutions
38. Contracts cannot solve the inefficiency that arises from externalities.
DIF: Moderate TOP: The types of private solutions
MULTIPLE CHOICE
1. When the government decides to dredge a bay to let big ships into the port, they are causing:
A. | a positive externality because dredging will allow bigger ships into the bay |
B. | a positive externality because the dredging will create profit for the dredging company |
C. | a negative externality because marine life will be displaced by the dredging |
D. | a negative externality because the dredging will take a long time to complete |
DIF: Easy TOP: Introduction
2. Aaron and Katie are building a house. They want to make sure they have a good relationship with the neighbours and do not want to impose any negative externalities on them. Which of the following are measures to avoid negative externalities on Aaron and Katie’s neighbours?
(i) making sure their windows do not look into the neighbours’ yard
(ii) carefully insulating their house so that sound doesn’t carry when they play loud music
(iii) building an environmentally friendly house.
A. | (i), (ii) and (iii) |
B. | only (i) and (iii) |
C. | only (ii) and (iii) |
D. | only (i) and (ii) |
DIF: Moderate TOP: Introduction
3. Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods. Policies to reduce this noise problem include:
A. | charging passengers an airport departure tax |
B. | charging excise taxes on airline fuel |
C. | encouraging people to drive rather than fly |
D. | requiring aircraft to use ‘whisper’ technology to quieten their engines |
DIF: Moderate TOP: Command-and-control policies: Regulation
4. A positive externality exists when:
A. | a person engages in an activity that has a spillover that makes a bystander better off |
B. | the market has only one seller |
C. | a firm sells its product in an external foreign market |
D. | a person engages in an activity that has a spillover that makes a bystander worse off |
DIF: Easy TOP: Positive externalities in production
5. Negative externalities occur when one person’s actions:
A. | cause another person to lose money in a stock-market transaction. |
B. | cause his or her employer to lose business. |
C. | adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange. |
D. | reveal his or her preference for foreign produced goods. |
DIF: Easy TOP: Negative externalities in production
6. It is generally difficult or impossible for private markets to take externalities into account because:
A. | decision makers in the market fail to take account of the spillover effects of their behaviour |
B. | buyers and sellers in private markets are only interested in social wellbeing |
C. | people are only interested in short-term gains |
D. | governments are responsible for externality problems |
DIF: Easy TOP: Introduction
7. Tom is very tall. When he goes to a music festival it is likely he will create:
A. | no externality because there are lots of people at the festival |
B. | a positive externality because he can hear the music very well, being above the crowd |
C. | a positive externality because he can easily find his friends if he loses them |
D. | a negative externality because he will block the view of shorter people who find themselves standing behind him |
DIF: Moderate TOP: Introduction
8. Suppose people plant flowering trees near their homes to encourage rare native birds to feed. If people believe that an increase in native bird populations is valuable, people who plant these trees:
A. | generate a negative consumption externality for their neighbours |
B. | generate a positive production externality for their neighbours |
C. | generate a positive consumption externality for their neighbours |
D. | generate a negative production externality for their neighbours |
DIF: Moderate TOP: Externalities in consumption
9. Jack loves surfing but prefers to go in winter instead of summer and always tries to find spots most surfers usually avoid. What could be one of the reasons for which Jack chooses to surf in this way?
A. | he only likes to surf in dangerous circumstances |
B. | having other surfers around imposes a negative externality on Jack |
C. | the spots most surfers avoid usually have the best conditions |
D. | he doesn’t want to impose a negative externality on other surfers by taking their waves |
DIF: Moderate TOP: Externalities in consumption
10. A _________ is enacted to correct the effects of a negative externality:
A. | regulation |
B. | deadweight loss |
C. | corrective tax |
D. | tradeable permit |
DIF: Easy TOP: Market-based policy 1:
Corrective taxes and subsidies
11. When the social cost of an externality is lower than its private cost:
A. | society is likely to benefit from a corrective tax |
B. | the externality is a positive one and society will not consume enough of the good |
C. | the externality is a positive one and society will consume too much of the good |
D. | society will benefit from the introduction of tradeable permits for production of the good |
DIF: Easy TOP: Positive externalities in production
12. If a particular market is associated with an externality, the social optimum should include the wellbeing of:
A. | buyers, sellers and bystanders |
B. | bystanders and buyers |
C. | bystanders and sellers |
D. | buyers and sellers only |
DIF: Easy TOP: Introduction
13. An externality will:
A. | usually be characterised as a form of market failure |
B. | cause markets to allocate resources efficiently |
C. | strengthen the role of the ‘invisible hand’ in the marketplace |
D. | always require the producer to compensate society |
DIF: Easy TOP: Introduction
14. To produce honey, beekeepers place hives of bees in orchards and crop fields. As bees gather nectar that they use to produce honey, they pollinate the orchards and fields increasing their yields of fruit and grain. This arrangement results in:
