Chapter 10

Chapter 10 Externalities
TRUE/FALSE 1. Markets sometimes fail to allocate resources efficiently. ANS: T DIF: 2 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Market failure MS#: Inter(reti)e 2. *+en a transaction ,et-een a ,uyer an% seller %irectly affects a t+ir% (arty$ t+e effect is calle% an e&ternality. ANS: T DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Definitional .. /uyers an% sellers ne0lect t+e e&ternal effects of t+eir actions -+en %eci%in0 +o- muc+ to %eman% or su((ly. ANS: T DIF: 2 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Inter(reti)e 1. In a market c+aracteri2e% ,y e&ternalities$ t+e market e3uili,rium fails to ma&imi2e t+e total ,enefit to society as a -+ole. ANS: T DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Definitional 4. In a market -it+ (ositi)e e&ternalities$ t+e market e3uili,rium 3uantity ma&imi2es t+e -elfare of society as a -+ole. ANS: F DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Inter(reti)e 5. /arkin0 %o0s cannot ,e consi%ere% an e&ternality ,ecause e&ternalities must ,e associate% -it+ some form of market e&c+an0e. ANS: F DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: A((licati)e 6. T+e social cost of (ollution inclu%es t+e (ri)ate costs of t+e (ro%ucers (lus t+e costs to t+ose ,ystan%ers a%)ersely affecte% ,y t+e (ollution. ANS: T DIF: 1 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Definitional 7. "r0ani2ers of an out%oor concert in a (ark surroun%e% ,y resi%ential nei0+,or+oo%s are likely to consi%er t+e noise an% traffic cost to resi%ential nei0+,or+oo%s -+en t+ey assess t+e financial )ia,ility of t+e concert )enture. ANS: F DIF: 1 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 8. *+en a %ri)er enters a cro-%e% +i0+-ay +e increases t+e tra)el times of all ot+er %ri)ers on t+e +i0+-ay. T+is is an e&am(le of a ne0ati)e e&ternality. ANS: T DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Inter(reti)e
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#+a(ter 109E&ternalities
10. *+en firms internali2e a ne0ati)e e&ternality$ t+e market su((ly cur)e s+ifts to t+e left. ANS: T DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 11. :o)ernment su,si%i2e% sc+olars+i(s are an e&am(le of a 0o)ernment (olicy aime% at correctin0 ne0ati)e e&ternalities associate% -it+ e%ucation. ANS: F DIF: 1 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 12. A con0estion toll im(ose% on a +i0+-ay %ri)er to force t+e %ri)er to take into account t+e increase in tra)el time s+e im(oses on all ot+er %ri)ers is an e&am(le of internali2in0 t+e e&ternality. ANS: T DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 1.. Ne0ati)e e&ternalities lea% markets to (ro%uce a smaller 3uantity of a 0oo% t+an is socially %esira,le$ -+ile (ositi)e e&ternalities lea% markets to (ro%uce a lar0er 3uantity of a 0oo% t+an is socially %esira,le. ANS: F DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities ; 'ositi)e e&ternalities MS#: Inter(reti)e 11. T+e 0o)ernment can internali2e e&ternalities ,y ta&in0 0oo%s t+at +a)e ne0ati)e e&ternalities an% su,si%i2in0 0oo%s t+at +a)e (ositi)e e&ternalities. ANS: T DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities ; 'ositi)e e&ternalities MS#: A((licati)e 14. If t+e social )alue of (ro%ucin0 ro,ots is 0reater t+an t+e (ri)ate )alue of (ro%ucin0 ro,ots$ t+e (ri)ate market (ro%uces too fe- ro,ots. ANS: T DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities ; Tec+nolo0y s(illo)ers MS#: Analytical 15. T+e (atent system 0i)es firms 0reater incenti)e to en0a0e in researc+ an% ot+er acti)ities t+at a%)ance tec+nolo0y. ANS: T DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 16. :o)ernment inter)ention in t+e economy -it+ t+e 0oal of (romotin0 tec+nolo0y (ro%ucin0 in%ustries is kno-n as (atent (olicy. ANS: F DIF: 1 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': In%ustrial (olicy MS#: Definitional 17. A tec+nolo0y s(illo)er is a ty(e of ne0ati)e e&ternality. ANS: F DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Inter(reti)e 18. E)en if (ossi,le$ it -oul% ,e inefficient to (ro+i,it all (ollutin0 acti)ity. ANS: T DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: A((licati)e
#+a(ter 109E&ternalities 20. *+en correctin0 for an e&ternality$ comman% an% control (olicies are al-ays (refera,le to market ,ase% (olicies. ANS: F DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #omman% an% control (olicies ; #orrecti)e ta&es MS#: Inter(reti)e 21. #orrecti)e ta&es en+ance efficiency$ ,ut t+e cost to a%minister t+em e&cee%s t+e re)enue t+ey raise for t+e 0o)ernment. ANS: F DIF: 1 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 22. #orrecti)e ta&es cause %ea%-ei0+t losses$ re%ucin0 economic efficiency. ANS: F DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 2..
