Deck 4: Externalities

Question 1

Public policy towards externalities becomes important when _____.

A)transactions costs are zero
B)transactions costs are low
C)transactions case are high
D)there is no relationship between transactions costs and externalities

Answer 1

C

Question 2

New homes built by the airport suffer from noise pollution created by a change in air-traffic patterns.If compensation is paid to the homeowners,_____.

A)they will internalize the externality
B)they will use the money to buy soundproofing for their homes
C)it should be equal to the marginal cost of their harm
D)it will reduce or eliminate any incentive to avoid the problem

Answer 2

D

Question 3

In Coase's confectioner and doctor example,what was the externality?

A)The doctor building his office so close to the confectioner.
B)The vibrations generated by the confectioner's production process.
C)The large number of people entering the confectioner's factory thinking it was the doctor's office.
D)The screams of the doctor's patients disrupted factory workers from performing their duties.

Answer 3

B

Question 4

If all my neighbors have well-manicured lawns and well-maintained houses,their actions not only benefit themselves,but they generate a _____ externality because their actions _____the value of my home.

A)negative;increase
B)negative;decrease
C)positive;increase
D)positive;decrease

Question 5

In general,pollution is economically inefficient because _____.

A)people do not like breathing bad air
B)it is a byproduct of a market exchange
C)producers are only pursuing their own self-interests
D)producers do not have to internalize the opportunity cost of clean air

Question 6

In theory,a corrective tax _____ the _____ will create the optimal result.

A)equal to;externality
B)above;externality
C)equal to;price
D)above;price

Question 7

An optimal corrective tax _____.

A)falls as quantity produced increases
B)is above the marginal external product
C)is a lump sum tax
D)helps to increase demand for the taxed product

Question 8

It is difficult to get the necessary information to apply corrective taxes in the real world,thus _____.

A)most government reluctantly apply to reduce negative externalities
B)use regulation to reduce negative externalities
C)use moral suasion to reduce negative externalities
D)most governments fail to do anything to reduce negative externalities

Question 9

When _____ are ______,it will be difficult to reach a private solution.

A)transactions costs;high
B)transactions costs;low
C)externalities;visible
D)externalities,invisible

Question 10

An unintended byproduct of a market exchange that is allocated outside the market system is _____.

A)a restrictive covenant
B)an externality
C)a pollution right
D)an external damage

Question 11

Which of the following is not a potential problem in using corrective taxation to deal with a negative externality?

A)Measuring the cost of the externality.
B)Estimating the supply curve of the externality creator.
C)Determining who is responsible for the externality.
D)Determining how the tax should be applied.

Question 12

An optimal corrective tax should be placed on _____.

A)the sellers of the externality-generating activity
B)the inputs into the externality-generating activity
C)the externality-generating activity
D)the purchasers of the output of the externality-generating activity

Question 13

A change in regulations increases the size of the airplanes that can fly into a local regional airport.The increase in average plane size increases noise pollution considerably.If compensation is to be paid to those harmed by this externality,the most efficient form of compensation would be _____.

A)a lump sum payment
B)a payment per violation
C)a set payment every month
D)regular payments equal to the monthly cost imposed on homeowners

Question 14

A corrective tax can improve upon the misallocation of resources resulting from an externality _____.

A)only if the externality is positive
B)only if it is easy to quantify the external damage
C)transactions costs are low
D)transactions costs are zero

Question 15

Internalizing a negative externality means _____.

A)changing the incentives of consumers to ignore the externality
B)changing the incentives of producers to act as if there were no market for the external cost
C)changing the incentives of producers to act as if there were a market for the external cost
D)changing the incentives of consumers to complain about the externality to the producers

Question 16

When there is no market for a negative externality,the producer of the externality _____.

A)has strong incentive to consider the costs it imposes on others
B)will try to create a market
C)will limit production of the good producing the externality
D)has no incentive to consider the costs it imposes on others

Question 17

Although the reciprocal nature of the problem suggest that the proceeds of a corrective tax not be paid to as compensation to those harmed,if compensation is paid to those harmed by externalities _____.

A)the payment should be made from general revenues to keep the corrective action separate from the compensatory part
B)the payment should be set equal to marginal external cost
C)the payment should be made in one lump sum to minimize incentives to create future problems
D)the payment should be double the amount of the corrective tax to justly compensate the victims

Question 18

An externality is_____.

A)an unintended by-product of market exchange that is allocated outside the market system
B)an intended by-product of market exchange that is allocated outside the market system
C)an unintended by-product of market exchange that is allocated within the market system
D)an intended by-product of market exchange that is allocated within the market system

Question 19

Corrective taxes are often difficult to implement because _____.

A)those affected by the externality are often loathe to use political means to implement the tax
B)those creating the externality threaten to shut down
C)those who suffer from the externality refuse to talk about it
D)the creator of an externality will use political means to try to prevent the tax

Question 20

The producers of externalities prefer _____ to _____.

A)corrective taxation;regulation
B)regulation;subsidization
C)competition;subsidization
D)regulation;corrective taxation

Question 21

When _____,we are at the optimal amount of pollution.