A. | positive externalities that benefit both the beekeeper and the owner of the fields of fruit and grain |
B. | no significant additional benefit to anyone |
C. | a positive externality that benefits only the owner of the fields of fruit and grain |
D. | a positive externality that solely benefits the beekeeper |
DIF: Moderate TOP: The types of private solutions
Graph 10-1
15. Refer to Graph 10-1. This graph reflects the presence of a:
A. | negative production externality |
B. | positive production externality |
C. | negative consumption externality |
D. | positive consumption externality |
DIF: Easy TOP: Negative externalities in production
16. Refer to Graph 10-1. In the figure shown, an optimal government policy would be a tax on production to the value of:
A. | P3 – P1 |
B. | P3 – P2 |
C. | P3 – P1 |
D. | The value of the optimal tax cannot be measured |
DIF: Moderate TOP: Negative externalities in production
17. Refer to Graph 10-1. Which price and quantity combination represents the social optimum?
A. | P1, Q1 |
B. | P2, Q1 |
C. | P1, Q2 |
D. | P2, Q2 |
DIF: Moderate TOP: Negative externalities in production
18. Suppose that a fish-food manufacturing company is located up the river from a fishing firm and often releases some of the food into the river. This me
A. | the fish food manufacturing company is imposing a negative externality on the fishing firm |
B. | the fish food manufacturing company is imposing a positive externality on the fishing firm |
C. | under the Coase theorem the two companies should be able to negotiate away the externality |
D. | unless the government imposes a tax on river pollution, the fishing firm will continue to be negatively impacted by the fish-food manufacturing company |
DIF: Easy TOP: Positive externalities in production
19. Using the information in question 30, what would be a private solution to the above externality?
A. | under the Coase theorem the two companies should be able to negotiate away the externality |
B. | the two companies would need to trade permits for river pollution in order to achieve an optimal outcome |
C. | the fishing firm could buy the fish-food manufacturing company |
D. | the fishing firm should continue to make the most of the positive externality |
DIF: Moderate TOP: The types of private solutions
20. Markets are often inefficient when negative production externalities are present because:
A. | private costs exceed social costs at the private market solution |
B. | externalities can never be corrected without government regulation |
C. | social costs exceed private costs at the private market solution |
D. | production externalities lead to consumption externalities |
DIF: Easy TOP: Negative externalities in production
Graph 10-2
This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
21. Refer to Graph 10-2. The social cost curve is above the supply curve because:
A. | it takes into account the external costs imposed on society by the kiwifruit farmers |
B. | honeybees are also a cost to society |
C. | kiwifruits are likely to cost more than growing the kiwifruit costs the organisers |
D. | workers on kiwifruit orchards also benefit from the job opportunities |
DIF: Moderate TOP: Negative externalities in production
22. Refer to Graph 10-2. The difference between the social cost curve and the supply curve reflects the:
A. | profit margin of each kiwifruit tray |
B. | cost of spillover effects from the kiwifruit orchards (replacing bees, lost honey output) |
C. | value of kiwifruit to society as a whole |
D. | amount by which the government should subsidise the kiwifruit orchardists |
DIF: Moderate TOP: Negative externalities in production
23. Refer to Graph 10-2. What price and quantity combination best represents the optimum price and number of kiwifruit trays that should be produced?
A. | P1, Q1 |
B. | P2, Q0 |
C. | P3, Q1 |
D. | The optimum quantity is zero kiwifruit as long as honey production by beekeepers is lower because of pesticide use. |
DIF: Moderate TOP: Negative externalities in production
24. Refer to Graph 10-2. Assume that the kiwifruit orchardists must purchase a pesticide application permit (the cost for the permit is included in private cost) before spraying their fruit. What criteria should the government use in determining whether or not to issue a permit?