14.
Most economists (refer re0ulation to ta&ation ,ecause re0ulation corrects market inefficiencies at a lo-er cost t+an ta&ation %oes. ANS: F DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 21. A correcti)e ta& (laces a (rice on t+e ri0+t to (ollute. ANS: T DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 24. Accor%in0 to recent researc+$ t+e 0as ta& in t+e <nite% States is lo-er t+an t+e o(timal le)el. ANS: T DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities =E>: #orrecti)e ta&es MS#: A((licati)e 25. T+e least e&(ensi)e -ay to clean u( t+e en)ironment is for all firms to re%uce (ollution ,y an e3ual (ercenta0e. ANS: F DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 26. #orrecti)e ta&es are more efficient t+an re0ulations for kee(in0 t+e en)ironment clean. ANS: T DIF: 1 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es ; Tra%a,le (ollution (ermits MS#: A((licati)e 27. A market for (ollution (ermits can efficiently allocate t+e ri0+t to (ollute ,y usin0 t+e forces of su((ly an% %eman%. ANS: T DIF: 1 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e 28. Economists ,elie)e t+at t+e o(timal le)el of (ollution is 2ero. ANS: F DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: Inter(reti)e .0. T+e En)ironmental 'rotection A0ency ?E'A@ cannot reac+ a tar0et le)el of (ollution t+rou0+ t+e use of (ollution (ermits. ANS: F DIF: 1 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e
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.1. Social -elfare can ,e en+ance% ,y allo-in0 firms to tra%e t+eir ri0+ts to (ollute. ANS: T DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e .2. Firms t+at can re%uce (ollution easily -oul% ,e -illin0 to sell t+eir (ollution (ermits. ANS: T DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e ... "ne e&am(le of a real -orl% market for tra%a,le (ollution (ermits is t+e market for car,on (ermits in Euro(e. ANS: T DIF: 1 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e .1. :o)ernment can ,e use% to sol)e e&ternality (ro,lems t+at are too costly for (ri)ate (arties to sol)e. ANS: T DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: Inter(reti)e .4. :o)ernment inter)ention is necessary to correct all e&ternalities. ANS: F DIF: 2 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities MS#: A((licati)e .5. Accor%in0 to t+e #oase t+eorem$ if (ri)ate (arties can ,ar0ain -it+out cost$ t+en t+e (ri)ate market -ill sol)e t+e (ro,lem of e&ternalities. ANS: T DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional .6. Accor%in0 to t+e #oase t+eorem$ t+e (ri)ate market -ill nee% 0o)ernment inter)ention in or%er to reac+ an efficient outcome. ANS: F DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional .7. Des(ite t+e a((ealin0 lo0ic of t+e #oase t+eorem$ (ri)ate actors often fail to resol)e on t+eir o-n t+e (ro,lems cause% ,y e&ternalities. ANS: T DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e .8. Accor%in0 to t+e #oase T+eorem$ in%i)i%uals can al-ays -ork out a mutually ,eneficial a0reement to sol)e t+e (ro,lems of e&ternalities e)en -+en +i0+ transaction costs are in)ol)e%. ANS: F DIF: 2 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase T+eorem MS#: Inter(reti)e 10. Accor%in0 to t+e #oase t+eorem$ -+ate)er t+e initial %istri,ution of ri0+ts$ t+e intereste% (arties can ,ar0ain to an efficient outcome. ANS: T DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional 11. 'ri)ate (arties may c+oose not to sol)e an e&ternality (ro,lem if t+e transaction costs are lar0e enou0+. ANS: T DIF: 2 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Inter(reti)e
#+a(ter 109E&ternalities 12. Many c+arities like t+e Sierra #lu, are esta,lis+e% to %eal -it+ e&ternalities. ANS: T DIF: 2 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #oase T+eorem MS#: Inter(reti)e SHORT ANSWER 1. ANS: <sin0 a su((ly an% %eman% %ia0ram$ %emonstrate +o- a ne0ati)e e&ternality lea%s to market inefficiency. Ao- mi0+t t+e 0o)ernment +el( to eliminate t+is inefficiencyB
