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and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which of the
following statements is correct?
a.
If Dick's benefit exceeds Jane's cost, government intervention is necessary.
b.
Dick will pay to keep his dog if his benefit exceeds Jane's cost.
c.
If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog.
d.
If Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial.
38. Karen’s cat causes Danny to sneeze. Karen values her cat’s companionship at $300 per year. The cost to Danny of
tissues and her allergy medication is $350 per year. Based on the Coase theorem,
a.
Karen should pay Danny $400 so that she may keep her cat.
b.
Karen should pay Danny $350 for tissues and allergy medication.
c.
Danny should pay Karen $325 to give away her cat.
d.
Danny should move.
39. According to the Coase theorem, in the presence of externalities
a.
private parties can bargain to reach an efficient outcome.
b.
government assistance is necessary to reach an efficient outcome.
c.
the assignment of legal rights can prevent externalities.
d.
the initial distribution of property rights will determine the efficient outcome.
40. Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost
on you. The Coase theorem would suggest that an efficient solution would be for you to
a.
pay your roommate at least $25 but no more than $50 to clean up after herself.
b.
pay your roommate at least $51 to clean up after herself.
c.
charge your roommate at least $25 to have you clean up after her.
d.
charge your roommate at least $50 but no more than $100 to keep you from complaining about the mess.
41. Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered
apartment. Suppose she gets an $80 benefit from being messy but imposes a $60 cost on you. The Coase theorem would
suggest that an efficient solution would be for your roommate to
a.
stop her messy habits or else move out.
b.
pay you at least $60 but less than $80 to live with the clutter.
c.
continue to be messy and force you to move out.
d.
demand payment of at least $60 but no more than $80 to clean up after herself.
42. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the
farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-
based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose
that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction
costs. Which of the following characterizes the efficient outcome?
a.
The railroad will continue to operate but will pay the farmer $1,500 in damages.
b.
The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will
occur.
c.
The farmer will incur $1,500 in damages to his crops.
d.
The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
43. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the
farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-
based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose
that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the
following characterizes an efficient outcome?
a.
The railroad will continue to operate but will pay the farmer $1,500 in damages.
b.
The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will
occur.
c.
The farmer will incur $1,500 in damages to his crops.
d.
The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
44. Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles
dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles
values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following
represents an efficient solution in the absence of transaction costs?
a.
Sam continues to smoke because he has a right to smoke in the smoking section.
b.
Charles offers Sam between $15 and $40 not to smoke. Sam accepts, and both parties are better off.
c.
Charles offers Sam between $15 and $40 not to smoke. Sam declines because he has a right to smoke in the
smoking section.
d.
Only a government policy banning smoking in restaurants will solve this problem.
45. Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill
dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill
values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter
not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient
solution?
a.
Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which
exceeds the benefit to him of no smoking ($15).
b.
Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties
are better off.
c.
Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has
a right to smoke in the smoking section.
d.
Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.
46. Cameron lives in an apartment building and gets a $700 benefit from playing his stereo. Renee, who lives next door to
Cameron and often loses sleep due to the music coming from Cameron’s stereo, bears a $1,000 cost from the noise. At
which of the following offers from Renee could both Renee and Cameron benefit from the silencing of Cameron’s stereo?
a.
$250
b.
$550
c.
$750
d.
$1,020
47. Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to
Alexander and often loses sleep due to the loud music coming from Alexander’s stereo, bears a $350 cost from the noise.
Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to
draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary
would benefit from the agreement?
a.
an amount less than $100
b.
an amount between $100 and $250
c.
an amount between $250 and $350
d.
Any amount could result in both parties benefiting from the agreement.
48. Ty lives in an apartment building and gets a benefit from playing his stereo. Olivia, who lives next door to Ty and
often loses sleep due to the loud music coming from Ty’s stereo, bears a cost from the noise. Olivia is threatening to call
the police to force Ty to turn down his stereo. Under which of the following conditions would Ty be able to offer Olivia
some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly?
a.
The cost of the noise to Olivia must exceed the benefit of the music to Ty.
b.
The benefit of the music to Ty must exceed the cost of the noise to Olivia.
c.
The Coase Theorem guarantees that Olivia and Ty will always be able to come to an agreement that keeps
Olivia from calling the police regardless of the individual benefits and costs.
d.
The cost of the noise to Olivia must exceed the benefit of the music to Ty by an amount greater than the
transaction costs associated with the agreement.
49. Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil
needs a lot of practice to earn $250, which is his share of the band’s profit. Thurman gets distracted by Phil’s drumming
but he needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution?
a.
Phil offers Thurman $499 to allow Phil to continue drumming. Thurman accepts and both are better off.
b.
Phil offers Thurman $249 to allow Phil to continue drumming. Thurman accepts and both are better off.
c.
Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off.
d.
Thurman offers Phil $501 to stop practicing his drumming. Phil agrees and both are better off.
