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True / False
1. Markets sometimes fail to allocate resources efficiently.
a.
True
b.
False
2. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.
a.
True
b.
False
3. Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.
a.
True
b.
False
4. In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a
whole.
a.
True
b.
False
5. In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.
a.
True
b.
False
6. Barking dogs cannot be considered an externality because externalities must be associated with some form of market
exchange.
a.
True
b.
False
7. When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an
example of a negative externality.
a.
True
b.
False
8. Research into new technologies conveys neither negative externalities nor positive externalities.
a.
True
b.
False
9. The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely
affected by the pollution.
a.
True
b.
False
10. Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise
and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.
a.
True
b.
False
11. When firms internalize a negative externality, the market supply curve shifts to the left.
a.
True
b.
False
12. Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities
associated with education.
a.
True
b.
False
13. A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she
imposes on all other drivers is an example of internalizing the externality.
a.
True
b.
False
14. Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive
externalities lead markets to produce a larger quantity of a good than is socially desirable.
a.
True
b.
False
15. The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods
that have positive externalities.
a.
True
b.
False
16. If the social value of producing robots is greater than the private value of producing robots, the private market
produces too few robots.
a.
True
b.
False
17. The patent system gives firms greater incentive to engage in research and other activities that advance technology.
a.
True
b.
False
18. Government intervention in the economy with the goal of promoting technology-producing industries is known as
patent policy.
a.
True
b.
False
19. A technology spillover is a type of negative externality.
a.
True
b.
False
20. Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the
good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is
maximized.
a.
True
b.
False
21. Suppose a certain good provides an external benefit. If the private cost of the last unit of the good that was produced is
equal to the social value of that unit, then the sum of producer and consumer surplus is maximized.
a.
True
b.
False
22. The concept of external cost is associated with a negative externality, but not with a positive externality.
a.
True
b.
False
23. When market activity generates a negative externality, the level of output in the market equilibrium is lower than the
socially optimal level.
a.
True
b.
False
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
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
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
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
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
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
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
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
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
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
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
57. All externalities impose a cost on others.
a.
True
b.
False
58. Refer to Figure 10-20. This market is characterized by a negative externality.
a.
True
b.
False
59. Refer to Figure 10-20. This market would benefit from a tax equal to $50 per unit.
a.
True
b.
False
60. Refer to Figure 10-20. The socially optimal price and quantity are $250 and 250 units, respectively.
a.
True
b.
False
61. The majority of economists believe that the social benefit of mandating measles vaccines for all Americans (except
those with compelling medical reasons) would exceed the social cost.
a.
True
b.
False
62. Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia
values a non-reclined seat in front of her at $20. Assuming no transaction costs, an efficient solution would be for Sophia
to pay Gabriel $15 to not recline his seat.
a.
True
b.
False
