Question 1

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

Accepted Answer

According to the Coase theorem, if property rights are well-defined and transaction costs are low, then private parties can negotiate and reach an efficient outcome on their own without government intervention. Therefore, the private market does not always need government intervention to address externalities.

Question 2

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

Accepted Answer

Externalities are costs or benefits that affect individuals or groups who are not directly involved in the production or consumption of a good or service. Private parties, such as producers or consumers, may fail to account for these external costs or benefits in their decision-making, leading to market failure. In such cases, government intervention may be necessary to address the externality and promote overall economic efficiency and fairness. This can include measures such as regulation, taxation, or subsidies.

Question 3

One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.

Accepted Answer

Regulation allows the government to establish and enforce pollution limits, ensuring that companies and individuals comply with environmental standards. By specifying the maximum amount of pollution that is legally acceptable, the government can help reduce the negative impact of pollution on public health and the environment.

Question 4

External benefits lead to inefficient market outcomes.

Accepted Answer

External benefits occur when the benefits of a transaction spill over to third parties who are not involved in the transaction. In such a situation, the market outcome is less efficient as the price mechanism fails to take into account the positive impact of the transaction on society. As a result, the market produces less than the socially optimal level of output, leading to a deadweight loss.

Question 5

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Accepted Answer

When the government subsidizes activities with external benefits, it lowers the cost of production for firms and therefore reduces the market price of the goods or services. This incentivizes consumers to consume more, as they are able to purchase the product at a cheaper price than they would have been able to without the subsidy.

Question 6

Make an argument that gun ownership creates external costs. How might the government address the external costs? Now make an argument that gun ownership creates external benefits. How might the government address the external benefits?

Accepted Answer

The answer of Make an argument that gun ownership creates...

Question 7

While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits.

Accepted Answer

Private actors may not be able to negotiate a mutually beneficial solution due to factors such as incomplete information, transaction costs, and bargaining power imbalances. As a result, government intervention may be necessary to address externalities.

Question 8

(Figure: Negative Externality) The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions. Figure: Negative Externality  a. What is the market quantity in this market? b. What is the social cost of the product? c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the tax has been imposed?

Accepted Answer

The answer of (Figure: Negative Externality) The figure shows the...

Question 9

Markets are always able to find solutions to externality problems, and thus maximize social surplus.

Accepted Answer

Markets may not always find solutions to externality problems, as some externalities cannot be easily quantified or solved through market mechanisms. Additionally, there may be information asymmetries or transaction costs that prevent efficient solutions from being reached. In these cases, government intervention or other non-market mechanisms may be necessary to address externalities and maximize social surplus.

Question 10

External costs cause deadweight losses, whereas external benefits do not.

Accepted Answer

External benefits can create additional social value and therefore do not cause deadweight losses. They can actually create a welfare gain for society.

Question 11

(Figure: Positive Externality) The figure shows the market for a good that, when consumed, causes an external benefit. Suppose the government decides to begin issuing a subsidy to the consumers of the good. Using the information provided in the figure, answer the following questions.  a. What is the initial market quantity in this market? b. What is the social benefit of the product? c. When the consumers of the product are subsidized, what is the dollar amount of deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the subsidy has been allocated?

Accepted Answer

The answer of (Figure: Positive Externality) The figure shows the...

Question 12

The market for bathroom cleaners can be defined by this set of equations:

Accepted Answer

The answer of The market for bathroom cleaners can be...

Question 13

Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves.

Accepted Answer

The answer of Using a demand and supply diagram demonstrate...

Question 14

Government intervention is necessary to correct all externalities.

Accepted Answer

While government intervention may be helpful in correcting certain externalities, it is not always necessary or efficient. In some cases, market-based solutions such as taxes or subsidies may be more effective in addressing externalities. Additionally, government intervention can sometimes lead to unintended consequences or inefficiencies.

Question 15

If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity.

Accepted Answer

If the private benefit is less than the social benefit, then the individual is not considering all of the positive externalities (such as not spreading the flu to others) that come with getting a flu shot. This means that the individual may be less likely to get a flu shot, which would result in a market quantity that is lower than the efficient quantity.

Question 16

Vaccines benefit the person who is vaccinated but they also create an external cost for others.

Accepted Answer

The answer of Vaccines benefit the person who is vaccinated...

Question 17

If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist.

Accepted Answer

When transaction costs are low and property rights are clearly identifiable, individuals can easily negotiate and transact in a way that internalizes the externalities. As a result, an efficient market equilibrium can be achieved despite the presence of externalities.

Question 18

The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.

Accepted Answer

The answer of The Coase theorem says that if transaction...

Question 19

The prime motivation for low-pollutant firms to enter into the market for tradeable allowances is profit.

Accepted Answer

Low-pollutant firms can profit from trading their unused allowances to high-polluting firms or by reducing their own emissions and selling their excess allowances. Thus, profit is the prime motivation for them to enter into the market for tradeable allowances.

Question 20

Explain in your own words: 1) What is an externality? and 2) What is the difference between a negative and positive externalities. Provide examples.

Accepted Answer

The answer of Explain in your own words: 1) What...

Quiz 10: Externalities: When the Price Is Not Right