50. Gretchen is a writer who works from her home. Gretchen lives next door to Randall, the trumpet player for a local
band. Randall needs lots of practice to earn his share of the band’s profit, which will amount to $350. Gretchen gets
distracted by Randall’s trumpet playing but she needs to get her writing done to earn $570 for her current article. If
Randall owns the right to play his music and Gretchen needs to hire a lawyer to help her reach an agreement with Randall,
then what price is Gretchen willing to pay the lawyer?
a.
less than $220
b.
less than $350
c.
less than $570
d.
less than $920
51. That some firms are engaged in more than one type of business is explained, in some cases, by
a.
moral injunctions such as the Golden Rule.
b.
the existence of charitable organizations.
c.
government regulations that discourage the internalization of externalities.
d.
the fact that the internalization of externalities sometimes coincides with the self-interest of the relevant
parties.
52. The Coase theorem asserts that, in the presence of externalities,
a.
private economic actors sometimes can reach a bargain that produces an efficient outcome.
b.
private economic actors always can reach a bargain that makes everyone better off.
c.
private solutions cannot be very effective.
d.
corrective taxes cannot be very effective.
53. When the government reduces my income tax by $0.30 for every $1.00 that I contribute to a charity, the government is
effectively
a.
alleviating the negative externalities that are associated with charitable giving.
b.
imposing a negative externality on those who do not pay income taxes.
c.
encouraging a private solution to a positive-externality problem.
d.
encouraging a private solution to a negative-externality problem.
54. When a particular negative externality affects a very large number of people, it is likely that
a.
government will not find it worthwhile to impose a corrective tax.
b.
private solutions to the problem will dominate any attempt by government to alleviate the problem.
c.
the solution to externalities suggested by the Coase theorem will work very well.
d.
the solution to externalities suggested by the Coase theorem will not work.
55. The Coase theorem asserts that, if externalities are present and if private parties can bargain over the allocation of
resources at no cost, then
a.
the private market will reach an equilibrium in which resources are allocated inefficiently.
b.
the private market will reach an equilibrium in which resources are allocated efficiently.
c.
the private market cannot reach an equilibrium.
d.
a mixture of corrective taxes and subsidies is necessary for a socially optimal equilibrium.
56. Which of the following statements about the Coase theorem is true?
a.
Underlying the results of the Coase theorem is the idea that private parties can bargain without cost over the
allocation of resources.
b.
The Coase theorem asserts that private solutions to externalities invariably lead to inefficient allocations of
resources.
c.
The Coase theorem applies to negative externalities, but not to positive externalities.
d.
All of the above are correct.
57. The Coase theorem asserts that the private market will always solve the problem of externalities and allocate resources
efficiently
a.
even if private parties experience substantial costs of bargaining.
b.
even if the initial distribution of legal rights is skewed in favor of some private parties over others.
c.
only when there is a large number of private parties that engage in bargaining.
d.
All of the above are correct.
58. By allowing an income-tax deduction for charitable contributions, the government
a.
encourages a private solution to a particular positive-externality problem.
b.
discourages a private solution to a particular positive-externality problem.
c.
encourages a private solution to a particular negative-externality problem.
d.
discourages a private solution to a particular negative-externality problem.
59. When the government uses a command-and-control policy to solve an externality, it
a.
is usually the most effective policy option available.
b.
creates policies that directly regulate behavior.
c.
usually involves taxing the consumption of a commodity.
d.
typically refers to the Coase theorem to structure the policy.
60. A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with
local clean air standards. This decision provides an example of
a.
a direct regulation of an externality.
b.
corrective taxes.
c.
a Coase theorem solution to an externality.
d.
the misuse of a subsidy.
61. If the government were to impose a fine of $4,000 for each unit of air-pollution released by a fertilizer plant, the
policy would be considered
a.
a subsidy.
b.
a regulation.
c.
a corrective tax.
d.
an application of the Coase theorem.
62. In Singapore, littering fines are strictly enforced. This is an example of a policy that
a.
relies on moral codes to reduce the pollution externality.
b.
relies on the Coase Theorem.
c.
discriminates against foreigners.
d.
relies on incentives to reduce the pollution externality.
63. A corrective tax is also known as:
a.
a command-and-control regulation.
b.
a Coase tax.
c.
a Pigovian tax.
d.
a Smithian tax.
64. Which of the following statements is not correct?
a.
Patents help internalize the externalities associated with technological advances.
b.
Economists typically prefer regulations to corrective taxes because regulations provide more incentives for
firms to seek continued reductions in pollution.
c.
Allowing firms to trade pollution permits will lower the total cost of reducing pollution.
d.
A big impediment to implementing the Coase theorem in many cases is high transactions costs.
65. Once tradable pollution permits have been allocated to firms,
a.
the government controls the price of permits.
b.
firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.
c.
the value of pollution-saving technology will be lower than the market value of a pollution permit.
d.
the Coase theorem is no longer applicable as a solution to reducing pollution.
66. 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 $40. Assuming no transaction costs, which of the following represents an
efficient solution?
a.
Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel accepts, and both parties are better
off.
b.
Sophia offers Gabriel between $0 and $10 to not recline his seat. Gabriel accepts, and Sophia is better off.
c.
Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel declines because he has the right to
recline his seat.
d.
Gabriel offers Sophia between $10 and $40 to recline his seat. Sophia accepts, and both parties are better off.
