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Externalities 2703
24. To determine the optimal level of output in a market with negative externalities, a benevolent
social planner would look for the level of output at which private cost equals private value.
a. True
b. False
25. The concept of external benefit is associated with a negative externality, but not with a positive
externality.
a. True
b. False
26. Patent protection is one way to deal with technology spillovers.
a. True
b. False
2704 Externalities
27. Laws that are passed that either require or forbid certain behaviors are examples of command-
and-control policies.
a. True
b. False
28. The tax on gasoline causes deadweight losses, as is the case with all taxes.
a. True
b. False
29. Even if possible, it would be inefficient to prohibit all polluting activity.
a. True
b. False
Externalities 2705
30. When correcting for an externality, command-and-control policies are always preferable to
market-based policies.
a. True
b. False
31. Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they
raise for the government.
a. True
b. False
32. Corrective taxes cause deadweight losses, reducing economic efficiency.
a. True
b. False
2706 Externalities
33. Most economists prefer regulation to taxation because regulation corrects market inefficiencies at
a lower cost than taxation does.
a. True
b. False
34. A corrective tax places a price on the right to pollute.
a. True
b. False
35. According to recent research, the gas tax in the United States is lower than the optimal level.
a. True
b. False
Externalities 2707
36. The least expensive way to clean up the environment is for all firms to reduce pollution by an
equal percentage.
a. True
b. False
37. Corrective taxes are more efficient than regulations for keeping the environment clean.
a. True
b. False
38. A market for pollution permits can efficiently allocate the right to pollute by using the forces of
supply and demand.
a. True
b. False
2708 Externalities
39. Economists believe that the optimal level of pollution is zero.
a. True
b. False
40. The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the
use of pollution permits.
a. True
b. False
41. Social welfare can be enhanced by allowing firms to trade their rights to pollute.
a. True
b. False
Externalities 2709
42. Firms that can reduce pollution easily would be willing to sell their pollution permits.
a. True
b. False
43. In some circumstances, selling pollution permits may be better than levying a corrective tax.
a. True
b. False
44. Although regulation and corrective taxes are both capable of reducing pollution, regulation
accomplishes this goal more efficiently.
a. True
b. False
2710 Externalities
45. Government can be used to solve externality problems that are too costly for private parties to
solve.
a. True
b. False
46. Government intervention is necessary to correct all externalities.
a. True
b. False
47. According to the Coase theorem, if private parties can bargain without cost, then the private
market will solve the problem of externalities.
a. True
b. False
Externalities 2711
48. According to the Coase theorem, the private market will need government intervention in order to
reach an efficient outcome.
a. True
b. False
49. Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own
the problems caused by externalities.
a. True
b. False
50. 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.
a. True
b. False
2712 Externalities
51. According to the Coase theorem, whatever the initial distribution of rights, the interested parties
can bargain to an efficient outcome.
a. True
b. False
52. Private parties may choose not to solve an externality problem if the transaction costs are large
enough.
a. True
b. False
53. Many charities like the Sierra Club are established to deal with externalities.
a. True
b. False
Externalities 2713
54. 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.
a. True
b. False
55. When externalities are present, reaching an efficient outcome is especially difficult when the
number of interested parties is large.
a. True
b. False
56. The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative
externalities.
a. True
b. False
2714 Externalities
57. Using a supply and demand diagram, demonstrate how a negative externality leads to market
inefficiency. How might the government help to eliminate this inefficiency?
Externalities 2715
58. Using a supply and demand diagram, demonstrate how a positive externality leads to market
inefficiency. How might the government help to eliminate this inefficiency?
2716 Externalities
59. Why are Pigovian taxes preferred to regulatory policies as methods to remedy negative
externalities?
60. Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax
has been imposed and (b) after tradable pollution permits have been imposed. Could these two
quantities ever be equivalent?
Externalities 2717
61. To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar,
they pollinate the crops in the fields, which increases the yields of these fields at no additional
cost to the farmer. What might be a reasonable private solution to this externality, and how might
the solution be reached?
62. The Coase theorem suggests that efficient solutions to externalities can be determined through
bargaining. Under what circumstances will private bargaining fail to produce a solution?
2718 Externalities
Problems
1. Does research into new technologies create a positive externality or does it create a negative
externality?
2. Does the phenomenon of externalities strengthen the argument that we should rely upon the
“invisible hand” of the marketplace, or does it weaken that argument?
3. Bruce engages in an activity that diminishes the well-being of Shawna. Bruce pays no
compensation to Shawna for her loss in well-being. What specific term do economists use to
describe this situation?