A. | the majority vote of the affected beekeepers should determine whether a permit is issued |
B. | as long as the value to consumers of kiwifruit exceeds the cost of kiwifruit (including the external costs), the permit should be issued |
C. | as long as kiwifruit orchardists are willing to replace the dead honeybees, the permit should be issued |
D. | the permit should not be issued as long as there are identifiable external costs imposed on local beekeepers. |
DIF: Moderate TOP: Negative externalities in production
25. Refer to Graph 10-2. The producer surplus derived from the most efficient kiwifruit production levels is represented by the area:
A. | g |
B. | e + g |
C. | a + b |
D. | a + b + c |
DIF: Difficult TOP: Negative externalities in production
26. Refer to Graph 10-2. At the private market outcome, the equilibrium price of kiwifruit will be:
A. | P1 |
B. | P2 |
C. | P3 |
D. | P4 |
DIF: Moderate TOP: Negative externalities in production
27. Refer to Graph 10-2. At the private market outcome, quantity Q1 represents the:
A. | quantity of kiwifruit consumers will buy |
B. | quantity of kiwifruit and honey consumers will buy |
C. | socially optimal quantity of kiwifruit that should be produced |
D. | optimal price of a kiwifruit from the standpoint of society as a whole |
DIF: Moderate TOP: Negative externalities in production
28. Suppose that a steel factory emits a certain amount of air pollution and that this pollution constitutes a negative externality. If this market is not required to internalise this externality:
A. | the supply curve would adequately reflect the marginal social cost of production |
B. | consumers will be required to pay a higher price for steel than they would have if the externality were internalised |
C. | the market equilibrium would not be the socially optimal quantity |
D. | producers will produce less steel than they otherwise would have if the externality were internalised |
DIF: Moderate TOP: Negative externalities in production
29. Melbourne city council is trying to quantify the social cost of smoking in order to determine the optimal value of a tax on smoking. What factors should they include when calculating the social cost of smoking?
A. | The chewing gum costs of the smokers and the price consumers pay for cigarettes |
B. | The price consumers pay for cigarettes and the costs to bystanders affected by air pollution |
C. | The costs to the bystanders affected by the air pollution only |
D. | The price consumers pay for the cigarettes |
DIF: Moderate TOP: Externalities in consumption
30. Which of the following statements is most correct about a market that is characterised by a negative production externality?
A. | the equilibrium quantity of output is equal to the socially optimal quantity |
B. | the equilibrium quantity of output is greater than the socially optimal quantity |
C. | government intervention is only required for negative externalities |
D. | the equilibrium quantity of output is less than the socially optimal quantity |
DIF: Easy TOP: Positive externalities in production
31. When a producer operates in a market characterised by negative production externalities, a tax that forces them to internalise the externality will:
A. | give sellers the incentive to take account of the external effects of their actions |
B. | have an offsetting effect that reduces the producer’s private production costs |
C. | increase the amount of the commodity exchanged in market equilibrium |
D. | restrict the producer’s ability to take the costs of the externality into account when deciding how much to supply |
DIF: Moderate TOP: Negative externalities in production
32. Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:
A. | farmers would choose not to use any fertiliser |
B. | farmers fully internalise the pollution costs of the fertiliser |
C. | farm output would be maximised |
D. | the value to consumers of pastoral products would exceeds the cost of production (including tax) at the market equilibrium |
DIF: Moderate TOP: Negative externalities in production
33. Internalising a positive production externality will cause the demand curve faced by an industry to:
A. | shift to the right |
B. | shift to the left |
C. | become more elastic |
D. | remain unchanged |
DIF: Moderate TOP: Negative externalities in production
34. Internalising a positive production externality will cause the supply curve faced by an industry to:
A. | shift to the right |
B. | shift to the left |
C. | expand |
D. | remain unchanged |
DIF: Moderate TOP: Positive externalities in production
35. Which of the following statements about internalising a negative production externality is LEAST correct?
A. | internalising a negative production externality will cause the supply curve for the good to shift to the left |
B. | internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced |
C. | internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced |
D. | internalising a negative production externality will cause an industry to move closer to the socially optimal price and quantity of the good |
