Question 1

If only a few people are affected by an externality, then it is likely that:

Accepted Answer

A)  Pigovian taxes will provide the most efficient solution to the externality
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

Question 2

Irrespective of whether an externality is positive or negative, all solutions share the same goal of:

Accepted Answer

A)  moving the allocation of resources closer to the market equilibrium
B)  reducing pollution
C)  moving the allocation of resources closer to the social optimum
D)  increasing the conservation of natural resources

Question 3

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Accepted Answer

A) True 
 B)False

Question 4

Graph 10-2  This graph depicts the market for pork.Use this information to answer the following question(s) .
-In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

Accepted Answer

A)  P₁, Q₁
B)  P₂, quantity of zero
C)  price of zero, Q₂
D)  P₀, Q₂

Question 5

Aaron has a tree in which bats like to perch.He is worried his children will catch a disease from the droppings if they play in the garden, but knows the droppings are also good fertiliser for the garden.These effects of the bats perching in the trees are examples of:

Accepted Answer

A)  why it is complicated to devise policies for externalities
B)  negative externalities
C)  both positive and negative externalities
D)  why governments should leave the market to find solutions to externalities

Question 6

If two parties negotiating a private solution to an externality cost employ a lawyer to help draft the contract, the lawyer's costs are a type of:

Accepted Answer

A)  transport cost
B)  legal cost
C)  negative consumption externality
D)  a transaction cost

Question 7

Pigovian taxes are typically advocated to correct for the effects of:

Accepted Answer

A)  positive externalities
B)  negative externalities
C)  regulatory burden
D)  all of the above

Question 8

Melbourne city council is trying to quantify the social cost of smoking in order to determine the optimal value of a tax on smoking.What factors should they include when calculating the social cost of smoking?

Accepted Answer

A)  The chewing gum costs of the smokers and the price consumers pay for cigarettes
B)  The price consumers pay for cigarettes and the costs to the bystanders affected by the air pollution
C)  The costs to the bystanders affected by the air pollution only
D)  The price consumers pay for the cigarettes

Question 9

In some cases, pollution permits may be better than a Pigovian tax because:

Accepted Answer

A)  Pigovian taxes reduce pollution by a greater amount than pollution permits
B)  pollution permits generate more revenue for the government than a Pigovian tax
C)  pollution is difficult to measure
D)  the government has more explicit control over the quantity of pollution created with permits

Question 10

Inventors in developing countries are usually unable to capture the full benefit of their innovations.They therefore tend to devote too few resources to research.Government can address this problem of under-investment in research by:
(i)  increasing restrictions on trade
(ii)  establishing a patent system to provide inventors with exclusive control over their inventions for a period of time
(iii)  subsidising the purchase of technology from other countries.

Accepted Answer

A)  only (i)  is used
B)  only (ii)  is used
C)  only (iii)  is used
D)  (i) , (ii)  and (iii)  are all used

Question 11

Mobile phones are banned in some public places.This is likely to be because:

Accepted Answer

A)  there are negative externalities associated with use of a mobile phone in public places
B)  a mobile phone user's private costs do not reflect the cost he or she imposes on bystanders
C)  mobile phone conversations in public are likely to annoy bystanders
D)  all of the above are true D

Question 12

Transaction costs are:

Accepted Answer

A)  the price paid for a good
B)  the cost that society places on a good
C)  what it costs two parties to negotiate with each other
D)  the same as a Pigovian tax

Question 13

The social cost of an externality can be described as:

Accepted Answer

A)  always equal to the tax the government imposes on production of the good
B)  the cost imposed on society that is neglected during the production of the good
C)  the situation that arises when two parties cannot reach an agreement over the production of a good
D)  the value people place on the production of a good B

Question 14

Tom is very tall.When he goes to a music festival it is likely he will create:

Accepted Answer

A)  no externality because there are lots of people at the festival
B)  a positive externality because he can hear the music very well, being above the crowd
C)  a positive externality because he can easily find his friends if he loses them
D)  a negative externality because he will block the view of shorter people who find themselves standing behind him

Question 15

Internalising a positive production externality through a government subsidy will cause the industry's supply curve to:

Accepted Answer

A)  remain unchanged
B)  shift down by an amount less than the subsidy
C)  shift down by an amount equal to the subsidy
D)  shift down by an amount greater than the subsidy

Question 16

When there are transaction costs to resolving an externality, the distribution of rights does not matter.

Accepted Answer

A) True 
 B)False

Question 17

A Pigovian tax:

Accepted Answer

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 deemed inferior to regulatory policy by most economists

Question 18

At any given quantity, cost to the marginal seller of soccer balls is shown by:

Accepted Answer

A)  the length of the supply curve for soccer balls
B)  the height of the supply curve for soccer balls
C)  the height of the demand curve for soccer balls
D)  the cost of each soccer ball B

Question 19

To produce honey, beekeepers place hives of bees in the fields of farmers.As bees gather nectar, they pollinate the crops in the fields, increasing the yields of these fields at no additional cost to the farmer.What might be a reasonable private solution to this externality and how might the solution be reached.

Accepted Answer

One solution would be to have the farmer...

