Deck 10: Externalities

Question 1

A technology spillover is a type of negative externality.

Answer 1

False

Question 2

When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.

Answer 2

True

Question 3

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

Answer 3

True

Question 4

When firms internalize a negative externality,the market supply curve shifts to the left.

Question 5

When correcting for an externality,command-and-control policies are always preferable to market-based policies.

Question 6

Markets sometimes fail to allocate resources efficiently.

Question 7

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable,while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Question 8

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

Question 9

Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

Question 10

If the social value of producing robots is greater than the private value of producing robots,the private market produces too few robots.

Question 11

The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.

Question 12

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.

Question 13

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

Question 14

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway.This is an example of a negative externality.

Question 15

In a market with positive externalities,the market equilibrium quantity maximizes the welfare of society as a whole.

Question 16

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Question 17

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

Question 18

Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.

Question 19

Government intervention in the economy with the goal of promoting technology-producing industries is known as patent policy.

Question 20

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Question 21

A corrective tax places a price on the right to pollute.

Question 22

Corrective taxes cause deadweight losses,reducing economic efficiency.

Question 23

The Environmental Protection Agency (EPA)cannot reach a target level of pollution through the use of pollution permits.

Question 24

Despite the appealing logic of the Coase theorem,private actors often fail to resolve on their own the problems caused by externalities.

Question 25

Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does.

Question 26

According to the Coase theorem,the private market will need government intervention in order to reach an efficient outcome.

Question 27

According to recent research,the gas tax in the United States is lower than the optimal level.

Question 28

Corrective taxes are more efficient than regulations for keeping the environment clean.

Question 29

The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.

Question 30

According to the Coase Theorem,individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

Question 31

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

Question 32

Government intervention is necessary to correct all externalities.

Question 33

According to the Coase theorem,whatever the initial distribution of rights,the interested parties can bargain to an efficient outcome.

Question 34

A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

Question 35

According to the Coase theorem,if private parties can bargain without cost,then the private market will solve the problem of externalities.

Question 36

Firms that can reduce pollution easily would be willing to sell their pollution permits.

Question 37

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

Question 38

One example of a real-world market for tradable pollution permits is the market for carbon permits in Europe.

Question 39

Economists believe that the optimal level of pollution is zero.

Question 40

Government can be used to solve externality problems that are too costly for private parties to solve.

Question 41

To produce honey,beekeepers place hives of bees in the fields of farmers.As bees gather nectar,they pollinate the crops in the fields,which increases 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?

Question 42

The impact of one person's actions on the well-being of a bystander is called

A) an economic dilemma.
B) deadweight loss.
C) a multi-party problem.
D) an externality.

Question 43

The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining.Under what circumstances will private bargaining fail to produce a solution?

Question 44

An externality is the impact of

A) society's decisions on the well-being of society.
B) a person's actions on that person's well-being.
C) one person's actions on the well-being of a bystander.
D) society's decisions on the poorest person in the society.

Question 45

Many charities like the Sierra Club are established to deal with externalities.

Question 46

Using a supply and demand diagram,demonstrate how a negative externality leads to market inefficiency.How might the government help to eliminate this inefficiency?

Question 47

The term market failure refers to

A) a market that fails to allocate resources efficiently.
B) an unsuccessful advertising campaign which reduces demand.
C) ruthless competition among firms.
D) a firm that is forced out of business because of losses.

Question 48

Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Question 49

In a market economy,government intervention

A) will always improve market outcomes.
B) reduces efficiency in the presence of externalities.
C) may improve market outcomes in the presence of externalities.
D) is necessary to control individual greed.

Question 50

Market failure can be caused by

A) too much competition.
B) externalities.
C) low consumer demand.
D) scarcity.

Question 51

Why are efficiency taxes preferred to regulatory policies as methods remedy externalities?

Question 52

In the absence of externalities,the "invisible hand" leads a market to maximize

A) producer profit from that market.
B) total benefit to society from that market.
C) both equality and efficiency in that market.
D) output of goods or services in that market.

Question 53

A cost imposed on someone who is neither the consumer nor the producer is called a

A) corrective tax.
B) command and control policy.
C) positive externality.
D) negative externality.

Question 54

Using a supply and demand diagram,demonstrate how a positive externality leads to market inefficiency.How might the government help to eliminate this inefficiency?

Question 55

An externality arises when a person engages in an activity that influences the well-being of

A) buyers in the market for that activity and yet neither pays nor receives any compensation for that effect.
B) sellers in the market for that activity and yet neither pays nor receives any compensation for that effect.
C) bystanders in the market for that activity and yet neither pays nor receives any compensation for that effect.
D) Both (a)and (b)are correct.

Question 56

An externality is

A) the costs that parties incur in the process of agreeing and following through on a bargain.
B) the uncompensated impact of one person's actions on the well-being of a bystander.
C) the proposition that private parties can bargain without cost over the allocation of resources.
D) a market equilibrium tax.

Question 57

An externality is an example of

A) a corrective tax.
B) a tradable pollution permit.
C) a market failure.
D) Both a and b are correct.