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*+en a ne0ati)e e&ternality e&ists$ t+e (ri)ate cost ?or su((ly cur)e@ is less t+an t+e social cost. T+e market e3uili,rium 3uantity of C0 -ill ,e 0reater t+an t+e socially o(timal 3uantity of C1. T+e 0o)ernment coul% +el( eliminate t+is inefficiency ,y ta&in0 t+e (ro%uct. In t+is e&am(le$ t+e si2e of t+e (er unit ta& -oul% ,e ' . '1 ?or '2 '0@. DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities MS#: Analytical T"': Ne0ati)e e&ternalities
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2. ANS:
#+a(ter 109E&ternalities <sin0 a su((ly an% %eman% %ia0ram$ %emonstrate +o- a (ositi)e e&ternality lea%s to market inefficiency. Ao- mi0+t t+e 0o)ernment +el( to eliminate t+is inefficiencyB
*+en a (ositi)e e&ternality e&ists$ t+e (ri)ate )alue ?or %eman% cur)e@ is less t+an t+e social )alue. T+e market e3uili,rium 3uantity -ill ,e less t+an t+e socially o(timal 3uantity. T+e 0o)ernment coul% +el( eliminate t+is inefficiency ,y su,si%i2in0 t+e (ro%uct. In t+is e&am(le$ t+e si2e of t+e (er unit su,si%y -oul% ,e '. '1. DIF: 2 REF: 10 1 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities MS#: Analytical T"': 'ositi)e e&ternalities
.. *+y are efficiency ta&es (referre% to re0ulatory (olicies as met+o%s reme%y e&ternalitiesB ANS: Efficiency ta&es allo- markets to coor%inate o(timal resource allocation. In or%er for re0ulations to ,e efficient$ t+e 0o)ernment nee%s %etaile% information a,out s(ecific in%ustries$ inclu%in0 information a,out t+e alternati)e tec+nolo0ies t+at t+ose in%ustries coul% a%o(t. T+us$ ta&es are likely to re%uce (ollution at a lo-er cost to society. DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #omman% an% control (olicies ; #orrecti)e ta&es
MS#: A((licati)e
#+a(ter 109E&ternalities 1. <se a 0ra(+ to illustrate t+e 3uantity of (ollution t+at -oul% ,e emitte% ?a@ after a correcti)e ta& +as ,een im(ose% an% ?,@ after tra%a,le (ollution (ermits +a)e ,een im(ose%. #oul% t+ese t-o 3uantities e)er ,e e3ui)alentB
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ANS:
>es$ t+ese t-o 3uantities coul% ,e e3ual. For e&am(le$ P/ coul% ,e e3ual to t+e amount of t+e correcti)e ta&. DIF: 2 REF: 10 2 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': #orrecti)e ta&es ; Tra%a,le (ollution (ermits MS#: 4.
Analytical
To (ro%uce +oney$ ,eekee(ers (lace +i)es of ,ees in t+e fiel%s of farmers. As ,ees 0at+er nectar$ t+ey (ollinate t+e cro(s in t+e fiel%s$ -+ic+ increases t+e yiel%s of t+ese fiel%s at no a%%itional cost to t+e farmer. *+at mi0+t ,e a reasona,le (ri)ate solution to t+is e&ternality$ an% +o- mi0+t t+e solution ,e reac+e%B
ANS: "ne solution -oul% ,e to +a)e one (erson o-n ,ot+ t+e farm fiel%s an% t+e ,ee+i)es$ in -+ic+ case t+e e&ternality is internali2e%. Anot+er solution -oul% ,e to +a)e t+e farmer an% ,eekee(er enter into a contract so t+at t+ey can coor%inate t+e num,er of ,ee +i)es an% acres of cro(s to maintain an efficient outcome. DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e 5. T"': E&ternalities
T+e #oase t+eorem su00ests t+at efficient solutions to e&ternalities can ,e %etermine% t+rou0+ ,ar0ainin0. <n%er -+at circumstances -ill (ri)ate ,ar0ainin0 fail to (ro%uce a solutionB
ANS: 'ri)ate (arties may fail to ,ar0ain to an efficient solution un%er a )ariety of circumstances. First$ t+e transaction costs of ,ar0ainin0 may ,e so +i0+ t+at one or ,ot+ of t+e (arties %eci%es not to ,ar0ain. Secon%$ t+e ,ar0ainin0 may not take (lace if one or ,ot+ of t+e (arties ,elie)es t+at t+e a0reement cannot ,e enforce%. T+ir%$ one or ,ot+ of t+e (arties may try to +ol% out for a ,etter %eal$ in -+ic+ case t+e ,ar0ainin0 (rocess ,reaks %o-n. Fourt+$ if t+ere are a lar0e num,er of (arties takin0 (art in t+e ne0otiations$ t+e costs of coor%ination may ,e so 0reat t+at t+e ,ar0ainin0 is not successful. DIF: 1 REF: 10 . NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e T"': #oase t+eorem
Sec00
MULTI LE CHOICE 1. In a market economy$ 0o)ernment inter)ention a. -ill al-ays im(ro)e market outcomes. ,. re%uces efficiency in t+e (resence of e&ternalities. c. may im(ro)e market outcomes in t+e (resence of e&ternalities. %. is necessary to control in%i)i%ual 0ree%.
