Question 1

Negative consumption externalities will have a socially optimal quantity that is smaller than the quantity determined by the private market.

Accepted Answer

Negative consumption externalities, such as pollution or second-hand smoke, harm individuals who are not directly involved in the consumption or production process. The private market may overlook these negative effects and overproduce the good, leading to a quantity greater than the socially optimal level. Therefore, the socially optimal quantity will be smaller than what the private market would determine.

Question 2

Taxation is often able to correct market externalities at a lower cost than regulations designed to achieve the same goal.

Accepted Answer

Taxation incentivizes individuals and businesses to internalize the cost of their actions that create negative externalities, whereas regulations impose restrictions on behavior. Taxation is often a more efficient and flexible method of achieving the same goal as regulations, with fewer administrative costs and compliance issues.

Question 3

Policy responses that try to deal with market failure resulting from externalities are largely restricted to various forms of taxation.

Accepted Answer

Policy responses to externalities include a range of tools such as subsidies, regulations, tradable permits, and voluntary agreements, in addition to taxation.

Question 4

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Accepted Answer

The Coase theorem states that under certain conditions, parties will negotiate and reach an efficient outcome without the need for government intervention. This assumes low transaction costs, clearly defined property rights, and rational decision-making by all parties involved.

Question 5

The externality associated with the production of electricity will lead the market to produce a larger quantity than socially desirable.

Accepted Answer

The production of electricity often generates negative externalities such as pollution and greenhouse gas emissions that have harmful effects on the environment and public health. Since the market only considers the private costs and benefits of production, it will tend to produce more electricity than is socially optimal, leading to excessive pollution and resource depletion. This market failure can be addressed through government intervention, such as the implementation of pollution taxes or regulations, to internalize the external costs and align private incentives with social goals.

Question 6

When regulating a market in which an externality arises, the government can only command how much of the good companies are allowed to produce.

Accepted Answer

When regulating a market with an externality, the government can also use taxes or subsidies to incentivize companies to reduce or increase production levels respectively. Additionally, the government can impose quality standards or regulations to ensure the externalities are minimized.

Question 7

When weighing the costs and benefits of pollution, the costs always exceed the benefits because the benefit equals zero.

Accepted Answer

While pollution may have some short-term benefits, such as increased industrial production or transportation efficiency, the long-term costs to human health, the environment, and the economy far exceed any potential benefits. Therefore, the statement that the benefits of pollution equal zero is not entirely accurate.

Question 8

Market outcomes cannot be improved by government policies.

Accepted Answer

While government policies may not always lead to optimal market outcomes, they can improve certain aspects of market performance such as reducing negative externalities, promoting competition, and ensuring fair distribution of resources.

Question 9

The Internet is a good example of a negative externality because it has aspects which may be inappropriate for some users.

Accepted Answer

The Internet has many aspects, such as access to inappropriate content or cyberbullying, which can be harmful or distressing to some users. These negative effects are not reflected in the cost of accessing the Internet and are therefore considered externalities.

Question 10

Government can internalise an externality by taxing the goods that have negative externalities and subsidising the goods that have positive externalities.

Accepted Answer

This is correct. By imposing a tax on goods that have negative externalities, such as pollution, the government can make the producers pay for the social cost of their production, thus reducing the amount of pollution produced. Similarly, by subsidising goods that have positive externalities, such as education, the government can encourage more of these goods to be produced and consumed, leading to a better outcome for society as a whole.

Question 11

Externalities can be solved if parties are able to bargain without cost.

Accepted Answer

When parties can bargain without cost, they can negotiate to reach an agreement that internalizes the externality, resulting in a more efficient allocation of resources. This is known as the Coase theorem. However, if bargaining costs are high, then it may not be possible for parties to arrive at an optimal solution through negotiation alone.

Question 12

The ability of individuals to arrive at a private solution to an externality is dependent on the initial distribution of rights.

Accepted Answer

The answer of The ability of individuals to arrive at...

Question 13

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Accepted Answer

When the private cost of producing robots does not take into account the negative externalities or social cost it imposes on society, the market tends to produce fewer robots than what is socially optimal. This is because the producers only consider their own private costs and not the cost imposed on society as a whole. As a result, the production of robots becomes inefficient and suboptimal.

Question 14

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

Accepted Answer

When externality problems arise, private parties may not have the resources, knowledge or incentive to solve them efficiently. The government, through regulation or other policies, can address these problems and manage negative externalities such as pollution or overuse of common resources.

Question 15

Internalising a negative consumption externality will cause the market supply curve to shift to the left.

Accepted Answer

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Question 16

The size and scope of technology spillovers is easy for governments to measure.

Accepted Answer

The size and scope of technology spillovers are often difficult to measure accurately and can vary depending on the sector, technology, and geographical location.

Question 17

Education has negative externalities for society.

Accepted Answer

Education has positive externalities for society, as it leads to higher productivity, lower crime rates, and improved public health.

Question 18

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

Accepted Answer

Private actors may not have the information, resources, or incentives to negotiate a mutually beneficial solution to externalities, leading to market inefficiencies and the need for government intervention.

Question 19

Government can accurately measure the social value of an externality.

Accepted Answer

While government can estimate the costs and benefits of an externality, accurately measuring its social value is difficult due to subjective valuation of different stakeholders and the complexity of spillover effects on various factors.

Question 20

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

Accepted Answer

A positive externality occurs when a third party benefits from a transaction they are not involved in. The owner enjoying added safety is a private benefit, not a positive externality.

Quiz 10: Externalities