Question 20

Paul owns a mushroom farm.The smell from the farm reduces the value of adjacent houses by a total of $20 000.Suppose that the benefit of the mushroom farm to Paul is $30 000.Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:

Accepted Answer

A)  adjacent property owners pay Paul $20 000 to stop farming mushroom
B)  there is no private solution that would improve this situation
C)  Paul pays the adjacent property owners $30 000 to compensate them for the loss in house values
D)  adjacent property owners pay Paul $25 000 to stop farming mushrooms

Exam 10: Externalities

If only a few people are affected by an externality, then it is likely that:

Correct Answer
verified

Irrespective of whether an externality is positive or negative, all solutions share the same goal of:

Correct Answer
verified

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Correct Answer
verified

Graph 10-2 This graph depicts the market for pork.Use this information to answer the following question(s) . -In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

Correct Answer
verified

Aaron has a tree in which bats like to perch.He is worried his children will catch a disease from the droppings if they play in the garden, but knows the droppings are also good fertiliser for the garden.These effects of the bats perching in the trees are examples of:

Correct Answer
verified

If two parties negotiating a private solution to an externality cost employ a lawyer to help draft the contract, the lawyer's costs are a type of:

Correct Answer
verified

Pigovian taxes are typically advocated to correct for the effects of:

Correct Answer
verified

Melbourne city council is trying to quantify the social cost of smoking in order to determine the optimal value of a tax on smoking.What factors should they include when calculating the social cost of smoking?

Correct Answer
verified

In some cases, pollution permits may be better than a Pigovian tax because:

Correct Answer
verified

Correct Answer
verified

Mobile phones are banned in some public places.This is likely to be because:

Correct Answer
verified
D

Transaction costs are:

Correct Answer
verified

The social cost of an externality can be described as:

Correct Answer
verified
B

Tom is very tall.When he goes to a music festival it is likely he will create:

Correct Answer
verified

Internalising a positive production externality through a government subsidy will cause the industry's supply curve to:

Correct Answer
verified

When there are transaction costs to resolving an externality, the distribution of rights does not matter.

Correct Answer
verified

A Pigovian tax:

Correct Answer
verified

At any given quantity, cost to the marginal seller of soccer balls is shown by:

Correct Answer
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B

Correct Answer
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One solution would be to have the farmer...
View Answer

Paul owns a mushroom farm.The smell from the farm reduces the value of adjacent houses by a total of $20 000.Suppose that the benefit of the mushroom farm to Paul is $30 000.Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:

Correct Answer
verified

Exam 10: Externalities

If only a few people are affected by an externality, then it is likely that:

Correct AnswerverifiedShow Answer

Irrespective of whether an externality is positive or negative, all solutions share the same goal of:

Correct AnswerverifiedShow Answer

Luckily, the free market corrects for the cost to bystanders of a crying child, because the parent is irritated as much as, if not more than the bystander.

Correct AnswerverifiedShow Answer

Graph 10-2 This graph depicts the market for pork.Use this information to answer the following question(s) . -In Graph 10-2, consumer surplus would be maximised at what price and quantity combination?

Correct AnswerverifiedShow Answer

Aaron has a tree in which bats like to perch.He is worried his children will catch a disease from the droppings if they play in the garden, but knows the droppings are also good fertiliser for the garden.These effects of the bats perching in the trees are examples of:

Correct AnswerverifiedShow Answer

If two parties negotiating a private solution to an externality cost employ a lawyer to help draft the contract, the lawyer's costs are a type of:

Correct AnswerverifiedShow Answer

Pigovian taxes are typically advocated to correct for the effects of:

Correct AnswerverifiedShow Answer

Melbourne city council is trying to quantify the social cost of smoking in order to determine the optimal value of a tax on smoking.What factors should they include when calculating the social cost of smoking?

Correct AnswerverifiedShow Answer

In some cases, pollution permits may be better than a Pigovian tax because:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Mobile phones are banned in some public places.This is likely to be because:

Correct AnswerverifiedD

Transaction costs are:

Correct AnswerverifiedShow Answer

The social cost of an externality can be described as:

Correct AnswerverifiedB

Tom is very tall.When he goes to a music festival it is likely he will create:

Correct AnswerverifiedShow Answer

Internalising a positive production externality through a government subsidy will cause the industry's supply curve to:

Correct AnswerverifiedShow Answer

When there are transaction costs to resolving an externality, the distribution of rights does not matter.

Correct AnswerverifiedShow Answer

A Pigovian tax:

Correct AnswerverifiedShow Answer

At any given quantity, cost to the marginal seller of soccer balls is shown by:

Correct AnswerverifiedB

Correct AnswerverifiedOne solution would be to have the farmer...View AnswerShow Answer

Paul owns a mushroom farm.The smell from the farm reduces the value of adjacent houses by a total of $20 000.Suppose that the benefit of the mushroom farm to Paul is $30 000.Assuming that Paul has the legal right to own the farm, a possible private solution to this problem is that:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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D

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B

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Correct Answer
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B

Correct Answer
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One solution would be to have the farmer...
View Answer

Correct Answer
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