Question 1

If transactions costs are high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?
A)Allow the parties to negotiate
B)Tax pollution
C)Require all polluters to limit their pollution to a certain level with regulation
D)Give subsidies to reduce pollution

Accepted Answer

B

Question 2

If she has the property rights with negotiation impossible, then what will the outcome be?
A)You will shut your stereo off
B)You will play to 3 and insulate so that the noise does not reach her
C)You will play to 6 and she will insulate her walls
D)You will play to 4 and she will absorb the noise even though she dislikes it

Accepted Answer

If negotiation is impossible, the best solution is to find a compromise where both parties can coexist peacefully. Playing to 3 and insulating your space can reduce the noise that reaches her while still allowing you to listen to your music. This solution respects her property rights while also allowing you to enjoy your stereo within reasonable limits.

Question 3

What if negotiation is impossible and you have the rights to play?
A)You will play at 10 and insulate your walls
B)She will insulate her walls and you will play at 10
C)You will play at 6 and she will suffer through the listening of your playing
D)You will play at 3 and she will listen to the music that comes into her apartment

Accepted Answer

B

Question 4

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if Peter had the rights to stop any cell phone calls from taking place at the coffee shop?
A)2
B)0
C)1
D)3

Accepted Answer

The answer of If the both Peter and John could...

Question 5

Negative externality occurs when
A)The production of a good harms third parties
B)The production of a good helps third parties
C)A buyer is sold inferior and damaged merchandise
D)The consumption of a good helps third parties

Accepted Answer

Negative externality occurs when the production or consumption of a good or service harms third parties who are not involved in the transaction. For example, pollution from a factory can harm the health of nearby residents, who have no control over the factory's activities.

Question 6

If grazing land is used by all individuals on a free open range, they will operate until
A)The AP of the land equals the opportunity cost of the input
B)The MP of the land equals the opportunity cost of the input
C)The TP of the land equals the opportunity cost of the input
D)The MP of the land is larger than the opportunity cost of the input

Accepted Answer

When grazing land is used by all individuals on a free open range, they will continue to operate until the AP (average product) of the land equals the opportunity cost of the input, which is the cost of giving up the next best alternative use of the resources. This is because at this point, each additional unit of input put into the land will yield the same amount of output as the opportunity cost of that input. Therefore, any additional use of the land beyond this point would result in a lower output than the opportunity cost of the input, leading to a reduction in profitability.

Question 7

Joe plays his stereo loud; this bothers Harry.According to the Coase theorem
A)The police should tell Joe to turn down his stereo
B)Harry should pay Joe to turn down his stereo
C)Joe should pay Harry to turn down his stereo
D)Joe and Harry should be able to work out an agreement between themselves

Accepted Answer

According to the Coase theorem, if there are no transaction costs and property rights are clearly defined, then Joe and Harry should be able to negotiate a solution on their own without the need for external intervention. Therefore, Joe and Harry should work out an agreement between themselves, which would be the most efficient and effective solution.

Question 8

An example of a positive externality is
A)Pollution
B)An apple orchard increasing the number of trees next to a bee farm
C)The Clean Air Act
D)Smoking in a crowded place

Accepted Answer

The apple orchard increasing the number of trees next to a bee farm is an example of a positive externality because it benefits the bee farm by providing more flowers for the bees to pollinate, resulting in higher yields of honey and other bee products. The orchard itself may not directly benefit from having more bees around, but the presence of the bee farm can have positive spillover effects on the orchard's productivity.

Question 9

If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? The answer to the questions are to the nearest whole dial number.
A)3
B)4
C)6
D)10

Accepted Answer

The Coase theorem states that if negotiation costs are zero and property rights are well-defined, the parties involved will negotiate to an efficient outcome, regardless of the initial allocation of property rights. In this case, the efficient outcome is for the music to be played at a level that maximizes the total benefit to both the music lover and the person who is disturbed by the noise. This level will be at dial number 6, which is the point where the marginal benefit of playing the music louder is equal to the marginal cost of the noise to the person who is disturbed.

Question 10

If a company dumps pollution in the water and if transactions costs are high
A)All parties connected with the pollution should negotiate
B)The company should be liable
C)The company should be allowed to pollute
D)The company should go out of business

Accepted Answer

The company should be liable for the pollution it is dumping in the water. This would ensure that the company takes responsibility for its actions and takes steps to reduce their pollution levels. Allowing the company to continue polluting or go out of business would not address the issue of pollution and its impact on the environment and society. Negotiation may not be a feasible solution if transactions costs are high.