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#+a(ter 109E&ternalities DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: # NAT: Analytic T"': E&ternalities 2.
In t+e a,sence of e&ternalities$ t+e Din)isi,le +an%D lea%s a market to ma&imi2e a. (ro%ucer (rofit from t+at market. ,. total ,enefit to society from t+at market. c. ,ot+ e3uality an% efficiency in t+at market. %. out(ut of 0oo%s or ser)ices in t+at market. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytic T"': E&ternalities ..
T+e term market failure refers to a. a market t+at fails to allocate resources efficiently. ,. an unsuccessful a%)ertisin0 cam(ai0n -+ic+ re%uces %eman%. c. rut+less com(etition amon0 firms. %. a firm t+at is force% out of ,usiness ,ecause of losses. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Definitional
ANS: A NAT: Analytic T"': E&ternalities 1.
Market failure can ,e cause% ,y a. too muc+ com(etition. ,. e&ternalities. c. lo- consumer %eman%. %. scarcity. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
ANS: / NAT: Analytic T"': E&ternalities 4.
An e&ternality is an e&am(le of a. a correcti)e ta&. ,. a tra%a,le (ollution (ermit. c. a market failure. %. /ot+ a an% , are correct. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
An e&ternality is t+e im(act of a. societyEs %ecisions on t+e -ell ,ein0 of society. ,. a (ersonEs actions on t+at (ersonEs -ell ,ein0. c. one (ersonEs actions on t+e -ell ,ein0 of a ,ystan%er. %. societyEs %ecisions on t+e (oorest (erson in t+e society. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Definitional
T+e im(act of one (ersonEs actions on t+e -ell ,ein0 of a ,ystan%er is calle% a. an economic %ilemma. ,. %ea%-ei0+t loss. c. a multi (arty (ro,lem. %. an e&ternality. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: D NAT: Analytic T"': E&ternalities
#+a(ter 109E&ternalities 7. An e&ternality a. results in an e3uili,rium t+at %oes not ma&imi2e t+e total ,enefits to society. ,. causes %eman% to e&cee% su((ly. c. stren0t+ens t+e role of t+e Fin)isi,le +an%G in t+e market(lace. %. affects ,uyers ,ut not sellers. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
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An e&ternality is a. t+e costs t+at (arties incur in t+e (rocess of a0reein0 an% follo-in0 t+rou0+ on a ,ar0ain. ,. t+e uncom(ensate% im(act of one (ersonEs actions on t+e -ell ,ein0 of a ,ystan%er. c. t+e (ro(osition t+at (ri)ate (arties can ,ar0ain -it+out cost o)er t+e allocation of resources. %. a market e3uili,rium ta&. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Definitional
A cost im(ose% on someone -+o is neit+er t+e consumer nor t+e (ro%ucer is calle% a a. correcti)e ta&. ,. comman% an% control (olicy. c. (ositi)e e&ternality. %. ne0ati)e e&ternality. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities =E>: Definitional
ANS: D NAT: Analytic T"': E&ternalities 11.
An e&ternality arises -+en a (erson en0a0es in an acti)ity t+at influences t+e -ell ,ein0 of a. ,uyers in t+e market for t+at acti)ity an% yet neit+er (ays nor recei)es any com(ensation for t+at effect. ,. sellers in t+e market for t+at acti)ity an% yet neit+er (ays nor recei)es any com(ensation for t+at effect. c. ,ystan%ers in t+e market for t+at acti)ity an% yet neit+er (ays nor recei)es any com(ensation for t+at effect. %. /ot+ ?a@ an% ?,@ are correct. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Definitional
An e&ternality e&ists -+ene)er a. t+e economy cannot ,enefit from 0o)ernment inter)ention. ,. markets are not a,le to reac+ e3uili,rium. c. a firm sells its (ro%uct in a forei0n market. %. a (erson en0a0es in an acti)ity t+at influences t+e -ell ,ein0 of a ,ystan%er an% yet neit+er (ays nor recei)es (ayment for t+at effect. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Definitional
ANS: D NAT: Analytic T"': E&ternalities 1..