Question 58

An externality exists whenever

A) the economy cannot benefit from government intervention.
B) markets are not able to reach equilibrium.
C) a firm sells its product in a foreign market.
D) a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

Question 59

Use a graph to illustrate the quantity of pollution that would be emitted (a)after a corrective tax has been imposed and (b)after tradable pollution permits have been imposed.Could these two quantities ever be equivalent?

Question 60

An externality

A) results in an equilibrium that does not maximize the total benefits to society.
B) causes demand to exceed supply.
C) strengthens the role of the "invisible hand" in the marketplace.
D) affects buyers but not sellers.

Question 61

If an externality is present in a market,economic efficiency may be enhanced by

A) increased competition.
B) weakening property rights.
C) better informed market participants.
D) government intervention.

Question 62

Which of the following is not correct?

A) Markets allocate scarce resources with the forces of supply and demand.
B) The equilibrium of supply and demand is typically an efficient allocation of resources.
C) Governments can sometimes improve market outcomes.
D) Externalities cannot be positive.

Question 63

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

A) A well-maintained yard conveys a positive externality because it increases the home's market value.
B) A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner.
C) A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
D) A well-maintained yard cannot provide any type of externality.

Question 64

Externalities tend to cause markets to be

A) inefficient.
B) unequal.
C) unnecessary.
D) overwhelmed.

Question 65

If a paper manufacturer does not bear the entire cost of the dioxin it emits,it will

A) emit a lower level of dioxin than is socially efficient.
B) emit a higher level of dioxin than is socially efficient.
C) emit an acceptable level of dioxin.
D) not emit any dioxin in an attempt to avoid paying the entire cost.

Question 66

A negative externality arises when a person engages in an activity that has

A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 67

A positive externality arises when a person engages in an activity that has

A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

Question 68

Altering incentives so that people take account of the external effects of their actions

A) is called internalizing the externality.
B) can be done by imposing a corrective tax.
C) is the role of government in markets with externalities.
D) all of the above.

Question 69

Since restored historic buildings convey a positive externality,local governments may choose to

A) regulate the demolition of them.
B) provide tax breaks to owners who restore them.
C) increase property taxes in historic areas.
D) Both a and b are correct.

Question 70

Private markets fail to account for externalities because

A) externalities don't occur in private markets.
B) sellers include costs associated with externalities in the price of their product.
C) decisionmakers in the market fail to include the costs of their behavior to third parties.
D) the government cannot easily estimate the optimal quantity of pollution.

Question 71

If a sawmill creates too much noise for local residents,

A) noise restrictions will force residents to move out of the area.
B) a sense of social responsibility will cause owners of the mill to reduce noise levels.
C) the government can raise economic well-being through noise-control regulations.
D) the government should avoid intervening because the market will allocate resources efficiently.

Question 72

Which of the following represents a way that a government can help the private market to internalize an externality?

A) taxing goods that have negative externalities
B) subsidizing goods that have positive externalities
C) The government cannot improve upon the outcomes of private markets.
D) Both a and b are correct.

Question 73

Which of the following statements is not correct?

A) Government policies may improve the market's allocation of resources when negative externalities are present.
B) Government policies may improve the market's allocation of resources when positive externalities are present.
C) A positive externality is an example of a market failure.
D) Without government intervention,the market will tend to undersupply products that produce negative externalities.

Question 74

Dioxin emission that results from the production of paper is a good example of a negative externality because

A) self-interested paper firms are generally unaware of environmental regulations.
B) there are fines for producing too much dioxin.
C) self-interested paper producers will not consider the full cost of the dioxin pollution they create.
D) toxic emissions are the best example of an externality.

Question 75

When an externality is present,the market equilibrium is

A) efficient,and the equilibrium maximizes the total benefit to society as a whole.
B) efficient,but the equilibrium does not maximize the total benefit to society as a whole.
C) inefficient,but the equilibrium maximizes the total benefit to society as a whole.
D) inefficient,and the equilibrium does not maximize the total benefit to society as a whole.

Question 76

When externalities are present in a market,the well-being of market participants

A) and market bystanders are both directly affected.
B) and market bystanders are both indirectly affected.
C) is directly affected,and market bystanders are indirectly affected.
D) is indirectly affected,and market bystanders are directly affected.

Question 77

When externalities exist,buyers and sellers

A) neglect the external effects of their actions,but the market equilibrium is still efficient.
B) do not neglect the external effects of their actions,and the market equilibrium is efficient.
C) neglect the external effects of their actions,and the market equilibrium is not efficient.
D) do not neglect the external effects of their actions,and the market equilibrium is not efficient.

Question 78

Which of the following is an example of an externality?

A) cigarette smoke that permeates an entire restaurant
B) a flu shot that prevents a student from transmitting the virus to her roommate
C) a beautiful flower garden outside of the local post office
D) All of the above are correct.

Question 79

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

A) making it illegal to "disturb the peace."
B) having a well-funded animal control department.
C) subsidizing local animal shelters.
D) encouraging people to adopt cats.

Question 80

All externalities

A) cause markets to fail to allocate resources efficiently.
B) cause equilibrium prices to be too high.
C) benefit producers at the expense of consumers.
D) cause equilibrium prices to be too low.