Question 1

The most efficient pollution control system would ensure that
A) the regulators decide how much each polluter should reduce its pollution.
B) no pollution of the environment is tolerated.
C) each polluter reduce its pollution an equal amount.
D) the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.

Accepted Answer

The most efficient pollution control system would ensure that the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount. This is because it is more costly for some polluters to reduce pollution compared to others, and the overall goal is to achieve the greatest reduction in pollution at the lowest cost. Allowing polluters with lower costs to reduce their pollution more would achieve this goal.

Question 2

To internalize a positive externality, an appropriate public policy response would be to
A) ban the good creating the externality.
B) tax the good.
C) subsidize the good.
D) have the government produce the good until the value of an additional unit is zero.

Accepted Answer

Subsidizing the good would increase its production and consumption, leading to a higher level of the positive externality. Therefore, the external benefit is internalized and the overall welfare is maximized. Banning or taxing the good would decrease its production and consumption, leading to a lower level of the positive externality, and potentially causing deadweight loss. Having the government produce the good until the value of an additional unit is zero (i.e., achieve allocative efficiency) is not necessary and may not be feasible in practice.

Question 3

Flu injections are associated with a positive externality. (Those who come in contact with people who are inoculated are helped as well.) Given perfect competition with no government intervention in the vaccination market, which of the following holds?
A) At the current output level, the marginal social benefit exceeds the marginal private benefit.
B) The current output level is inefficiently low.
C) A subsidy on each injection could turn an inefficient situation into an efficient one.
D) All of the above are correct.

Accepted Answer

A) At the current output level, the marginal social benefit exceeds the marginal private benefit because of the positive externality.
B) The current output level is inefficiently low because the marginal social benefit exceeds the marginal cost, indicating that society would benefit from more vaccinations.
C) A subsidy on each injection could turn an inefficient situation into an efficient one by offsetting the gap between the marginal social benefit and the marginal private cost, leading to an increase in the level of vaccinations and a more efficient allocation of resources.

Question 4

Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true?
A) It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound.
B) It is efficient for Roberto to continue to play loud music.
C) It is efficient for Roberto to stop playing loud music only if Thomas has the property right to peace and quiet.
D) It is efficient for Roberto to stop playing loud music only if Roberto has the property right to play loud music.

Accepted Answer

Since Thomas values peace and quiet more (€150) than Roberto values playing loud music (€100), it is efficient for Roberto to stop playing loud music regardless of who has the property right.

Question 5

Because there are positive externalities from higher education,
A) private markets would provide too little of it.
B) private markets would provide too much of it.
C) the government should impose a tax on university students.
D) the government should impose a tax on students' families.

Accepted Answer

Positive externalities imply that there are external benefits to society that are not being taken into account by individuals when making their decisions about how much education to pursue. Private markets tend to focus on individual benefits and costs, rather than externalities, which means that they may not provide enough education to satisfy social demand. Therefore, the government may need to intervene to ensure that education levels are optimal from a social perspective.

Question 6

A benefit of taxes over regulation to internalize externalities is
A) it is easier to choose the optimal amount of taxes than the optimal amount of regulation.
B) regulations are more difficult to impose than taxes.
C) taxes equate the social costs with the social benefits.
D) taxes provide incentives to adopt new methods to reduce the externality.

Accepted Answer

Taxes provide a financial incentive for firms to innovate and adopt new methods to reduce the externality, as they can lower their tax burden by reducing the negative externality they produce.

Question 7

According to the Coase theorem, private parties can solve the problem of externalities if
A) there are no transaction costs.
B) each affected party has equal power in the negotiations.
C) the party affected by the externality has the initial property right to be left alone.
D) there are a large number of affected parties.
E) the government requires them to negotiate with each other.

Accepted Answer

The Coase theorem states that private parties can solve the problem of externalities if there are no transaction costs. This means that if parties can negotiate without incurring additional costs, they will be able to come to an efficient solution that maximizes the total value of resources. The other choices are not necessarily true for the Coase theorem to hold.

Question 8

Refer to the figure below. This diagram represents the tobacco industry. The socially optimal price and quantity exchanged are 
A) €1.90 and 38 units.
B) €1.80 and 35 units.
C) €1.60 and 42 units.
D) €1.35 and 58 units.

Accepted Answer

The answer of Refer to the figure below. This diagram...

Question 9

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?
A) costs incurred due to lawyers' fees
B) costs incurred to reduce the pollution
C) costs incurred to enforce the agreement
D) costs incurred due to a large number of parties affected by the externality
E) All of these answers are considered transaction costs.

Accepted Answer

The costs incurred to reduce the pollution are not considered transaction costs, as they are the costs of actually addressing the externality itself. The other options are all transaction costs that may be incurred in creating and enforcing a contract to address the externality.

Question 10

Internalizing an externality means
A) the good becomes a public good.
B) government regulations or taxes are sufficient to eliminate the externality completely.
C) government imposes regulations that eliminate the externality completely.
D) incentives are altered so that people take account of the external effects of their actions.

Accepted Answer

Internalizing an externality means altering incentives so that people take account of the external effects of their actions. This can be done through government regulations or taxes, but it doesn't necessarily eliminate the externality completely. The good doesn't become a public good and government regulations don't always eliminate the externality completely.

Question 11

When an individual buys a car in a congested urban area, it generates
A) a positive externality.
B) a positive technology spillover.
C) an efficient market outcome.
D) a negative externality.