*+en e&ternalities are (resent in a market$ t+e -ell ,ein0 of market (artici(ants a. an% market ,ystan%ers are ,ot+ %irectly affecte%. ,. an% market ,ystan%ers are ,ot+ in%irectly affecte%. c. is %irectly affecte%$ an% market ,ystan%ers are in%irectly affecte%. %. is in%irectly affecte%$ an% market ,ystan%ers are %irectly affecte%. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Analytical
ANS: # NAT: Analytic T"': E&ternalities
150
11.
#+a(ter 109E&ternalities Do0 o-ners %o not ,ear t+e full cost of t+e noise t+eir ,arkin0 %o0s create an% often take too fe- (recautions to (re)ent t+eir %o0s from ,arkin0. !ocal 0o)ernments a%%ress t+is (ro,lem ,y a. makin0 it ille0al to D%istur, t+e (eace.D ,. +a)in0 a -ell fun%e% animal control %e(artment. c. su,si%i2in0 local animal s+elters. %. encoura0in0 (eo(le to a%o(t cats. DIF: 1 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+ic+ of t+e follo-in0 statements a,out a -ell maintaine% yar% ,est con)eys t+e 0eneral nature of t+e e&ternalityB a. A -ell maintaine% yar% con)eys a (ositi)e e&ternality ,ecause it increases t+e +omeEs market )alue. ,. A -ell maintaine% yar% con)eys a ne0ati)e e&ternality ,ecause it increases t+e (ro(erty ta& lia,ility of t+e o-ner. c. A -ell maintaine% yar% con)eys a (ositi)e e&ternality ,ecause it increases t+e )alue of a%Hacent (ro(erties in t+e nei0+,or+oo%. %. A -ell maintaine% yar% cannot (ro)i%e any ty(e of e&ternality. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
Since restore% +istoric ,uil%in0s con)ey a (ositi)e e&ternality$ local 0o)ernments may c+oose to a. re0ulate t+e %emolition of t+em. ,. (ro)i%e ta& ,reaks to o-ners -+o restore t+em. c. increase (ro(erty ta&es in +istoric areas. %. /ot+ a an% , are correct. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
All e&ternalities a. cause markets to fail to allocate resources efficiently. ,. cause e3uili,rium (rices to ,e too +i0+. c. ,enefit (ro%ucers at t+e e&(ense of consumers. %. cause e3uili,rium (rices to ,e too lo-. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+en e&ternalities e&ist$ ,uyers an% sellers a. ne0lect t+e e&ternal effects of t+eir actions$ ,ut t+e market e3uili,rium is still efficient. ,. %o not ne0lect t+e e&ternal effects of t+eir actions$ an% t+e market e3uili,rium is efficient. c. ne0lect t+e e&ternal effects of t+eir actions$ an% t+e market e3uili,rium is not efficient. %. %o not ne0lect t+e e&ternal effects of t+eir actions$ an% t+e market e3uili,rium is not efficient. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
Dio&in emission t+at results from t+e (ro%uction of (a(er is a 0oo% e&am(le of a ne0ati)e e&ternality ,ecause a. self intereste% (a(er firms are 0enerally una-are of en)ironmental re0ulations. ,. t+ere are fines for (ro%ucin0 too muc+ %io&in. c. self intereste% (a(er (ro%ucers -ill not consi%er t+e full cost of t+e %io&in (ollution t+ey create. %. to&ic emissions are t+e ,est e&am(le of an e&ternality. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: # NAT: Analytic T"': E&ternalities
#+a(ter 109E&ternalities 20. If a (a(er manufacturer %oes not ,ear t+e entire cost of t+e %io&in it emits$ it -ill a. emit a lo-er le)el of %io&in t+an is socially efficient. ,. emit a +i0+er le)el of %io&in t+an is socially efficient. c. emit an acce(ta,le le)el of %io&in. %. not emit any %io&in in an attem(t to a)oi% (ayin0 t+e entire cost. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
151
*+ic+ of t+e follo-in0 is an e&am(le of an e&ternalityB a. ci0arette smoke t+at (ermeates an entire restaurant ,. a flu s+ot t+at (re)ents a stu%ent from transmittin0 t+e )irus to +er roommate c. a ,eautiful flo-er 0ar%en outsi%e of t+e local (ost office %. All of t+e a,o)e are correct. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+ic+ of t+e follo-in0 statements is not correctB a. :o)ernment (olicies may im(ro)e t+e marketEs allocation of resources -+en ne0ati)e e&ternalities are (resent. ,. :o)ernment (olicies may im(ro)e t+e marketEs allocation of resources -+en (ositi)e e&ternalities are (resent. c. A (ositi)e e&ternality is an e&am(le of a market failure. %. *it+out 0o)ernment inter)ention$ t+e market -ill ten% to un%ersu((ly (ro%ucts t+at (ro%uce ne0ati)e e&ternalities. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
ANS: D NAT: Analytic T"': E&ternalities 2..
