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

Accepted Answer

When transaction costs are high, it becomes difficult for private individuals to negotiate and enforce agreements to internalize external costs or benefits. In such situations, public policy interventions become necessary to address the externality problem. When transaction costs are low or zero, private individuals can internalize external costs or benefits through negotiation and exchange without the need for government intervention.

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

Accepted Answer

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.

Accepted Answer

The externality in Coase's confectioner and doctor example was the vibrations generated by the confectioner's production process, which were affecting the structure of the doctor's office. The doctor was bearing the cost of this externality, as he had to spend money to reinforce his office, while the confectioner was not paying for the harm caused to the doctor.

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

Accepted Answer

A positive externality is the positive impact that an individual's actions have on the well-being of a third party. In this case, the well-maintained houses and lawns of the neighbors increase the value of the home of the speaker, which is a positive externality. Thus, the best choice is C.

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

Accepted Answer

Pollution is economically inefficient because producers do not have to internalize the opportunity cost of clean air. This means that the cost of pollution is not fully reflected in the price of the good or service being produced, leading to a situation where too much pollution is being produced from a societal perspective. This is known as a market failure, where the market is not achieving the most efficient outcome for society as a whole.

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

Accepted Answer

A corrective tax equal to the externality will internalize the external cost or benefit, leading to an optimal allocation of resources by aligning private costs or benefits with social costs or benefits.

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

Accepted Answer

The answer of An optimal corrective tax _____.
A)falls as quantity...

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

Accepted Answer

Due to the difficulty in obtaining necessary information for corrective taxes, governments often resort to using regulations to address negative externalities instead of applying corrective taxes. This allows them to still address the externalities but without relying on precise information about the costs and benefits of different levels of pollution or other forms of 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

Accepted Answer

When transaction costs are high, it means that the costs involved in negotiating, monitoring, and enforcing contracts are higher. This can make it difficult for private parties to come to a mutually beneficial agreement, leading to market failure. Therefore, it will be difficult to reach a private solution.

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

Accepted Answer

An externality is an unintended consequence of a market exchange and may have positive or negative effects. It is allocated outside the market system because it affects individuals or groups not directly involved in the exchange. The other options (restrictive covenant, pollution right, external damage) do not necessarily involve market exchanges.

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.

Accepted Answer

Estimating the supply curve of the externality creator is not directly a problem in using corrective taxation to address a negative externality. The main issues involve measuring the cost of the externality, determining responsibility, and deciding on the tax application method. The supply curve estimation is more related to understanding market responses than to the initial implementation of a corrective tax.

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

Accepted Answer

The optimal corrective tax should be placed on the externality-generating activity itself. This will increase the cost of producing the activity and discourage its production, leading to a reduction in the associated negative externality. Taxing the sellers, inputs or purchasers does not directly address the externality-generating activity and may not be as effective in reducing the externality.

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

Accepted Answer

A lump sum payment is the most efficient form of compensation because it avoids the administrative costs and inefficiencies associated with monitoring and enforcing payments for each violation or making regular payments, which could vary and require constant reassessment.

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

Accepted Answer

A corrective tax is a tax levied on an activity that generates negative externalities, in order to offset the social costs of that activity. However, in order for the tax to be effective, it is necessary to quantify the external damage that the activity generates. This can be difficult in practice, particularly for externalities that are difficult to measure or predict. Therefore, B is the correct answer, as it acknowledges that an accurate measure of the external damage is a key factor in the effectiveness of a corrective tax.

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

Accepted Answer

Internalizing a negative externality means that the producer is made responsible for paying the cost of the externality and is incentivized to reduce it. This is achieved by creating a market for the external cost, which encourages producers to factor it into their production decisions. Changing the incentives of consumers, as suggested in options A and D, would not address the externality at its root cause. Option B suggests removing the producer's incentives to consider the externality, which is the opposite of what should happen when internalizing a negative externality.

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

Accepted Answer

When there is no market for a negative externality, the producer does not have any direct economic incentives to consider the costs it imposes on others. This is because the market price of the good does not reflect the full social costs, and thus, the producer may continue to produce as much as it wants without bearing the true costs of the externality.

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

Accepted Answer

The answer of Although the reciprocal nature of the problem...

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

Accepted Answer

An externality is an unintended by-product of market exchange that is allocated outside the market system. It is a spillover effect on third parties who are not participants in the market transaction, and its costs or benefits are not reflected in the market price. Examples of externalities include pollution, congestion, noise, and positive spillovers such as education or research and development.

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

Accepted Answer

The creator of an externality will often use political means to try to prevent the tax, making it difficult to implement.

Question 20

The producers of externalities prefer _____ to _____.
A)corrective taxation;regulation
B)regulation;subsidization
C)competition;subsidization
D)regulation;corrective taxation

Accepted Answer

The producers of externalities, who cause harm or benefit to others without being compensated or penalized, prefer regulation rather than corrective taxation. This is because regulation sets a specific standard or limit on their behavior, giving them more certainty about the costs and benefits of their activities. In contrast, corrective taxation imposes a tax on the activities that generate negative externalities, according to how much harm they cause, which can be uncertain and create more administrative costs for businesses. Therefore, the producers of externalities prefer regulation as a more predictable and less costly way to comply with environmental and social standards.

Quiz 4: Externalities

Public policy towards externalities becomes important when _____.

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,_____.

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

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.

In general,pollution is economically inefficient because _____.

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

An optimal corrective tax _____.

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

When _ are __,it will be difficult to reach a private solution.

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

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

An optimal corrective tax should be placed on _____.

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

Internalizing a negative externality means _____.

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

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 _____.

An externality is_____.

Corrective taxes are often difficult to implement because _____.

The producers of externalities prefer _ to _.