Chapter 10

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Chapter 10

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

When negative externalities are present in a market

a.	producers will be affected, but not consumers.
b.	overproduction will occur.
c.	demand will be too high.
d.	the market will still maximize total benefits.

The demand curve for a product reflects the

a.	value of the product to consumers.
b.	cost of the product to consumers.
c.	quantity consumers are able to purchase.
d.	price the product will sell for in the market.

Since air pollution creates a negative externality,

a.	welfare will be enhanced when some, but not all air pollution is eliminated.
b.	social welfare is optimal when all air pollution is eliminated.
c.	governments should encourage all private firms to consider only private costs.
d.	the free market result maximizes social welfare.

Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. The social cost of producing the steel includes the

a.	private costs of the steel producers and the price consumers pay for the steel.
b.	private costs of the steel producers and the costs to the bystanders affected by the pollution.
c.	costs to the bystanders effected by the pollution only.
d.	price consumers pay for the steel.

Figure 10-4

Refer to Figure 10-4. This market is experiencing

a.	government intervention.
b.	a positive externality.
c.	a negative externality.
d.	None of the above are correct.

Technology spillover occurs when

a.	a firm passes the high costs of technical research on to society through higher prices.
b.	a firm's research yields technical knowledge that is used by society as a whole.
c.	the government subsidizes firms engaged in high-tech research.
d.	copyright laws prohibit firms from profiting from the research of others.

Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?

a.	social cost
b.	opportunity cost of technology
c.	internalization of an externality
d.	technology spillover

Which of the following statements about a market that is affected by a positive externality is correct?

a.	The optimum level of output is less than the free market level of output and the optimum price is greater than the free market price.
b.	The optimum level of output is greater than the free market level of output and the optimum price is less than the free market price.
c.	The optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price.
d.	The optimum level of output is less than the free market level of output and the optimum price is less than the free market price.

To enhance the well-being of society, a social planner will encourage firms to increase production when

a.	the firms are producing basic goods.
b.	there is a shortage in the market.
c.	technology spillovers are associated with production.
d.	any negative externalities associated with production are imposed only upon consumers.

10.

If making computer chips yields greater spillovers than making potato chips, some economists would argue that government should

a.	encourage the production of computer chips with subsidies.
b.	discourage the production of potato chips with taxes.
c.	encourage the production of potato chips with subsidies.
d.	discourage the production of computer chips with taxes.

11.

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.

12.

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 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.

13.

According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as

a.	private parties can bargain without cost.
b.	government assigns property rights to the harmed party.
c.	the externalities that are present are positive and not negative.
d.	businesses determine an appropriate level of production.

14.

Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that

a.	Jane pays Dick $500 to get rid of the dog.
b.	Dick pays Jane $650 for her inconvenience.
c.	Jane pays Dick $650 to get rid of the dog.
d.	There is no private solution that would improve this situation.

15.

Chad's maple tree hangs over Amy's fence and drops leaves into her yard each autumn. The benefit to Chad of lower utility bills is about $300. The cost to Amy of having her lawn cleaned and reseeded is $350. Based on the Coase theorem

a.	Amy should pay Chad $325 to cut down the tree.
b.	Chad should pay Amy $350 to have her lawn repaired and cleaned.
c.	Chad should pay Amy $400 to keep the tree.
d.	Amy should build a higher fence.

16.

Pigovian taxes

a.	encourage consumers to avoid sales taxes by shopping online.
b.	are frequently used to discourage imports.
c.	are rarely preferred to direct regulation.
d.	give factory owners an economic incentive to reduce pollution.

17.

If the government were to limit the release of air-pollution produced by a steel mill to 10,000 units, this policy would be considered a

a.	regulation.
b.	Pigovian tax.
c.	subsidy.
d.	market-based policy.

18.

If the government were to impose a fee of $10,000 for each unit of air-pollution released by a steel mill, this policy would be considered a

a.	subsidy.
b.	regulation.
c.	Pigovian tax.
d.	command-and-control policy.

19.

The difference between a Pigovian tax and pollution permits is

a.	a Pigovian tax sets the price of pollution and permits set the quantity of pollution.
b.	a Pigovian tax provides a more efficient outcome than permits.
c.	a Pigovian tax sets the quantity of pollution and permits set the price of pollution.
d.	permits provide a more efficient outcome than a Pigovian tax.

20.

If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example of

a.	a market-based policy.
b.	a command-and-control policy.
c.	pollution permits.
d.	transaction costs.

True/False

Indicate whether the sentence or statement is true or false.

21.

Government intervention is necessary to correct all externalities.

22.

The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the use of pollution permits.

Short Answer

23.

Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

24.

Graphically illustrate the quantity of pollution that would be emitted (a) after a Pigovian tax has been imposed and then (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

25.

The Coase theorem suggests that efficient solutions to externalities can be arrived at through bargaining. Under what circumstances does this fail to produce a solution?