*+ic+ of t+e follo-in0 re(resents a -ay t+at a 0o)ernment can +el( t+e (ri)ate market to internali2e an e&ternalityB a. ta&in0 0oo%s t+at +a)e ne0ati)e e&ternalities ,. su,si%i2in0 0oo%s t+at +a)e (ositi)e e&ternalities c. T+e 0o)ernment cannot im(ro)e u(on t+e outcomes of (ri)ate markets. %. /ot+ a an% , are correct. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+ic+ of t+e follo-in0 is not correctB a. Markets allocate scarce resources -it+ t+e forces of su((ly an% %eman%. ,. T+e e3uili,rium of su((ly an% %eman% is ty(ically an efficient allocation of resources. c. :o)ernments can sometimes im(ro)e market outcomes. %. E&ternalities cannot ,e (ositi)e.
ANS: D DIF: 2 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Markets ; E&ternalities MS#: Inter(reti)e 24. A ne0ati)e e&ternality arises -+en a (erson en0a0es in an acti)ity t+at +as a. an a%)erse effect on a ,ystan%er -+o is not com(ensate% ,y t+e (erson -+o causes t+e effect. ,. an a%)erse effect on a ,ystan%er -+o is com(ensate% ,y t+e (erson -+o causes t+e effect. c. a ,eneficial effect on a ,ystan%er -+o (ays t+e (erson -+o causes t+e effect. %. a ,eneficial effect on a ,ystan%er -+o %oes not (ay t+e (erson -+o causes t+e effect.
ANS: A DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Definitional
152
25.
#+a(ter 109E&ternalities A (ositi)e e&ternality arises -+en a (erson en0a0es in an acti)ity t+at +as a. an a%)erse effect on a ,ystan%er -+o is not com(ensate% ,y t+e (erson -+o causes t+e effect. ,. an a%)erse effect on a ,ystan%er -+o is com(ensate% ,y t+e (erson -+o causes t+e effect. c. a ,eneficial effect on a ,ystan%er -+o (ays t+e (erson -+o causes t+e effect. %. a ,eneficial effect on a ,ystan%er -+o %oes not (ay t+e (erson -+o causes t+e effect.
ANS: D DIF: 1 REF: 10 0 NAT: Analytic !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Definitional 26. *+en an e&ternality is (resent$ t+e market e3uili,rium is a. efficient$ an% t+e e3uili,rium ma&imi2es t+e total ,enefit to society as a -+ole. ,. efficient$ ,ut t+e e3uili,rium %oes not ma&imi2e t+e total ,enefit to society as a -+ole. c. inefficient$ ,ut t+e e3uili,rium ma&imi2es t+e total ,enefit to society as a -+ole. %. inefficient$ an% t+e e3uili,rium %oes not ma&imi2e t+e total ,enefit to society as a -+ole. DIF: 2 REF: 10 0 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
ANS: D NAT: Analytic T"': E&ternalities
Sec01!Externalities an" Mar#et Ine$$icienc%

MULTI LE CHOICE 1. If an e&ternality is (resent in a market$ economic efficiency may ,e en+ance% ,y a. increase% com(etition. ,. -eakenin0 (ro(erty ri0+ts. c. ,etter informe% market (artici(ants. %. 0o)ernment inter)ention. DIF: 1 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: D NAT: Analytical T"': E&ternalities 2.
E&ternalities ten% to cause markets to ,e a. inefficient. ,. une3ual. c. unnecessary. %. o)er-+elme%. DIF: 1 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: A NAT: Analytical T"': E&ternalities ..
