Externalities 2603
Multiple Choice – Section 02: Public Policies toward Externalities
1. Refer to Figure 10-13. Each unit of plastics that is produced results in an external
a. cost of $6.
b. cost of $8.
c. benefit of $6.
d. benefit of $8.
2. Refer to Figure 10–13. In order to reach the social optimum, the government could
a. impose a tax of $2 per unit on plastics.
b. impose a tax of $6 per unit on plastics.
c. impose a tax of $8 per unit on plastics.
d. offer a subsidy of $6 per unit on plastics.
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3. Refer to Figure 10-13. If 250 units of plastics are produced and consumed, then the
a. social optimum has been reached.
b. market equilibrium has been reached.
c. negative externality associated with plastics has been eliminated.
d. positive externality associated with plastics has been eliminated.
4. Refer to Figure 10-13. If 325 units of plastics are produced and consumed, then the
a. social optimum has been reached.
b. market equilibrium has been reached.
c. government must have imposed a corrective tax to guide the market to this outcome.
d. government must have offered a corrective subsidy to guide the market to this outcome.
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5. Refer to Figure 10-13. If the government imposed a corrective tax that successfully moved the
market from the market equilibrium to the social optimum, then tax revenue for the government
would amount to
a. $1,250.
b. $1,600.
c. $2,000.
d. $2,500.
Figure 10–14
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6. Refer to Figure 10-14. Which of the following statements is correct?
a. To induce firms to internalize the externality in this market, the government should impose a tax
measured by P2 – P0.
b. To induce firms to internalize the externality in this market, the government should offer a
subsidy measured by P2 – P0.
c. To induce firms to internalize the externality in this market, the government should impose a tax
measured by P2 – P1.
d. There is no externality in this market.
7. Suppose that an MBA degree creates no externality because the benefits of an MBA are
internalized by the student in the form of higher wages. If the government offers subsidies for
MBAs, then which of the following statements is correct?
a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.
c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.
d. There is not enough information to answer the question.
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8. Suppose that an MBA degree creates no externality because the benefits of an MBA are
internalized by the student in the form of higher wages. If there are no government subsidies for
MBAs, then which of the following statements is correct?
a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.
c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of MBAs.
d. There is not enough information to answer the question.
9. Since almost all forms of transportation produce some type of pollution,
a. the government should ban all transportation.
b. the government should ban all pollution.
c. society has to weigh the cost and benefits when deciding how much pollution to allow.
d. refrain from intervening because the market can best solve this problem.
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10. Some environmentalists argue that we should protect the environment as much as possible,
regardless of cost.
Which of the following is not a likely outcome of pursuing such a course of action?
a. lower levels of nutrition, health care, and housing
b. a lower standard of living
c. slowing or reversing technological advancement
d. the elimination of all pollution
11. The best remedy for market failure is often
a. a market-based solution.
b. shutdown of the market.
c. no government intervention.
d. externalizing the externalities.
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12. Which of the following statements is correct?
a. The use of pollution permits and corrective taxes reduces the cost of environmental protection.
b. Rich countries usually have cleaner environments than poor countries because a clean
environment is like other normal goods in that it has a positive income elasticity.
c. Clean water and clean air are goods to which the law of demand applies.
d. All of the above are correct.
13. A command-and-control policy is another term for a
a. pollution permit.
b. government regulation.
c. corrective tax.
d. Both a and b are correct.
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14. If the government were to limit the release of air pollution produced by a glue factory to 75 parts
per million, the policy would be considered a
a. corrective tax.
b. subsidy.
c. command-and–control policy.
d. market-based policy.
15. Emission controls on automobiles are an example of a
a. corrective tax.
b. command–and-control policy to increase social efficiency.
c. policy that reduces pollution by allocating resources through market mechanisms.
d. policy to reduce congestion on urban freeways.
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16. In some parts of the United States, sugar beets are grown and harvested. The process of
producing usable sugar from the beets generates foul-smelling smoke. A government policy that
limits the emission of smoke by sugar– beet-processing firms is an example of
a. a market-based policy.
b. a command-and–control policy.
c. tradable pollution permits.
d. transaction costs.
17. Which of the following problems can not be alleviated by a gasoline tax?
a. traffic congestion
b. traffic accidents
c. the undersupply of goods that produce positive externalities
d. air pollution
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18. Which of the following statements is correct?
a. Gasoline taxes are an example of an EPA regulation.
b. Gasoline taxes are higher in many European countries than in the United States.
c. Gasoline taxes contribute to global warming.
d. Gasoline taxes are an example of a command-and-control policy.
19. The tax on cigarettes is an example of
a. a consumption tax.
b. a corrective tax.
c. an income tax.
d. a command-and–control policy.
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20. If gasoline taxes were significantly increased in the United States, then
a. some of the government regulations that require automakers to produce more fuel-efficient cars
would become unnecessary.
b. other taxes, such as income taxes, could be lowered.
c. it is likely that roads would become safer and the environment would become cleaner.
d. All of the above are correct.
