Deck 16: Externalities Property Rights and the Coase Theorem

Question 1

If transactions costs are high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?

A)Allow the parties to negotiate
B)Tax pollution
C)Require all polluters to limit their pollution to a certain level with regulation
D)Give subsidies to reduce pollution

Answer 1

B

Question 2

If she has the property rights with negotiation impossible, then what will the outcome be?

A)You will shut your stereo off
B)You will play to 3 and insulate so that the noise does not reach her
C)You will play to 6 and she will insulate her walls
D)You will play to 4 and she will absorb the noise even though she dislikes it

Answer 2

B

Question 3

What if negotiation is impossible and you have the rights to play?

A)You will play at 10 and insulate your walls
B)She will insulate her walls and you will play at 10
C)You will play at 6 and she will suffer through the listening of your playing
D)You will play at 3 and she will listen to the music that comes into her apartment

Answer 3

B

Question 4

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if Peter had the rights to stop any cell phone calls from taking place at the coffee shop?

A)2
B)0
C)1
D)3

Question 5

Negative externality occurs when

A)The production of a good harms third parties
B)The production of a good helps third parties
C)A buyer is sold inferior and damaged merchandise
D)The consumption of a good helps third parties

Question 6

If grazing land is used by all individuals on a free open range, they will operate until

A)The AP of the land equals the opportunity cost of the input
B)The MP of the land equals the opportunity cost of the input
C)The TP of the land equals the opportunity cost of the input
D)The MP of the land is larger than the opportunity cost of the input

Question 7

Joe plays his stereo loud; this bothers Harry.According to the Coase theorem

A)The police should tell Joe to turn down his stereo
B)Harry should pay Joe to turn down his stereo
C)Joe should pay Harry to turn down his stereo
D)Joe and Harry should be able to work out an agreement between themselves

Question 8

An example of a positive externality is

A)Pollution
B)An apple orchard increasing the number of trees next to a bee farm
C)The Clean Air Act
D)Smoking in a crowded place

Question 9

If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? The answer to the questions are to the nearest whole dial number.

A)3
B)4
C)6
D)10

Question 10

If a company dumps pollution in the water and if transactions costs are high

A)All parties connected with the pollution should negotiate
B)The company should be liable
C)The company should be allowed to pollute
D)The company should go out of business

Question 11

According to Pigou the best way to deal with a negative externality is to

A)Allow both parties to negotiate
B)Assign liability to the party with the highest cost of prevention
C)Assign liability to the party with the lowest cost of prevention
D)Tax it

Question 12

If the both Peter and John could negotiate a settlement, but the cost of making a transaction for Peter were $5 (he is very shy and does not like to talk to strangers) , how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?

A)2
B)0
C)1
D)3

Question 13

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?

A)2
B)0
C)1
D)3

Question 14

According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another

A)An efficient outcome results if the liability is placed on the party with the lowest cost of prevention
B)An efficient outcome results no matter how the law assigns responsibility
C)Efficiency cannot be reached without government intervention
D)The correct way to deal with an externality is to tax it

Question 15

If the costs of negotiation are small but not negligible,

A)An efficient outcome results if the liability is placed on the party with the lowest cost of prevention
B)An efficient outcome results no matter how the law assigns responsibility
C)Efficiency cannot be reached without government intervention
D)The correct way to deal with an externality is to tax it

Question 16

An example of a negative externality is

A)Pollution
B)An apple orchard increasing the number of trees next to a bee farm
C)The Clean Air Act
D)A consumer paying too much for an item

Question 17

If the fishery was own collectively by all the fishermen, how many boats would be sent out fishing?

A)0
B)6
C)7
D)8

Question 18

Fishing often occurs where no clearly defined property rights exist.One would expect

A)Too few fish would be caught
B)Too many fish would be caught
C)To problems when this happens because fisherman will stop fishing when their costs of fishing equal the benefits of fishing
D)Too few boats to go out fishing

Question 19

If there were no controls over fishing how many vessels would be sent out fishing?

A)0
B)6
C)7
D)8

Question 20

If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played?

A)0
B)3
C)4
D)6

Question 21

The diagram above shows the general equilibrium model for X and Y for a small hypothetical economy.Point A in this diagram represents a positions where:

A)There is an excess supply of good X
B)There is an excess demand for good X
C)The economy is at an economically efficient allocation of resources
D)Maximizing utility

Question 22

If there are no restrictions of any kind on burning leaves and negotiation costs among citizens are prohibitive, what will happen to the leaves in the town?

Question 23

The laws relating to trespass, the use of airspace, and unobstructed view tell us what about property rights definition in the United States?

A)The laws are not absolute in protecting a property owner from intrusion
B)The laws rely on cost-benefit analysis to arrive at efficient outcomes
C)The laws vary depending on information costs and enforcement costs
D)Property laws involve all of the above considerations

Question 24

Provide an example of a positive externality and explain: 1) why it should be considered a positive externality and 2) what could be done in order to internalize the externality.

Question 25

Define in technical terms the tragedy of the commons.

Question 26

A positional externality occurs when

A)One person's increase in consumption lowers his neighbor's utility
B)One person builds a house which obstructs his neighbor's view
C)A polluter positions himself in a crowded city
D)A drunk person decides to drive

Question 27

Laws are efficient if they

A)Uphold absolute property rights
B)Restrict all undesirable action like polluting
C)Work to equate the marginal benefits and marginal costs of behavior
D)Help maximize total benefits of behavior
E)Impose no costs on citizens

Question 28

How much irritation is the most efficient amount for each person in the town to absorb?

Question 29

According to the text, if diamonds represent a form of conspicuous consumption, then

A)They should be taxed
B)They should be outlawed.
C)They should be subsidized
D)The should be given for free

Question 30

The slope of the contract curve for two consumers is determined by the

A)Relative prices of goods
B)Absolute prices of goods
C)Marginal rates of substitution of the two trades
D)Income of the two traders

Question 31

What is the marginal cost to society when a bushel of leaves is burned?

Question 32

Given high transactions costs, the best way to deal with a positive externality is

A)To tax it
B)To subsidize it
C)To allow both parties to negotiate
D)To limit the extent of the externality

Question 33

Some time ago an executive of a Broadcasting company argued before a congressional committee that they should make a law rating TV shows for violence content.He said that children are damaged and violence must be curbed.He indicated that his own network shows too much violence and that he would welcome a law himself so that Turner Broadcasting would show less violence.Explain why someone who shows violence on his TV channels is arguing for government regulation of himself.

Question 34

The diagram above shows the general equilibrium model for a small economy.Fort this economy, the economically efficient allocation of resources occurs at point:

A)A
B)B
C)C
D)D

Question 35

Propose a solution for the town that will lead to efficiency.

Question 36

If each person pursues their own self interest, how much irritation will each person in the town experience from burning leaves each fall?

Question 37

When one party's economic activities on another party is not taken into account by the price system we say to have the market failure of:

A)Imperfect information
B)Externalities
C)Public goods
D)Imperfect competition

Question 38

According to the General Equilibrium Model an economically efficient allocation of resources:

A)Is also a "fair" allocation of resources
B)Interpersonal comparisons of utility are both important and useful
C)Is that where no welfare-improving trades can be made
D)Can only be achieved with government intervention

Question 39

In this problem we change several of the assumptions used so far.Individuals now vary in their distaste for carrying leaves to the land-fill.Also, the first 100 bushels burned do not create a problem for anyone because the air could dissipate the smoke without harm.However, after the first 100 bushels the problem sets in as described earlier.How could efficiency be reached under these new circumstances?