DIF: Moderate TOP: Negative externalities in production
36. Markets are inefficient when positive production externalities are present because:
A. | private benefits of consumption exceed social benefits of consumption when the market is in equilibrium |
B. | social costs of production exceed private costs of production when the market is in equilibrium |
C. | social benefits of consumption exceed private benefits of consumption when the market is in equilibrium |
D. | private costs of production exceed social costs of production when the market is in equilibrium |
DIF: Moderate TOP: Positive externalities in production
37. Technology spillover occurs when:
A. | the firm’s innovations allow it to establish monopoly power |
B. | new products by high-tech firms create harmful wastes |
C. | research by a firm creates innovations that are easily applied and used by others |
D. | patent laws are used to hinder other firms adopting new technology |
DIF: Easy TOP: Positive externalities in production
38. Which of the following statements about a market that is affected by a positive production externality is correct?
A. | the optimum level of output is less than the free market level of output and the optimum price is greater than the free market price |
B. | the optimum level of output is greater than the free market level of output and the optimum price is less than the free market price |
C. | the optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price |
D. | the optimum level of output is less than the free market level of output and the optimum price is less than the free market price |
DIF: Moderate TOP: Positive externalities in production
39. Encouraging firms to increase production via a subsidy will tend to be socially optimal when:
A. | the firms are producing necessities |
B. | there is excess supply in the market |
C. | the firms output is associated with large technology spillovers |
D. | the market equilibrium output level is greater than the social optimum |
DIF: Moderate TOP: Positive externalities in production
40. A positive production externality will cause a market to produce:
A. | less than is socially desirable |
B. | more than is socially desirable |
C. | more than is market optimal |
D. | less than is market optimal |
DIF: Easy TOP: Positive externalities in production
41. Internalising a positive production externality through technology policy:
A. | involves a subsidy to industries that yield the largest spillovers |
B. | requires that the government be able to measure the size of technology spillovers |
C. | does not have the support of economists who believe technology spillovers are difficult to measure |
D. | all of the above are true |
DIF: Moderate TOP: Positive externalities in production
42. Internalising a positive production externality through a government subsidy will cause the industry’s supply curve to:
A. | remain unchanged |
B. | shift down by an amount less than the subsidy |
C. | shift down by an amount equal to the subsidy |
D. | shift down by an amount greater than the subsidy |
DIF: Moderate TOP: Positive externalities in production
43. To ensure the market reaches the social optimum in presence of a technology spillover, the government should subsidise producers by:
A. | means of a Pigovian tax |
B. | an amount equal to the value of the technology spillover |
C. | helping those companies that are adversely affected by the new technology |
D. | transferring income to the low-income portion of the population |
DIF: Moderate TOP: Positive externalities in production
44. A positive consumption externality occurs when:
A. | Jack eats too much chocolate and gets a sore stomach |
B. | Jack eats healthily and as a result is very productive at work |
C. | Jack eats badly and is always in a good mood |
D. | Jack pays Aaron to allow him to eat all his chocolate biscuits |
DIF: Moderate TOP: Externalities in consumption
45. A positive consumption externality will cause a private market to produce:
A. | less than is socially desirable |
B. | more than is socially desirable |
C. | more than is market optimal |
D. | less than is market optimal |
DIF: Easy TOP: Externalities in consumption
46. When dealing with consumption externalities, government can potentially correct the market failure:
A. | only in the case of positive consumption externalities |
B. | only in the case of negative consumption externalities |
C. | in both the positive and negative cases by inducing market participants to internalise the externality |
D. | in neither the positive or negative cases because governments can only correct production externalities |
DIF: Easy TOP: Externalities in consumption
47. When dealing with consumption externalities, the market equilibrium can be moved closer to the social equilibrium by:
A. | taxing negative externalities and subsidising positive externalities |
B. | taxing both positive and negative externalities |
C. | subsidising both positive and negative externalities |
D. | none of the above because government has no corrective policy with regards to consumption externalities |
DIF: Easy TOP: Externalities in consumption
48. Private markets fail to reach a socially optimal level when negative consumption externalities are present because:
A. | social costs equal private costs at the private market solution |
B. | private value exceeds social value at the private market solution |
C. | private value exceeds social costs at the private market solution |
D. | consumption externalities lead to production externalities |
DIF: Easy TOP: Externalities in consumption
49. Private markets fail to reach a socially optimal level when positive consumption externalities are present because:
A. | private benefit equals social benefit at the private market solution |
B. | private costs exceed private benefits at the private market solution |
C. | social value exceeds private value at the private market solution |
D. | private costs exceed social benefit at the private market solution |
DIF: Easy TOP: Externalities in consumption
50. Which of the following is true of positive consumption externalities?
A. | social value exceeds private value and market quantity exceeds socially optimal quantity |
B. | social value is less than private value and market quantity exceeds socially optimal quantity |
C. | social value exceeds private value and market quantity is less than socially optimal quantity |
D. | social value seldom exceeds private value and therefore social quantity is less than private quantity |
DIF: Easy TOP: Externalities in consumption
51. Irrespective of whether an externality is positive or negative, all solutions share the same goal of:
A. | moving the allocation of resources closer to the market equilibrium |
B. | reducing pollution |
C. | moving the allocation of resources closer to the social optimum |
D. | increasing the conservation of natural resources |
DIF: Easy TOP: Externalities in consumption
52. When private solutions fail to arise, an externality will:
A. | move consumption and production away from the market equilibrium |
B. | move consumption away from the equilibrium quantity produced |
C. | move consumption towards the private cost |
D. | move consumption and production away from the socially optimal equilibrium |
DIF: Easy TOP: The types of private solutions
53. If sparks from trains sets adjacent farmland on fire, one way to internalise the externality is:
A. | for the rail company to increase the volume of rail traffic |
B. | for the rail company to purchase the adjacent farmland |
C. | for the government to buy the farmland |
D. | for the rail company to lower their freight charges |
DIF: Moderate TOP: The types of private solutions
54. Private contracts between parties with mutual interests:
A. | can only reduce the wellbeing of society |
B. | will lead to outcomes where public interest is sacrificed for personal gain |
C. | can solve some inefficiencies associated with positive externalities |
D. | will always cause negative externalities to arise |
DIF: Moderate TOP: The types of private solutions
55. Which of the following suggests that the private market can be effective in dealing with externalities?
A. | the ‘invisible hand’ |
B. | the law of diminishing social returns |
C. | the Coase theorem |
D. | the law of increasing social returns |
DIF: Easy TOP: The types of private solutions
56. Paul owns a mushroom farm. The smell from the farm reduces the value of adjacent houses by a total of $30 000. Suppose that the benefit of the mushroom farm to Paul is $20 000. Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:
A. | adjacent property owners pay $20 000 to Paul to stop farming mushrooms |
B. | Paul pays the adjacent property-owners $25 000 for their loss in house-values |
C. | adjacent property owners pay $25 000 to Paul to stop farming mushrooms |
D. | there is no private solution that would improve this situation |
DIF: Difficult TOP: The types of private solutions
57. Paul owns a mushroom farm. The smell from the farm reduces the value of adjacent houses by a total of $20 000. Suppose that the benefit of the mushroom farm to Paul is $30 000. Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:
A | adjacent property owners pay Paul $20 000 to stop farming mushroom |
B. | there is no private solution that would improve this situation |
C. | Paul pays the adjacent property owners $30 000 to compensate them for the loss in house values |
D. | adjacent property owners pay Paul $25 000 to stop farming mushrooms |
DIF: Difficult TOP: The types of private solutions
58. Which of the following statements is true?
A. | the initial distribution of rights affects the market’s ability to reach an efficient outcome |
B. | the initial distribution of rights affects the distribution of economic wellbeing |
C. | government intervention is required if the distribution of rights favours Dick |
D. | government intervention is always required |
DIF: Moderate TOP: The types of private solutions
59. Transaction costs are:
A. | the price paid for a good |
B. | the cost that society places on a good |
C. | what it costs two parties to negotiate with each other |
D. | the same as a Pigovian tax |
DIF: Easy TOP: Why private solutions do not always work
60. If only a few people are affected by an externality, then it is likely that:
A. | Pigovian taxes will provide the most efficient solution to the externality |
B. | command-and-control regulation will provide the most efficient solution to the externality |
C. | a private solution to the inefficiency will occur |
D. | a private solution will be very difficult to negotiate |
DIF: Easy TOP: Why private solutions do not always work
61. If two parties negotiating a private solution to an externality cost employ a lawyer to help draft the contract, the lawyer’s costs are a type of:
A. | transport cost |
B. | legal cost |
C. | negative consumption externality |
D. | a transaction cost |
DIF: Easy TOP: Why private solutions do not always work
62. Which of the following is one problem that keeps people from privately solving externalities?
A. | each party involved holds out for a better deal |
B. | an efficient bargain price is unattainable |
C. | only problems with a sufficiently large number of parties can be solved |
D. | there is a lack of government intervention |
DIF: Moderate TOP: Why private solutions do not always work
63. Consider a local factory that pollutes a nearby stream. Local fishers may be unable to negotiate a deal with the local factory to eliminate the negative externality because:
A. | the fishers’ cost will never exceed the factory’s benefit from polluting the stream |
B. | the local law gives the factory the right to pollute |
C. | the cost of coordinating the fishers into one bargaining body is too large |
D. | some of the local fishers work at the factory |
DIF: Moderate TOP: Why private solutions do not always work
64. Siobhan loves it when there are dried flowers in the kitchen, but Anna hates it. Anna puts a value of $12 on having a flower-free kitchen, while Siobhan puts a value of $14 on having the flowers. If Anna has the right to a flower-free kitchen, whose position will win out?
A. | Anna |
B. | Siobhan |
C. | A private solution to this problem doesn’t exist |
D. | They will have to compromise |
DIF: Moderate TOP: The Coase theorem
65. Japanese fishermen use gill nets to catch tuna with great efficiency. Many environmentalists have objected to this practice since many marine animals such as dolphins and sharks are killed by the nets and discarded by the fishermen. Which of the following statements is most correct?
