Question 1

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

Accepted Answer

Regulation often involves setting specific standards or rules that must be followed, which can be less flexible and potentially less efficient than corrective taxes. Corrective taxes, such as a carbon tax, can provide economic incentives for reducing pollution across a wide range of activities, allowing businesses and individuals to find the most cost-effective ways to reduce emissions.

Question 2

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

Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of rights.

Question 3

Government intervention is necessary to correct all externalities.

Accepted Answer

Not all externalities require government intervention because some can be resolved through private negotiation or market mechanisms, and intervention might sometimes lead to inefficiencies or unintended consequences.

Question 4

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.

Accepted Answer

The Coase Theorem suggests that individuals can work out mutually beneficial agreements to solve externalities without government intervention, assuming zero or low transaction costs. High transaction costs can prevent these agreements from being reached.

Question 5

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

Accepted Answer

The Coase theorem suggests that if property rights are clearly defined and transaction costs are low, private parties can negotiate to solve the problem of externalities on their own without the need for government intervention, such as taxes.

Question 6

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

Accepted Answer

The Coase theorem posits that if trade in an externality is possible and there are no transaction costs, parties can negotiate terms that will lead to an efficient outcome regardless of the initial allocation of property rights.

Question 7

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

Accepted Answer

The Coase theorem suggests that if property rights are clearly defined and transaction costs are low, private negotiations will lead to an efficient allocation of resources without the need for government intervention.

Question 8

Figure 10-8  ​
-Refer to Figure 10-8. This market would benefit from a tax equal to $50 per unit.

Accepted Answer

Without seeing Figure 10-8, it's impossible to determine if a $50 per unit tax would benefit the market, as the impact of a tax depends on factors like the elasticity of demand and supply, the market equilibrium before the tax, and how the tax revenue is used.

Question 9

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

Accepted Answer

Private parties may find the costs of negotiating a solution to an externality (such as legal fees, enforcement costs, and information costs) to be higher than the benefits of solving the problem, leading them to not address the externality. This concept is discussed in the Coase Theorem, which suggests that if transaction costs are low, parties can negotiate solutions to externalities on their own, but high transaction costs can prevent these negotiations from occurring.

Question 10

Figure 10-8  ​
-Refer to Figure 10-8. This market is characterized by a negative externality.

Accepted Answer

A negative externality occurs when a third party not directly involved in a transaction is negatively affected by it. Figure 10-8, while not visible here, typically illustrates a situation where the social cost of a market activity exceeds the private cost, indicating a negative externality.

Question 11

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

Accepted Answer

The Sierra Club and similar charities are established to address externalities, particularly negative environmental externalities, by advocating for conservation, environmental protection, and sustainable practices.

Question 12

Figure 10-8  ​
-Refer to Figure 10-8. The socially optimal price and quantity are $250 and 250 units, respectively.

Accepted Answer

The socially optimal price and quantity cannot be determined without specific information on supply and demand curves, externalities, or the figure mentioned.

Question 13

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

Accepted Answer

Firms that can reduce pollution easily and at a lower cost would be willing to sell their pollution permits because they can achieve their emission reduction targets at a lower cost and profit from selling the excess permits.

Question 14

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

Accepted Answer

When externalities are present, coordinating among a large number of interested parties to reach an efficient outcome is difficult due to the complexity of accounting for all the external costs or benefits affecting each party.

Question 15

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

Accepted Answer

Governments can intervene in markets to correct externalities, such as pollution, through regulations, taxes, or subsidies when the cost for private parties to negotiate solutions is too high or impractical.

Question 16

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

Accepted Answer

By allowing firms to trade pollution rights, it can lead to a more efficient allocation of resources where firms that can reduce pollution at lower costs will do so, while those for whom it is more expensive can buy rights. This can lead to an overall reduction in pollution at a lower cost to society, potentially enhancing social welfare.

Question 17

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

Accepted Answer

The Coase theorem suggests that if property rights are clearly defined and transaction costs are low, private parties can negotiate solutions to the problem of externalities on their own. However, in reality, high transaction costs, information asymmetry, and public goods characteristics often prevent private actors from successfully resolving externalities without government intervention.

Question 18

In some circumstances, selling pollution permits may be better than levying a corrective tax.

Accepted Answer

Selling pollution permits can be more effective than levying a corrective tax in certain situations because it allows for a fixed limit on the total amount of pollution, providing certainty about environmental outcomes, while also giving firms flexibility to trade permits based on their individual reduction costs.

Question 19

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

Accepted Answer

The Coase theorem posits that private economic actors can efficiently solve the problem of externalities among themselves without government intervention, but this is under the condition of zero transaction costs. If there are significant costs in reaching and enforcing an agreement, this condition is violated, and the theorem's conclusion may not hold.

Question 20

All externalities impose a cost on others. ​

Accepted Answer

Externalities can be positive, providing benefits to others, or negative, imposing costs on others. Positive externalities do not impose a cost but rather confer benefits.

Quiz 10: Externalities

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

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

Government intervention is necessary to correct all externalities.

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.

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

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

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

Figure 10-8 -Refer to Figure 10-8. This market would benefit from a tax equal to $50 per unit.

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

Figure 10-8 -Refer to Figure 10-8. This market is characterized by a negative externality.

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

Figure 10-8 -Refer to Figure 10-8. The socially optimal price and quantity are $250 and 250 units, respectively.

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

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

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

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

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

In some circumstances, selling pollution permits may be better than levying a corrective tax.

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

All externalities impose a cost on others.

Quiz 10: Externalities

Although regulation and corrective taxes are both capable of reducing pollution, regulation accomplishes this goal more efficiently.

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

Government intervention is necessary to correct all externalities.

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.

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

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

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

Figure 10-8 ​ -Refer to Figure 10-8. This market would benefit from a tax equal to $50 per unit.

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

Figure 10-8 ​ -Refer to Figure 10-8. This market is characterized by a negative externality.

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

Figure 10-8 ​ -Refer to Figure 10-8. The socially optimal price and quantity are $250 and 250 units, respectively.

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

When externalities are present, reaching an efficient outcome is especially difficult when the number of interested parties is large.

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

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

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

In some circumstances, selling pollution permits may be better than levying a corrective tax.

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

All externalities impose a cost on others. ​

Figure 10-8 -Refer to Figure 10-8. This market would benefit from a tax equal to $50 per unit.

Figure 10-8 -Refer to Figure 10-8. This market is characterized by a negative externality.

Figure 10-8 -Refer to Figure 10-8. The socially optimal price and quantity are $250 and 250 units, respectively.

All externalities impose a cost on others.