1. Externalities can be corrected by each of the following except
a.
self-interest.
b.
moral codes and social sanctions.
c.
charity.
d.
normal market adjustments.
2. The Golden Rule is an example of a private solution for
a.
subsidizing higher education.
b.
internalizing externalities.
c.
increasing production.
d.
reducing scarcity.
3. Two types of private solutions to the problem of externalities are
a.
b.
c.
d.
4. When externalities cause markets to be inefficient,
a.
government action is always needed to solve the problem.
b.
private solutions can be developed to solve the problem.
c.
given enough time, externalities can be solved through normal market adjustments.
d.
there is no way to eliminate the problem of externalities in a market.
5. Honey producers provide a positive externality to orchards because
a.
the honey producers get more honey.
b.
the orchard owner frequently gets stung by the honey producer’s bees.
c.
the orchard owner does not have to purchase bees to pollinate his flowers.
d.
the honey producers have to rent access to the orchard grounds.
6. Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action
a.
is always needed because private solutions can never be attained.
b.
is needed when private solutions fail to arise.
c.
will be needed only to correct for positive externalities.
d.
will be needed only to correct for negative externalities.
7. Firms that are involved in more than one type of business could be evidence of an attempt to
a.
increase private profit at the expense of consumers.
b.
internalize some forms of positive externalities.
c.
reduce the impact of government regulations on their business.
d.
increase the private marginal cost of production.
8. Private contracts between parties with mutual interests
a.
will reduce the well-being of society.
b.
will lead to market outcomes in which the public interest is sacrificed for personal gain.
c.
can solve some inefficiencies associated with positive externalities.
d.
will create negative externalities.
9. Which of the following statements is not correct?
a.
Private markets tend to over-produce products with negative externalities.
b.
Private markets tend to under-produce products with positive externalities.
c.
Private parties can bargain to efficient outcomes even in the presence of externalities.
d.
Private parties are usually more successful in achieving efficient outcomes than government policies in the
presence of externalities.
10. Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are
called
a.
transaction costs.
b.
corrective costs.
c.
input costs.
d.
private costs.
11. Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is
an example of
a.
an opportunity cost.
b.
an implicit cost.
c.
a sunk cost.
d.
a transaction cost.
12. The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the
problem of externalities on their own, is called
a.
the Pigovian theorem.
b.
a corrective tax.
c.
the externality theorem.
d.
the Coase theorem.
13. Which of the following suggests that private markets can be effective in dealing with externalities?
a.
the “invisible hand”
b.
the law of diminishing social returns
c.
the Coase theorem
d.
technology policy
14. The Coase theorem suggests that private markets may not be able to solve the problem of externalities
a.
if the government does not become involved in the process.
b.
when the number of interested parties is large and bargaining costs are high.
c.
if the firm in the market is a monopoly.
d.
if some people benefit from the externality.
15. Transaction costs
a.
can keep private parties from solving externality problems.
b.
are incurred in the production process due to externalities.
c.
increase when taxes are imposed to correct negative externalities.
d.
are eliminated when the government intervenes in a market with externalities.
16. One reason that private solutions to externalities do not always work is that
a.
government intervention negates the benefits of positive externalities.
b.
some people benefit from externalities.
c.
interested parties incur costs in the bargaining process.
d.
charities are not well organized.
17. Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient
solution for which of the following problems?
a.
One neighbor doesn’t mow his lawn.
b.
One neighbor doesn’t paint her house.
c.
One neighbor comes home on his noisy motorcycle late at night.
d.
All of the above are correct.
18. If only a few people are affected by an externality, then it is likely that
a.
the government will play a role in collective action.
b.
command-and-control regulation will provide the most efficient solution to the externality.
c.
a private solution to the inefficiency will occur.
d.
a private solution will be very difficult to negotiate.
19. Reaching an efficient bargain is difficult when the
a.
externality is large.
b.
number of interested parties is large.
c.
externality is negative.
d.
government becomes involved.
20. Which of the following is a problem that keeps people from privately solving externality problems?
a.
Each party involved holds out for a better deal.
b.
The externality is large.
c.
Only problems with a sufficiently large number of parties can be solved.
d.
There is a lack of government intervention.
21. In class action lawsuits, interested parties to the lawsuit are not required to pay attorney fees directly. This is an
example of an attempt to
a.
maximize attorney fees.
b.
reduce the incentive of attorneys to file class action lawsuits.
c.
reduce the transaction costs of finding a private solution to an externality.
d.
regulate attorney fees.
22. Dee loves to landscape her yard, but her neighbor Marvin places a low value on his landscaping. When Marvin’s grass
is neglected and gets long, Dee will mow it for Marvin. This is an example of
a.
a situation in which the Coase theorem fails to explain the lawn mowing arrangement.
b.
an improper allocation of resources.
c.
a private solution to a negative externality problem.
d.
an exploitation of a common resource.