If a sa-mill creates too muc+ noise for local resi%ents$ a. noise restrictions -ill force resi%ents to mo)e out of t+e area. ,. a sense of social res(onsi,ility -ill cause o-ners of t+e mill to re%uce noise le)els. c. t+e 0o)ernment can raise economic -ell ,ein0 t+rou0+ noise control re0ulations. %. t+e 0o)ernment s+oul% a)oi% inter)enin0 ,ecause t+e market -ill allocate resources efficiently. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: # NAT: Analytical T"': E&ternalities 1.
'ri)ate markets fail to account for e&ternalities ,ecause a. e&ternalities %onEt occur in (ri)ate markets. ,. sellers inclu%e costs associate% -it+ e&ternalities in t+e (rice of t+eir (ro%uct. c. %ecisionmakers in t+e market fail to inclu%e t+e costs of t+eir ,e+a)ior to t+ir% (arties. %. t+e 0o)ernment cannot easily estimate t+e o(timal 3uantity of (ollution. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: # NAT: Analytical T"': E&ternalities
#+a(ter 109E&ternalities 4. Alterin0 incenti)es so t+at (eo(le take account of t+e e&ternal effects of t+eir actions a. is calle% internali2in0 t+e e&ternality. ,. can ,e %one ,y im(osin0 a correcti)e ta&. c. is t+e role of 0o)ernment in markets -it+ e&ternalities. %. all of t+e a,o)e. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
15.
*+en t+e 0o)ernment inter)enes in markets -it+ e&ternalities$ it %oes so in or%er to a. increase (ro%uction -+en ne0ati)e e&ternalities are (resent. ,. (rotect t+e interests of ,ystan%ers. c. make certain all ,enefits are recei)e% ,y market (artici(ants. %. re%uce (ro%uction -+en (ositi)e e&ternalities are (resent. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytical T"': E&ternalities 6.
All reme%ies for e&ternalities s+are t+e 0oal of a. mo)in0 t+e allocation of resources to-ar% t+e market e3uili,rium. ,. mo)in0 t+e allocation of resources to-ar% t+e socially o(timal e3uili,rium. c. increasin0 t+e allocation of resources. %. %ecreasin0 t+e allocation of resources. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
At any 0i)en 3uantity$ t+e -illin0ness to (ay in t+e market for 0asoline is reflecte% in t+e a. +ei0+t of t+e %eman% cur)e at t+at 3uantity. ,. +ei0+t of t+e su((ly cur)e at t+at 3uantity. c. )alue to t+e (ro%ucer of t+e last unit of 0asoline sol%. %. total 3uantity of 0asoline e&c+an0e% in t+e market. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: A NAT: Analytical T"': E&ternalities 8.
T+e su((ly cur)e for a (ro%uct reflects t+e a. -illin0ness to (ay of t+e mar0inal ,uyer. ,. 3uantity ,uyers -ill ultimately (urc+ase of t+e (ro%uct. c. cost to sellers of (ro%ucin0 t+e (ro%uct. %. sellerEs (rofit from (ro%ucin0 t+e (ro%uct. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
Since air (ollution creates a ne0ati)e e&ternality$ a. social -elfare -ill ,e en+ance% -+en some$ ,ut not all air (ollution is eliminate%. ,. social -elfare is o(timal -+en all air (ollution is eliminate%. c. 0o)ernments s+oul% encoura0e (ri)ate firms to consi%er only (ri)ate costs. %. t+e free market result ma&imi2es social -elfare. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
T+e %ifference ,et-een social cost an% (ri)ate cost is a measure of t+e a. loss in (rofit to t+e seller as t+e result of a ne0ati)e e&ternality. ,. cost of an e&ternality. c. cost re%uction -+en t+e ne0ati)e e&ternality is eliminate%. %. cost incurre% ,y t+e 0o)ernment -+en it inter)enes in t+e market.
151
#+a(ter 109E&ternalities DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+en a market is c+aracteri2e% ,y an e&ternality$ t+e 0o)ernment a. can correct t+e market failure only in t+e case of (ositi)e e&ternalities. ,. can correct t+e market failure only in t+e case of ne0ati)e e&ternalities. c. can correct t+e market failure in t+e case of ,ot+ (ositi)e an% ne0ati)e e&ternalities ,y in%ucin0 market (artici(ants to internali2e t+e e&ternality. %. cannot correct for e&ternalities %ue to t+e e&istence of (atents. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
ANS: # NAT: Analytical T"': E&ternalities 1..