A)pollution is at zero
B)pollution is equal to the amount produced in an unregulated market
C)the total cost of pollution is equal to the total cost of pollution abatement
D)the marginal cost of pollution is equal to the marginal cost of pollution abatement

Question 22

Marketable pollution rights _____.

A)make producers pay for polluting
B)are inherently wrong
C)give producers incentive to internalize external costs
D)do nothing to reduce pollution in the long run

Question 23

Other things being equal,corrective taxation is superior to regulation in the long run because it _____.

A)gives the producer an incentive to find a way to reduce external costs
B)the tax revenue can be used as compensation
C)the tax revenue can be used on other parts of the budget
D)is more burdensome on the producers of the externality

Question 24

The optimal amount of pollution is zero.

Question 25

Positive externalities are _____ because their producers have no incentive to take the _____ into account.

A)oversupplied;external cost
B)undersupplied;external benefit
C)oversupplied;external benefit
D)undersupplied;external cost

Question 26

Positive externalities can be dealt with by _____ them.

A)subsidizing
B)taxing
C)regulating
D)encouraging

Question 27

A tax and a regulation that have the same effect on output in the short run will have different effects in the long run._____ creates profits which encourages _____,while _____ creates losses and encourages _____.

A)Corrective taxation;entry;regulation;exit
B)Regulation;entry;corrective taxation;exit
C)Corrective taxation;exit;regulation;entry
D)Regulation;exit;corrective taxation;entry

Question 28

If it costs relatively little to measure the external damage of a negative externality and it can be determined who is responsible for the externality,there are no other barriers to corrective taxation.

Question 29

Positive externalities ______.

A)are not important economically
B)should be reduced through subsidiziation
C)are undersupplied by unfettered markets
D)can be ignored

Question 30

A pecuniary externality _____.

A)affects the prices facing the third parties on which the externality falls
B)affects the products bought by third parties
C)affects the production functions of third parties
D)affects the production functions of producers of the externalities

Question 31

An inframarginal externality is where_____.

A)there are spillover benefits and costs,both in total and on the margin.
B)there are spillover benefits and costs,but only in total.
C)there are no spillover benefits,but there are marginal costs
D)there are spillover benefits and costs,but they relate only to infrared technology

Question 32

Anyone can buy marketable pollution rights for sulfur dioxide,even environmentalists.

Question 33

The level of transactions costs is relevant to the resolution of property rights problems.

Question 34

The optimal public policy to correct for negative pecuniary externalities is _____.

A)corrective taxation and compensation
B)subsidization
C)corrective taxation without compensation
D)nothing

Question 35

An externality is an economic cost or benefit that is the by-product of economic activity and which is allocated within the market system.

Question 36

On efficiency grounds,corrective taxes should not be given as compensation to those individuals harmed by negative externalities

Question 37

When transactions costs are low,private actions to correct externalities are usually feasible.

Question 38

Assume that the government can reduce car pollution using either a corrective tax or a regulatory scheme,both of which will achieve the same results in the short-run.In the long run,however,the regulatory scheme will be more efficient because it provides incentives to avoid the regulation altogether.

Question 39

An inframarginal positive externality _____.

A)requires subsidization to reach an optimal level of output
B)requires regulation to reach an optimal level of output
C)requires corrective taxation to reach an optimal level of output
D)requires no action because the optimal level of output has been reached

Question 40

The difference between the costs (or benefits)created by both technological and pecuniary externalities is that in both cases costs are imposed on _____,but for _____ they are external to the market while _____ are allocated within the market.

A)parties to the transaction;technological externalities;pecuniary externalities
B)parties to the transaction;pecuniary externalities;technological externalities
C)third parties;technological externalities;pecuniary externalities
D)third parties;pecuniary externalities;technological externalities

Question 41

If K-12 education is determined to be an inframarginal positive externality,this means that K-12 education is being underproduced.

Question 42

Explain the difference between a technological and pecuniary externality.What are the public policy implications of both types of externalities? Explain your reasoning.

Question 43

A regional airport decides to extend a runway,increasing the amount of noise pollution on nearby homes.Assume that an optimal corrective tax can be applied.Should that tax be paid as compensation to the nearby homeowners? How might compensating the homeowners change their (and potentially others)incentives?

Question 44

For the affected individuals,pecuniary externalities can be as harmful as technological externalities.

Question 45

Suppose that a factory is located on the outskirts of a small town.As a by-product of its production process,it produces sulfur dioxide that gets released into the air.The sulfur dioxide lowers the quality of the in the town.Suggest some possible remedies for this negative externality.

Question 46

Draw a negative externality.Clearly label the axis and the equilibrium that would occur were there no external costs and the equilibrium with external costs.Explain the diagram and the resulting problem that negative externalities create from the standpoint of economic efficiency.

Question 47

An excess benefit from corrective taxation arises because the tax revenues can be spent on compensation.

Question 48

If the government subsidizes an activity it believes is generates a positive externality and it really only produces an inframarginal positive externality then the subsidization will result in an overproduction of the activity in question.

Question 49

Draw the demand and supply curve for a good with an inframarginal external benefit.Clearly label the axis and equilibrium point.Using your graph,describe why the equilibrium level of output is efficient.