A. | a private solution can be reached through negotiation between the fishermen and the environmentalists |
B. | a private solution is not practical due to the number of individuals affected |
C. | the market price of tuna is higher than the socially optimum price of tuna |
D. | a private solution to this problem would not affect the price of tuna |
DIF: Moderate TOP: Why private solutions do not always work
66. The Coase theorem suggests that private solutions to the externality problem:
A. | will always allocate resources efficiently if private parties can bargain without cost |
B. | are effective under all conditions |
C. | are only efficient when there are negative externalities |
D. | may not be possible because of the distribution of property rights |
DIF: Easy TOP: The Coase theorem
67. Assume that your housemate is very messy. Suppose he gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for you to:
A. | pay your housemate at least $100 but no more than $200 to clean up after himself |
B. | pay your housemate at least $201 to clean up after himself |
C. | continue to live with your messy housemate until you are able to make other living arrangements elsewhere |
D. | charge your housemate at least $100 to have you clean up after him |
DIF: Difficult TOP: The Coase theorem
68. Assume that your housemate is very messy. Suppose she gets a $100 benefit from being messy but imposes a $200 cost on you. The Coase theorem would suggest that an efficient solution would be for you to:
A. | continue to live with your messy housemate until you are able to make other living arrangements elsewhere |
B. | encourage your messy housemate to stop her messy habits or force her to move out |
C. | pay your housemate at least $100 but no more than $200 to clean up after herself |
D. | charge your housemate at least $100 but no more than $200 to have you clean up after her |
DIF: Difficult TOP: The Coase theorem
69. Assume that your housemate is very messy. Suppose he gets a $200 benefit from being messy but imposes a $300 cost on you. The Coase theorem would suggest that an efficient solution would be:
A. | for you to tell him to stop his messy habits or force him to move out |
B. | for you to pay your housemate at least $200 but less than $300 to clean up |
C. | for him to continue to be messy and force you to make other living arrangements elsewhere |
D. | for you to demand payment of at least $200 but no more than $300 to clean up after him |
DIF: Difficult TOP: The Coase theorem
70. The distribution of rights among parties affected by an externality:
A. | hinders the ability of private parties to properly price the externality |
B. | enhances the market incentive to reach an efficient solution |
C. | determines who bears the cost of the solution but has no effect on the efficiency of this outcome |
D. | affects the efficiency of the outcome, but does not determine who bears the cost |
DIF: Moderate TOP: The types of private solutions
71. When the government reverts to command-and-control policy to solve an externality, it:
A. | is usually the most effective policy option available |
B. | creates policies that directly regulate behaviour |
C. | usually involves taxing consumption of a commodity |
D. | typically refers to the Coase theorem to structure the policy |
DIF: Easy TOP: Why private solutions do not always work
72. When the government chooses an externality policy that aligns private incentives with social efficiency to solve an externality:
A. | it provides incentives to private decision makers to induce them to solve the externality problem on their own |
B. | it typically uses command-and-control techniques |
C. | the use of taxes is strictly forbidden |
D. | subsidies are always the best policy |
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
73. A local cafe that allowed patrons to smoke was recently forced to close its doors because it did not comply with local clean air standards. This decision provides an example of:
