Question 1

Dick owns a dog whose barking annoys Dick's neighbor Jane.Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking.Assuming Dick has the legal right to keep the dog,a possible private solution to this problem is that

Accepted Answer

A)  Dick pays Jane $600 for her inconvenience.
B)  Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
C)  Jane pays Dick $800 to give the dog to his parents who live on an isolated farm.
D)  There is no private transaction that would improve this situation.E) All of the above
F) C) and D)

Question 2

One drawback to industrial policy is that

Accepted Answer

A)  technology spillovers are too expensive to control.
B)  measuring the size of spillovers from different markets is difficult.
C)  spillovers often occur in industries that produce undesirable products for society.
D)  positive side effects are often outweighed by negative side effects.E) A) and B)
F) None of the above

Question 3

Suppose that flu shots create a positive externality equal to $12 per shot.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Accepted Answer

A)  They are equal.
B)  The equilibrium quantity is greater than the socially optimal quantity.
C)  The equilibrium quantity is less than the socially optimal quantity.
D)  There is not enough information to answer the question.E) C) and D)
F) A) and D)

Question 4

Suppose that flower gardens create a positive externality equal to $1 per plant.What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown?

Accepted Answer

A)  They are equal.
B)  The equilibrium quantity is greater than the socially optimal quantity.
C)  The equilibrium quantity is less than the socially optimal quantity.
D)  There is not enough information to answer the question.E) A) and B)
F) None of the above

Question 5

When an industry is characterized by technology spillover,what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

Accepted Answer

A)  Impose a tax greater than the value of the technology spillover.
B)  Not allow production of any product that causes a technology spillover.
C)  Provide a subsidy equal to the value of the technology spillover.
D)  Require producers to "clean up" any spillover that results from their production process.E) A) and C)
F) All of the above

Question 6

Dick owns a dog whose barking annoys Dick's neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking.Assuming Dick has the legal right to keep the dog,a possible private solution to this problem is that

Accepted Answer

A)  Jane pays Dick $450 to give the dog to his parents who live on an isolated farm.
B)  Dick pays Jane $650 for her inconvenience.
C)  Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
D)  There is no private transaction that would improve this situation.E) B) and C)
F) All of the above

Question 7

Which of the following would not be considered a negative externality?

Accepted Answer

A)  Smelter, Inc.creates steel and pollution.
B)  Your friend buys a new puppy that barks every night.
C)  You have an adverse reaction to a medication your doctor prescribed for you.
D)  Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.E) A) and D)
F) A) and B)

Question 8

Transaction costs

Accepted Answer

A)  can keep private parties from solving externality problems.
B)  are incurred in the production process due to externalities.
C)  increase when taxes are imposed to correct negative externalities.
D)  are eliminated when the government intervenes in a market with externalities.E) All of the above
F) A) and B)

Question 9

Which of the following statements is not correct?

Accepted Answer

A)  Patents help internalize the externalities associated with technological advances.
B)  Economists typically prefer regulations to corrective taxes because regulations provide more incentives for firms to seek continued reductions in pollution.
C)  Allowing firms to trade pollution permits will lower the total cost of reducing pollution.
D)  A big impediment to implementing the Coase theorem in many cases is high transactions costs.E) B) and D)
F) A) and D)

Question 10

A patent is used to

Accepted Answer

A)  disseminate information.
B)  offset the negative effects of taxes.
C)  protect inventors for as long as they live.
D)  assign property rights.E) A) and D)
F) B) and D)

Question 11

Corrective taxes differ from most taxes in that corrective taxes

Accepted Answer

A)  enhance economic efficiency.
B)  do not raise revenue from the government.
C)  cause deadweight loss.
D)  cannot be divided between the buyer and seller.E) C) and D)
F) A) and D)

Question 12

When negative externalities are present in a market,

Accepted Answer

A)  producers will be affected but consumers will not.
B)  producers will supply too much of the product.
C)  demand will be too high.
D)  the market will still maximize total benefits.E) A) and C)
F) C) and D)

Question 13

Research into new technologies

Accepted Answer

A)  provides positive externalities because it creates knowledge others can use.
B)  results in negative externalities because government funding for research causes less government spending in other areas.
C)  is protected by patent laws, which eliminates the need for government intervention.
D)  should only be funded by the corporations that will receive the profits from the research.E) A) and B)
F) A) and C)

Question 14

Figure 10-7
 
-Refer to Figure 10-7.Which graph illustrates a corrective tax?

Accepted Answer

A)  the left graph
B)  the right graph
C)  both graphs
D)  neither graphE) All of the above
F) A) and C)

Question 15

When parties who are bargaining to eliminate an externality "hold out" for a better deal,

Accepted Answer

A)  the inefficient outcome persists.
B)  the eventual outcome will maximize total well-being.
C)  transaction costs must be low.
D)  one party will gain more than the other party.E) B) and C)
F) All of the above

Question 16

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

Accepted Answer

A)  an opportunity cost.
B)  an implicit cost.
C)  a sunk cost.
D)  a transaction cost.E) A) and D)
F) None of the above

Question 17

Figure 10-5
 
-Refer to Figure 10-5.Which of the following statements is correct?

Accepted Answer

A)  The marginal benefit of the positive externality is measured by P₃ - P₁.
B)  The marginal cost of the negative externality is measured by P₃ - P₂.
C)  The marginal cost of the negative externality is measured by P₃ - P₁.
D)  The marginal cost of the negative externality is measured by P₃ - P₀.E) A) and C)
F) C) and D)

Question 18

At any given quantity,the willingness to pay in the market for gasoline is reflected in the

Accepted Answer

A)  height of the demand curve at that quantity.
B)  height of the supply curve at that quantity.
C)  value to the producer of the last unit of gasoline sold.
D)  total quantity of gasoline exchanged in the market.E) A) and D)
F) B) and D)

Question 19

A negative externality will cause a private market to produce

Accepted Answer

A)  less than is socially desirable.
B)  more than is socially desirable.
C)  exactly the quantity that is socially desirable.
D)  less than the same market would produce in the presence of a positive externality.E) A) and C)
F) B) and C)

Question 20

Corrective taxes enhance efficiency,but the cost to administer them exceeds the revenue they raise for the government.

Accepted Answer

A) True 
 B)False

Exam 10: Externalities

Suppose that flower gardens create a positive externality equal to $1 per plant.What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown?

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Dick owns a dog whose barking annoys Dick's neighbor Jane.Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking.Assuming Dick has the legal right to keep the dog,a possible private solution to this problem is that

Correct AnswerverifiedShow Answer

Figure 10-5 -Refer to Figure 10-5.Which of the following statements is correct?

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Dick owns a dog whose barking annoys Dick's neighbor Jane.Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking.Assuming Dick has the legal right to keep the dog,a possible private solution to this problem is that

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Transaction costs

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At any given quantity,the willingness to pay in the market for gasoline is reflected in the

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When parties who are bargaining to eliminate an externality "hold out" for a better deal,

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Which of the following statements is not correct?

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A negative externality will cause a private market to produce

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One drawback to industrial policy is that

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Research into new technologies

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Corrective taxes enhance efficiency,but the cost to administer them exceeds the revenue they raise for the government.

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Figure 10-7 -Refer to Figure 10-7.Which graph illustrates a corrective tax?

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Suppose that flu shots create a positive externality equal to $12 per shot.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

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Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

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Corrective taxes differ from most taxes in that corrective taxes

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A patent is used to

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When negative externalities are present in a market,

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Which of the following would not be considered a negative externality?

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When an industry is characterized by technology spillover,what should the government do to ensure that the market equilibrium equals the socially optimal equilibrium?

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