Accepted Answer

Buying a car in a congested urban area generates a negative externality because it adds to the existing congestion and pollution in the area, adversely affecting the well-being of other individuals living in the vicinity.

Question 12

Refer to the figure below. This diagram represents the tobacco industry. The market creates an equilibrium price and quantity exchanged of 
A) €1.90 and 38 units.
B) €1.80 and 35 units.
C) €1.60 and 42 units.
D) €1.35 and 58 units.

Accepted Answer

The answer of Refer to the figure below. This diagram...

Question 13

The government engages in a technology policy
A) by allocating tradable technology permits to high technology industry.
B) to internalize the positive externality associated with technology-enhancing industries.
C) to help stimulate private solutions to the technology externality.
D) to internalize the negative externality associated with industrial pollution.

Accepted Answer

The government engages in a technology policy to internalize the positive externality associated with technology-enhancing industries. This means that the government incentivizes and invests in industries that lead to positive spillover effects, such as increased productivity and innovation, that benefit society as a whole. This is done to ensure that these benefits are not just enjoyed by the firms themselves, but also by the wider community. The other options listed do not accurately describe the purpose or methods of a technology policy.

Question 14

Refer to the figure below. This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost) curve? 
A) the cost of labour
B) the cost to the government of the hospital expenses of smokers with cancer
C) the increased risk of cancer to the non-smoking passengers in the smoker's car pool
D) all of the above

Accepted Answer

The supply (private cost) curve only includes the costs that are directly incurred by the producers, such as the cost of labour, materials, and equipment. The costs in options B and C are externalities that are not reflected in the supply curve.

Question 15

Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs?
A) Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music.
B) Roberto will pay Thomas €150 and Roberto will continue to play loud music.
C) Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music.
D) Roberto will pay Thomas €100 and Roberto will stop playing loud music.

Accepted Answer

Thomas values peace and quiet more than Roberto values playing loud music, so Thomas will pay Roberto to stop playing loud music, resulting in an efficient solution.

Question 16

Refer to the figure below. Assume the production of the product imposes a cost on society of €7.00 per unit. If the free market equilibrium output is 50 units, the government should 
A) impose a tax of €2.50 per unit.
B) reduce the output of the firm by approximately 39 units.
C) impose a lump-sum tax of €350 per period.
D) impose a tax of €7.00 per unit.

Accepted Answer

The answer of Refer to the figure below. Assume the...

Question 17

A positive externality will cause a market to produce
A) more than is socially desirable.
B) less than is socially desirable.
C) the socially optimal equilibrium amount.
D) more than the same market would produce in the presence of a negative externality.

Accepted Answer

The answer of A positive externality will cause a market...

Question 18

Refer to the figure below. This diagram represents the tobacco industry. The industry creates 
A) positive externalities.
B) negative externalities.
C) no externalities.
D) no equilibrium in the market.

Accepted Answer

The diagram represents negative externalities in the tobacco industry, as there is a difference between private costs (the cost of production for the tobacco companies) and social costs (the cost to society, including health care costs and lost productivity due to smoking-related illnesses). This results in a deadweight loss and a market inefficiency.

Question 19

When a person drives a car that pollutes the air the
A) private cost of consuming the car's services exceeds the social cost.
B) private benefit of consuming the car's services exceeds the social benefit.
C) social cost of consuming the car's services exceeds the private cost.
D) social benefit of consuming the car's services exceeds the private benefits.

Accepted Answer

When a person drives a car that pollutes the air, the private cost of consuming the car's services is low, as the person only pays for the fuel and maintenance. However, the social cost of consuming the car's services exceeds the private cost because the pollution from the car causes negative externalities such as health problems, environmental damage, and increased healthcare costs. These external costs are borne by society as a whole, not just the individual driving the car. Therefore, the social cost of consuming the car's services exceeds the private cost.

Question 20

If a perfectly competitive industry is not forced to take account of a negative externality it creates, it will produce where
A) the marginal cost of production equals the marginal private benefit.
B) the marginal cost of production equals the marginal social benefit.
C) the marginal social cost of production equals the marginal social benefit.
D) price equals marginal social benefit.

Accepted Answer

In a perfectly competitive market without accounting for negative externalities, firms produce where marginal cost equals marginal private benefit, ignoring the external costs imposed on society.

Quiz 11: Market Failure and Externalities

The most efficient pollution control system would ensure that

To internalize a positive externality, an appropriate public policy response would be to

Flu injections are associated with a positive externality. (Those who come in contact with people who are inoculated are helped as well.) Given perfect competition with no government intervention in the vaccination market, which of the following holds?

Roberto and Thomas live in a university hall of residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true?

Because there are positive externalities from higher education,

A benefit of taxes over regulation to internalize externalities is

According to the Coase theorem, private parties can solve the problem of externalities if

Refer to the figure below. This diagram represents the tobacco industry. The socially optimal price and quantity exchanged are

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?

Internalizing an externality means

When an individual buys a car in a congested urban area, it generates

Refer to the figure below. This diagram represents the tobacco industry. The market creates an equilibrium price and quantity exchanged of

The government engages in a technology policy

Refer to the figure below. This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost) curve?

Refer to the figure below. Assume the production of the product imposes a cost on society of €7.00 per unit. If the free market equilibrium output is 50 units, the government should

A positive externality will cause a market to produce

Refer to the figure below. This diagram represents the tobacco industry. The industry creates

When a person drives a car that pollutes the air the

If a perfectly competitive industry is not forced to take account of a negative externality it creates, it will produce where