Question 1

_____ is the act of altering private costs and benefits to account fully for external effects.

Accepted Answer

Internalizing an externality involves adjusting private costs and benefits to reflect the external impacts of a decision or activity, ensuring that the decision-maker bears all the societal costs and benefits.

Question 2

When a paper mill pollutes the air as a result of its production process, the firm must pay a fine. This is an example of:

Accepted Answer

This is an example of internalizing an externality, where the firm is made to bear the cost of the negative effects (pollution) its operations have on the environment, typically through fines or taxes.

Question 3

_____ is a tax levied on activities that generate a negative externality so that the externality is considered in the decision making.

Accepted Answer

A corrective tax is specifically designed to account for the external costs of negative externalities, making it the correct choice. It aims to correct the market outcome by including these external costs in the decision-making process of consumers and producers.

Question 4

A _____ tax is an example of a corrective tax.

Accepted Answer

A carbon emissions tax is an example of a corrective tax because it is designed to internalize the external costs associated with carbon emissions, such as environmental damage and health issues, thereby encouraging less pollution.

Question 5

_____ may be applied to activities that generate a positive externality or a smaller negative externality on a comparable activity to encourage businesses to consider of the externality in decision making.

Accepted Answer

A corrective subsidy is designed to encourage activities that generate a positive externality or a smaller negative externality compared to other activities. It does this by providing financial incentives, making it more attractive for businesses to consider the external benefits or reduced external costs of their actions in their decision-making processes.

Question 6

A positive externality exists, which leads the government to issue a corrective subsidy. It is attempting to:

Accepted Answer

Corrective subsidies are used by governments to encourage activities that have positive externalities, ensuring that the benefits of those activities are considered in decision-making processes.

Question 7

When the government aids the solar power industry by issuing a corrective subsidy, it is effectively:

Accepted Answer

Corrective subsidies are designed to lower the production costs for businesses, making solar power more affordable and encouraging its adoption. This does not directly raise revenue for the government, increase demand, or reduce competition.

Question 8

_____ energy subsidies help make electricity generated by wind and solar competitive with electricity generated by fossil fuels.

Accepted Answer

Green energy subsidies are financial incentives provided by governments to support and promote renewable energy sources like wind and solar power. These subsidies help reduce the cost of green energy production, making it more competitive with traditional fossil fuels.

Question 9

_____ allow firms the right to pollute for a strictly limited amount and type of pollution.

Accepted Answer

Tradable pollution permits allow firms the right to pollute up to a certain limit. Firms can buy and sell these permits, providing flexibility and an incentive to reduce pollution.

Question 10

A government program where permits are issued for a maximum allowable amount of pollution and those permits can be bought and sold is called:

Accepted Answer

Cap and trade is a system where the government sets a limit (cap) on the total amount of pollution that can be emitted and allows companies to buy and sell permits to emit a certain amount of pollution. This system incentivizes companies to reduce their emissions in order to sell their excess permits.

Question 11

_____ is a type of tradable pollution permits program that allow firms to pollute up to a given limit.

Accepted Answer

Cap and trade is a system where companies are given a limit (cap) on the amount of greenhouse gases they can emit, but they can buy or sell permits to emit these gases, thus making it a tradable pollution permits program.

Question 12

_____ are a form of property rights.

Accepted Answer

Tradable pollution permits are a form of property rights because they grant the holder the right to emit a certain amount of pollution, and these permits can be bought, sold, or traded, thus behaving as a property that can be owned.

Question 13

_____ suggests that private individuals are able to negotiate an efficient solution to the problem of external costs or benefits in the presence of clearly defined property rights and low transaction costs.

Accepted Answer

The Coase theorem posits that if property rights are well-defined and transaction costs are low, parties can negotiate privately to resolve externalities, leading to an efficient allocation of resources.

Question 14

The Coase theorem claims that many instances of externality problems can be solved by:

Accepted Answer

The Coase theorem posits that if property rights are clearly defined and transaction costs are negligible, externalities can be efficiently resolved through private negotiations between the parties involved.

Question 15

Ronald Coase claimed that when many people are affected by negative externalities, it becomes difficult to negotiate a mutually beneficial outcome due to:

Accepted Answer

Ronald Coase argued that when many people are affected by negative externalities, the primary obstacle to negotiating a mutually beneficial outcome is the presence of high transaction costs. These costs include the expenses related to bargaining, reaching agreements, and enforcing those agreements among the parties involved.

Question 16

The expense of complex negotiated settlements in cases where many people are affected by negative externalities is known as:

Accepted Answer

Transaction costs refer to the expenses incurred in making an economic exchange, including the costs of negotiating and enforcing agreements. In the context of addressing negative externalities affecting many people, the process of reaching a complex negotiated settlement can involve significant transaction costs.

Question 17

The Coase theorem suggests that negative externalities occur, in part, because of a lack of clearly defined:

Accepted Answer

The Coase theorem posits that if property rights are clearly defined and transaction costs are low, externalities (negative or positive) can be efficiently resolved through bargaining between parties. It emphasizes the importance of clearly defined property rights for the efficient allocation of resources.

Question 18

_____ good is one that can be used or consumed by only one consumer.

Accepted Answer

An excludable good is one that can be used or consumed by only one consumer because access to the good can be limited or excluded for others.

Question 19

One person's consumption of _____ good diminishes the ability of others to consume the same good.

Accepted Answer

Rival goods are those where one person's consumption reduces the availability or diminishes the ability of others to consume the same good. Examples include food and clothing.

Question 20

_____ goods can be denied to individuals who do not pay.

Accepted Answer

Excludable goods are those from which individuals can be prevented from using if they do not pay. This characteristic allows providers to deny access to the good or service to those who do not pay.

Quiz 8: Externalities, the Environment, and Public Goods