21. Which of the following is not an advantage of corrective taxes?
a. They raise revenues for the government.
b. They enhance economic efficiency.
c. They subsidize the production of goods with positive externalities.
d. They move the allocation of resources closer to the social optimum.
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22. Which of the following statements is not correct?
a. Corrective taxes can be used to place a price on the right to pollute.
b. Corrective taxes allocate pollution to those producers who face the highest cost of reducing
pollution.
c. Corrective taxes provide incentives to develop cleaner technologies.
d. Corrective taxes require the government to set a target level of pollution.
23. Most taxes distort incentives and move the allocation of resources away from the social optimum.
Why do corrective taxes avoid the disadvantages of most other taxes?
a. Corrective taxes apply only to goods that are bad for people’s health, such as cigarettes and
alcohol.
b. Because corrective taxes correct for market externalities, they take into consideration the well-
being of bystanders.
c. Corrective taxes provide incentives for the conservation of natural resources.
d. Corrective taxes do not affect deadweight loss.
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24. Corrective taxes differ from most taxes in that corrective taxes
a. reduce economic efficiency.
b. do not raise revenue for the government.
c. do not cause deadweight losses.
d. always result in a high burden on sellers of goods to which the corrective tax applies.
25. A corrective tax
a. allocates pollution to those factories that face the highest cost of reducing it.
b. is a form of regulation.
c. works well for all types of externalities.
d. is inferior to regulatory policy according to most economists.
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26. Corrective taxes are unlike most other taxes because they
a. distort incentives.
b. move the allocation of resources away from the social optimum.
c. raise revenue for the government.
d. move the allocation of resources closer to the social optimum.
27. Corrective taxes are typically advocated to correct for the effects of
a. positive externalities.
b. negative externalities.
c. patents.
d. All of the above are correct.
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28. With a corrective tax, the supply curve for pollution is
a. vertical.
b. horizontal.
c. upward–sloping.
d. downward–sloping.
29. Corrective taxes
a. encourage consumers to avoid sales taxes by shopping online.
b. are frequently used to discourage imports.
c. are less efficient than direct regulation.
d. give factory owners an economic incentive to reduce pollution.
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30. Suppose that cigarette smokers create a negative externality. Further suppose that the
government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship
between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?
a. They are equal.
b. The after–tax equilibrium quantity is greater than the socially optimal quantity.
c. The after–tax equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
31. Suppose that alcohol consumption creates a negative externality. What can the government do to
equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
a. impose a tax on alcohol that is equal to the per–unit externality
b. offer a subsidy on alcohol that is equal to the per-unit externality
c. impose a regulation limiting the amount of alcohol that each consumer can purchase
d. nothing
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32. Suppose that smoking creates a negative externality. If the government imposes a per-cigarette
tax equal to the per-cigarette externality, then
a. the after–tax equilibrium quantity of cigarettes smoked will be less than the socially optimal
quantity of cigarettes smoked.
b. the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal
quantity of cigarettes smoked.
c. the after–tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of
cigarettes smoked.
d. There is not enough information to answer the question.
33. Suppose that electricity producers create a negative externality equal to $5 per unit. Further
suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship
between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be
produced?
a. They are equal.
b. The after–tax equilibrium quantity is greater than the socially optimal quantity.
c. The after–tax equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
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34. Corrective taxes that are imposed upon the producer of a nasty smell can be successful in
reducing that smell because the tax makes the producer
a. externalize the positive externality.
b. externalize the negative externality.
c. internalize the positive externality.
d. internalize the negative externality.
35. Suppose that electricity producers create a negative externality equal to $5 per unit. Further
suppose that the government gives a $5 per–unit subsidy to producers. What is the relationship
between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
Externalities 2621
36. Suppose that electricity producers create a negative externality equal to $6 per unit. Further
suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship
between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be
produced?
a. They are equal.
b. The after–tax equilibrium quantity is greater than the socially optimal quantity.
c. The after–tax equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
37. Suppose that elementary education creates a positive externality. If the government subsidizes
education by an amount equal to the per-unit externality it creates, then
a. the equilibrium quantity of education will equal the socially optimal quantity of education.
b. the equilibrium quantity of education will be greater than the socially optimal quantity of
education.
c. the equilibrium quantity of education will be less than the socially optimal quantity of education.
d. There is not enough information to answer the question.
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38. University researchers create a positive externality because what they discover in their research
labs can easily be learned by others who haven‘t contributed to the research costs. What could
the federal government do to equate the equilibrium quantity of university research and the
socially optimal quantity of university research produced?
a. tax university researchers
b. offer grants to university researchers
c. eliminate subsidized student loans
d. nothing
39. University researchers create a positive externality because what they discover in their research
labs can easily be learned by others who haven’t contributed to the research costs. Suppose that
the federal government gives grants to these researchers equal to the their per-unit production
externality. What is the relationship between the equilibrium quantity of university research and
the socially optimal quantity of university research produced?
a. The equilibrium quantity is greater than the socially optimal quantity.
b. They are equal.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.