A. | direct regulation of an externality |
B. | Pigovian taxes |
C. | a Coase theorem solution to an externality |
D. | unjustified discrimination against smokers |
DIF: Easy TOP: Command-and-control policies: Regulation
74. In Australia, hunting regulations for kangaroos are closely monitored and enforced. This is an example of a policy:
A. | in which moral codes and social sanctions reduce the conservation externality |
B. | that relies on command-and-control techniques |
C. | that discriminates against native wildlife |
D. | in which private incentives are used to reduce the conservation externality in Australia |
DIF: Easy TOP: Command-and-control policies: Regulation
75. Which policy would best suit a positive externality?
A. | taxes |
B. | pollution permits |
C. | regulation |
D. | subsidies |
DIF: Easy TOP: Positive externalities in production
76. Emission controls on automobiles provide an example of a:
A. | Pigovian tax on automobiles, based on how much they pollute |
B. | command-and-control policy to increase social efficiency |
C. | policy that reduces pollution by allocating resources through market mechanisms |
D. | policy to reduce congestion on urban freeways |
DIF: Easy TOP: Command-and-control policies: Regulation
77. Pigovian taxes are typically advocated to correct for the effects of:
A. | positive externalities |
B. | negative externalities |
C. | regulatory burden |
D. | all of the above |
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
78. Pigovian taxes:
A. | encourage consumers to avoid sales taxes by shopping online |
B. | are frequently used to encourage exports |
C. | are rarely preferred to direct regulation |
D. | give factory owners an economic incentive to reduce pollution |
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
79. Which of the following statements is most correct?
A. | Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost |
B. | Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a higher cost |
C. | Pigovian taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate |
D. | Pigovian taxes are less preferred than direct regulation because they typically reduce externalities at a slower rate |
DIF: Moderate TOP: Market-based policy 1: Corrective taxes and subsidies
80. If the government were to limit the release of air pollution produced by a steel mill to 10 000 units, this policy would be considered a:
A. | regulation |
B. | Pigovian tax |
C. | subsidy |
D. | market-based policy |
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
81. If the government were to decide that for the best interests of the country each litre of petrol should cost $2.50 instead of $1.50, it would be making an assumption about:
A. | subsidies |
B. | Pigovian taxes |
C. | the social cost of petrol |
D. | the private cost of petrol |
DIF: Moderate TOP: Welfare economics: a recap
Graph 10-3
82. Referring to Graph 10-3, which curve best represents a Pigovian tax?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Difficult TOP: Market-based policy 1: Corrective taxes and subsidies
83. Refer to Graph 10-3. The equivalence of a Pigovian tax and a pollution permit would require that:
A. | PB be equivalent to the Pigovian tax |
B. | QA be equivalent to the amount of pollution allowed by the pollution permit holders |
C. | the equilibrium price and quantity of pollution be the same in both panel A and panel B |
D. | all of the above conditions hold |
DIF: Difficult TOP: Public policies on externalities
84. In order for a Pigovian tax to be efficient, it often requires detailed information about:
A. | the social and private costs of the good |
B. | command and control |
C. | governments and individuals |
D. | production and technology |
DIF: Difficult TOP: Market-based policy 1: Collective taxes and subsidies
85. A Pigovian tax:
A. | allocates pollution to those factories that face the highest cost of reducing it |
B. | is a form of regulation |
C. | works well for all types of externalities |
D. | is deemed inferior to regulatory policy by most economists |
DIF: Moderate TOP: Market-based policy 1: Corrective taxes and subsidies
Graph 10-4
86. Refer to Graph 10-4. Which of the graphs shown best depicts the case of a negative production externality?
A. | panel (a) |
B. | panel (b) |
C. | panel (c) |
D. | panel (d) |
DIF: Difficult TOP: Negative externalities in production
87. Refer to Graph 10-4. Which of the graphs shown best depicts the case of a positive production externality?
A. | panel (a) |
B. | panel (b) |
C. | panel (c) |
D. | panel (d) |
DIF: Difficult TOP: Positive externalities in production
88. Refer to Graph 10-4. Which of the graphs shown best depicts the case of a negative consumption externality?
A. | panel (a) |
B. | panel (b) |
C. | panel (c) |
D. | panel (d) |
DIF: Difficult TOP: Externalities in consumption
89. Refer to Graph 10-4. Which of the graphs shown best depicts the case of a positive consumption externality?
A. | panel (a) |
B. | panel (b) |
C. | panel (c) |
D. | panel (d) |
DIF: Difficult TOP: Externalities in consumption
90. Refer to Graph 10-4. In the figure shown, which set of graphs depict a situation most likely to benefit from a Pigovian tax?
A. | panels (a) and (c) |
B. | panels (b) and (d) |
C. | panels (b) and (c) |
D. | panels (a) and (d) |
DIF: Difficult TOP: Market-based policy 1: Corrective taxes and subsidies
91. Refer to Graph 10-4. A policy that restricts the use of a mobile phone while driving an automobile would best be applied to a market characterised by:
A. | panel (a) |
B. | panel (b) |
C. | panel (c) |
D. | panel (d) |
DIF: Difficult TOP: Market-based policy 1: Corrective taxes and subsidies
92. Pigovian taxes are unlike most other taxes because they:
A. | distort incentives |
B. | move the allocation of resources away from the social optimum |
C. | raise revenue for the government |
D. | move the allocation of resources closer to the social optimum |
DIF: Easy TOP: Market-based policy 1: Corrective taxes and subsidies
93. A broad-based carbon tax may be preferred to a targeted carbon tax because:
A. | it will raise more revenue for the government |