23. The Coase theorem suggests that private solutions to an externality problem
a.
are effective under all conditions.
b.
will usually allocate resources efficiently if private parties can bargain without cost.
c.
are only efficient when there are negative externalities.
d.
may not be possible because of the distribution of property rights.
24. In which of the following cases is the Coase theorem most likely to solve the externality?
a.
Ed is allergic to his roommate’s cat.
b.
Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada.
c.
Polluted water runoff from farms is making residents of a nearby town sick.
d.
Industrialization around the world is causing global warming.
25. According to the Coase theorem, private parties can solve the problem of externalities if
a.
the cost of bargaining is small.
b.
the initial distribution of legal rights favors the person being adversely affected by the externality.
c.
the number of parties involved is sufficiently large.
d.
All of the above are correct.
26. According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as
long as
a.
the externalities that are present are positive, not negative.
b.
government assigns property rights to the harmed party.
c.
private parties can bargain with sufficiently low transaction costs.
d.
businesses determine an appropriate level of production.
27. The Coase theorem states that
a.
under certain circumstances government intervention is not needed to reach efficient outcomes when an
externality is present.
b.
government intervention is always required to reach an efficient outcome when an externality is present.
c.
government intervention cannot lead to an efficient outcome when an externality is present.
d.
only negative externalities can be resolved using government intervention.
28. Which of the following is not a necessary condition for the Coase theorem?
a.
Property rights are clearly defined.
b.
The costs of bargaining are sufficiently low.
c.
The government intervenes to internalize the externality.
d.
There are only a few parties involved.
29. In many cases the Coase theorem does not work well because
a.
there are too few parties at the negotiation table.
b.
the government does not know about the Coase theorem.
c.
transaction costs are too high.
d.
transaction costs are too low.
30. Why can’t private individuals always internalize an externality without the help of government?
a.
Legal restrictions prevent side payments between individuals.
b.
Transactions costs may be too high.
c.
Side payments between individuals are inefficient.
d.
Side payments between individuals are insufficient.
31. What economic argument suggests that if transactions costs are sufficiently low, the post-bargaining equilibrium is
economically efficient regardless of how property rights are distributed?
a.
the Coase theorem
b.
the laws of supply and demand
c.
the law of comparative advantage
d.
the law of externalities
32. The Coase theorem states that
a.
taxes are an efficient way for governments to remedy negative externalities.
b.
subsidies are an efficient way for governments to remedy positive externalities.
c.
industrial policies encourage technology spillovers.
d.
in the absence of transaction costs, private parties can solve the problem of externalities on their own.
33. Mary and Cathy are roommates. Mary assigns a $30 value to smoking cigarettes. Cathy values smoke-free air at $15.
Which of the following scenarios is a successful example of the Coase theorem?
a.
Cathy offers Mary $20 not to smoke. Mary accepts and does not smoke.
b.
Mary pays Cathy $16 so that Mary can smoke.
c.
Mary pays Cathy $14 so that Mary can smoke.
d.
Cathy offers Mary $15 not to smoke. Mary accepts and does not smoke.
34. A dentist shares an office building with a radio station. The electrical current from the dentist’s drill causes static in the
radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of
$30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station‘s
lost profits. What is the economically efficient outcome?
a.
The radio station puts up a shield, which it pays for.
b.
The radio station puts up a shield, which the dentist pays for.
c.
Neither the radio station nor the dentist purchase additional equipment.
d.
The dentist gets a new drill; it does not matter who pays for it.
35. Abe owns a dog; the dog’s barking annoys Abe’s neighbor, Jenny. Suppose that the benefit of owning the dog is worth
$200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a
possible private solution to this problem is that
a.
Jenny pays Abe $150 to give the dog to his parents who live on an isolated farm.
b.
Abe pays Jenny $350 for her inconvenience.
c.
Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.
d.
There is no private transaction that would improve this situation.
36. Wally owns a dog whose barking annoys Wally’s neighbor, Corrine. Suppose that the benefit of owning the dog is
worth $700 to Wally and that Corrine bears a cost of $500 from the barking. Assuming Wally has the legal right to keep
the dog, a possible private solution to this problem is that
a.
Wally pays Corrine $600 for her inconvenience.
b.
Corrine pays Wally $400 to give the dog to his parents who live on an isolated farm.
c.
Corrine pays Wally $550 to give the dog to his parents who live on an isolated farm.
d.
The current situation is efficient.
37. Dick owns a dog whose barking annoys Dick’s neighbor Jane. Dick receives personal benefit from owning the dog,