Question 11

According to Pigou the best way to deal with a negative externality is to
A)Allow both parties to negotiate
B)Assign liability to the party with the highest cost of prevention
C)Assign liability to the party with the lowest cost of prevention
D)Tax it

Accepted Answer

Pigou's solution to negative externalities is to tax the activity that generates the externality to internalize the costs and discourage the activity. This tax should be set at the level that makes the social cost equal to the private cost.

Question 12

If the both Peter and John could negotiate a settlement, but the cost of making a transaction for Peter were $5 (he is very shy and does not like to talk to strangers) , how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?
A)2
B)0
C)1
D)3

Accepted Answer

Since Peter is not willing to talk to strangers, John will have to make the phone call to negotiate the settlement. As John is able to make any cell phone calls he likes at the coffee shop, he doesn't have to worry about transaction costs. Therefore, John will only make one phone call to negotiate the settlement.

Question 13

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?
A)2
B)0
C)1
D)3

Accepted Answer

The answer of If the both Peter and John could...

Question 14

According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another
A)An efficient outcome results if the liability is placed on the party with the lowest cost of prevention
B)An efficient outcome results no matter how the law assigns responsibility
C)Efficiency cannot be reached without government intervention
D)The correct way to deal with an externality is to tax it

Accepted Answer

According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility. This is because in such a scenario, the parties will bargain to reach an efficient outcome, regardless of who is assigned the liability.

Question 15

If the costs of negotiation are small but not negligible,
A)An efficient outcome results if the liability is placed on the party with the lowest cost of prevention
B)An efficient outcome results no matter how the law assigns responsibility
C)Efficiency cannot be reached without government intervention
D)The correct way to deal with an externality is to tax it

Accepted Answer

When the costs of negotiation are small but not negligible, an efficient outcome results if the liability is placed on the party with the lowest cost of prevention. This way, the party can take preventive measures at a lower cost than the other party, resulting in a more efficient outcome without government intervention.

Question 16

An example of a negative externality is
A)Pollution
B)An apple orchard increasing the number of trees next to a bee farm
C)The Clean Air Act
D)A consumer paying too much for an item

Accepted Answer

Pollution is an example of a negative externality because it imposes costs on society that are not borne by the polluter. For example, a factory may release pollutants into the air or water, which can harm the health of nearby residents and damage ecosystems. These costs are not reflected in the price of the goods produced by the factory, so they are external to the market.

Question 17

If the fishery was own collectively by all the fishermen, how many boats would be sent out fishing?
A)0
B)6
C)7
D)8

Accepted Answer

If the fishery is collectively owned by all the fishermen, then they would have to work together and make a decision on how many boats to send out based on sustainable fishing practices. Assuming they come to a consensus, one reasonable option would be to send out all six boats, which would allow for a reasonable catch while still maintaining the health of the fishery.

Question 18

Fishing often occurs where no clearly defined property rights exist.One would expect
A)Too few fish would be caught
B)Too many fish would be caught
C)To problems when this happens because fisherman will stop fishing when their costs of fishing equal the benefits of fishing
D)Too few boats to go out fishing

Accepted Answer

Without clearly defined property rights, there is no incentive for fishermen to conserve the fishery as they are not reaping the full benefits of doing so. This often leads to overfishing and too many fish being caught.

Question 19

If there were no controls over fishing how many vessels would be sent out fishing?
A)0
B)6
C)7
D)8

Accepted Answer

The answer of If there were no controls over fishing...

Question 20

If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played?
A)0
B)3
C)4
D)6

Accepted Answer

Since negotiation costs are zero and she has property rights, she can set the loudness at the level that maximizes her utility. Therefore, she will choose the highest level of loudness, which is 6.

Quiz 16: Externalities Property Rights and the Coase Theorem

If transactions costs are high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?

If she has the property rights with negotiation impossible, then what will the outcome be?

What if negotiation is impossible and you have the rights to play?

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if Peter had the rights to stop any cell phone calls from taking place at the coffee shop?

Negative externality occurs when

If grazing land is used by all individuals on a free open range, they will operate until

Joe plays his stereo loud; this bothers Harry.According to the Coase theorem

An example of a positive externality is

If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? The answer to the questions are to the nearest whole dial number.

If a company dumps pollution in the water and if transactions costs are high

According to Pigou the best way to deal with a negative externality is to

If the both Peter and John could negotiate a settlement, but the cost of making a transaction for Peter were $5 (he is very shy and does not like to talk to strangers) , how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?

If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any cell phones he liked at the coffee shop?

According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another

If the costs of negotiation are small but not negligible,

An example of a negative externality is

If the fishery was own collectively by all the fishermen, how many boats would be sent out fishing?

Fishing often occurs where no clearly defined property rights exist.One would expect

If there were no controls over fishing how many vessels would be sent out fishing?

If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played?