B. | it is more like a tradeable permit system, which works better for reducing pollution externalities |
C. | it leaves it to the market to determine where the economy can most efficiently reduce its emissions |
D. | it gives a smaller incentive to companies to reduce their emissions |
DIF: Moderate TOP: Market-based policy 1: Corrective taxes and subsidies
94. One advantage of allowing a market for pollution permits to control the total amount of pollution released in an area is that:
A. | the government knows exactly how much each firm is allowed to pollute |
B. | government revenue from the sale of permits is greater than revenue from a Pigovian tax |
C. | the initial allocation of permits to firms does not affect the efficiency of the market |
D. | firms will work together to eventually eliminate pollution |
DIF: Easy TOP: Market-based policy 2: Tradeable pollution permits
95. In some cases, pollution permits may be better than a Pigovian tax because:
A. | Pigovian taxes reduce pollution by a greater amount than pollution permits |
B. | pollution permits generate more revenue for the government than a Pigovian tax |
C. | pollution is difficult to measure |
D. | the government has more explicit control over the quantity of pollution created with permits |
DIF: Moderate TOP: Public policies on externalities
96. Once tradeable pollution permits have been allocated to firms:
A. | the government controls the price of permits |
B. | firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits |
C. | the value of pollution saving technology is always lower than the market value of a pollution permit |
D. | the total amount of pollution governed by the permit will always decrease |
DIF: Moderate TOP: Market-based policy 2: Tradeable pollution permits
97. When one firm sells its pollution permit to another firm:
A. | both firms benefit |
B. | the total amount of pollution remains the same |
C. | social welfare is enhanced |
D. | all of the above occur |
DIF: Moderate TOP: Market-based policy 2: Tradeable pollution permits
98. In France, drivers in one central region are required to carry breathalysers in their cars. This is an example of:
A. | a command-and-control policy to reduce the negative externality of the consumption of alcohol |
B. | a market-based policy to reduce the negative externality of the consumption of alcohol |
C. | a command-and-control policy to raise awareness of the importance of road safety |
D. | a market-based policy to raise awareness of the importance of road safety |
DIF: Moderate TOP: Command-and-control policies: Regulation
99. Tim and Tom are having an argument because they can’t agree on which television show to watch and they have only one television in their house, which they share. A possible solution to this problem is:
A. | to compromise and watch half of Tim’s show and half of Tom’s show |
B. | for Tom to pay Tim enough such that he will allow him to watch his preferred show |
C. | to turn to a third party to moderate their negotiations |
D. | not possible to give as there is not enough information to answer this question |
DIF: Moderate TOP: Why private solutions do not always work
100. Mobile phones are banned in some public places. This is likely to be because:
A. | there are negative externalities associated with use of a mobile phone in public places |
B. | a mobile phone user’s private costs do not reflect the cost he or she imposes on bystanders |
C. | mobile phone conversations in public are likely to annoy bystanders |
D. | all of the above are true |
DIF: Moderate TOP: Externalities in consumption
101. If children impose a negative externality, which of the following must be true?
A. | parents would rather have less children |
B. | parents’ costs exceed the benefits associated with having children |
C. | parents do not bear the full cost imposed by their children |
D. | all of the above |
DIF: Moderate TOP: Externalities in consumption
102. Which of the following policies is government most inclined to use when faced with a positive externality?
A. | taxation |
B. | permits |
C. | subsidies |
D. | usage fees |
DIF: Easy TOP: Externalities in consumption
103. The coalition government has removed the ban on the manufacture and sale of CFCs in Australia. This is an example of:
A. | a market-based policy |
B. | a command-and-control policy |
C. | tradeable permits |
D. | allowing the market to reach equilibrium taking only private costs into account |
DIF: Easy TOP: Command-and-control policies: Regulation
SHORT ANSWER
1. Why does society sometimes impose taxes on negative externalities?
DIF: Moderate TOP: Negative externalities in production
2. What is meant by ‘internalising’ an externality? How can a negative externality be internalised?
DIF: Easy TOP: Negative externalities in production
3. Consider the following negative production externality as depicted:
Identify the social optimum and explain what methods the government could use to achieve this outcome.
DIF: Moderate TOP: Negative externalities in production
4. Using a supply and demand diagram, demonstrate how a positive consumption externality leads to market inefficiency.
DIF: Moderate TOP: Positive externalities in production
5. What is the Coase theorem? What are the conditions needed for the Coase theorem to hold?
DIF: Moderate TOP: The Coase theorem
6. To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, increasing the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality and how might the solution be reached.
DIF: Moderate TOP: The types of private solutions
7. Katie owns a rabbit which loves to roam in the neighbours’ garden and eat the grass, as Katie only has a courtyard. However, when Katie’s parents buy the property next door and she moves in with her family, Katie decides to keep her rabbit in a cage. What can explain the change in Katie’s behaviour?
DIF: Difficult TOP: The types of private solutions
8. Why are tradeable pollution permits considered to be a more efficient way to reduce pollution than Government regulation?
DIF: Difficult TOP: Market-based policy 2: Tradeable pollution permits