*+ic+ of t+e follo-in0 statements is correctB a. :o)ernment s+oul% ta& 0oo%s -it+ eit+er (ositi)e or ne0ati)e e&ternalities. ,. :o)ernment s+oul% ta& 0oo%s -it+ ne0ati)e e&ternalities an% su,si%i2e 0oo%s -it+ (ositi)e e&ternalities. c. :o)ernment s+oul% su,si%i2e 0oo%s -it+ eit+er (ositi)e or ne0ati)e e&ternalities. %. :o)ernment s+oul% ta& 0oo%s -it+ (ositi)e e&ternalities an% su,si%i2e 0oo%s -it+ ne0ati)e e&ternalities. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytical T"': E&ternalities Figure 10-1
11.
Re$er t& Fi'(re 10!1. T+is 0ra(+ re(resents t+e to,acco in%ustry. T+e in%ustry creates a. (ositi)e e&ternalities. ,. ne0ati)e e&ternalities. c. no e&ternalities. %. no e3uili,rium in t+e market. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytical T"': E&ternalities
#+a(ter 109E&ternalities 14.
154
Re$er t& Fi'(re 10!1. T+is 0ra(+ re(resents t+e to,acco in%ustry. *it+out any 0o)ernment inter)ention$ t+e e3uili,rium (rice an% 3uantity are a. I1.80 an% .7 units$ res(ecti)ely. ,. I1.70 an% .4 units$ res(ecti)ely. c. I1.50 an% 12 units$ res(ecti)ely. %. I1..4 an% 47 units$ res(ecti)ely. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
Re$er t& Fi'(re 10!1. T+is 0ra(+ re(resents t+e to,acco in%ustry. T+e socially o(timal (rice an% 3uantity are a. I1.80 an% .7 units$ res(ecti)ely. ,. I1.70 an% .4 units$ res(ecti)ely. c. I1.50 an% 12 units$ res(ecti)ely. %. I1..4 an% 47 units$ res(ecti)ely. DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytical T"': E&ternalities Figure 10-2

7.4 7 6.4 6 5.4 5 4.4 4 1.4 1 ..4 . 2.4 2 1.4 1 0.4 100 200 .00 Price
Social #ost
' ri)ate #ost
Deman%
100
400
500
600
700
800
Quantity
16.
Re$er t& Fi'(re 10!)* Su((ose t+at t+e (ro%uction of (lastic creates a social cost -+ic+ is %e(icte% in t+e 0ra(+ a,o)e. *it+out any 0o)ernment re0ulation$ +o- muc+ (lastic -ill ,e (ro%uce%B a. 200 ,. 400 c. 540 %. 800
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 17. Re$er t& Fi'(re 10!)* Su((ose t+at t+e (ro%uction of (lastic creates a social cost -+ic+ is %e(icte% in t+e 0ra(+ a,o)e. *it+out any 0o)ernment re0ulation$ -+at (rice -ill t+e firm c+ar0e (er unit of (lasticB a. I. ,. I..40 c. I4 %. I7
155
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 18. Re$er t& Fi'(re 10!)* Su((ose t+at t+e (ro%uction of (lastic creates a social cost -+ic+ is %e(icte% in t+e 0ra(+ a,o)e. *+at is t+e socially o(timal 3uantity of (lasticB a. 200 units ,. 140 units c. 400 units %. 540 units
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e T+is fi0ure reflects t+e market for out%oor concerts in a (u,lic (ark surroun%e% ,y resi%ential nei0+,or+oo%s. Figure 10-3
20.
Re$er t& Fi'(re 10!+* T+e social cost cur)e is a,o)e t+e su((ly cur)e ,ecause a. it takes into account t+e e&ternal costs im(ose% on society ,y t+e concert. ,. it takes into account t+e effect of local noise restrictions on concerts in (arks surroun%e% ,y resi%ential nei0+,or+oo%s. c. concert tickets are likely to cost more t+an t+e concert actually costs t+e or0ani2ers. %. resi%ents in t+e surroun%in0 nei0+,or+oo%s 0et to listen to t+e concert for free.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 21. Re$er t& Fi'(re 10!+* T+e %ifference ,et-een t+e social cost cur)e an% t+e su((ly cur)e reflects t+e a. (rofit mar0in of eac+ concert. ,. cost of s(illo)er effects from t+e concert ?e.0.$ noise an% traffic@. c. )alue of concerts to society as a -+ole. %. amount ,y -+ic+ t+e city s+oul% su,si%i2e t+e concert or0ani2ers.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 22. Re$er t& Fi'(re 10!+* At t+e (ri)ate market outcome$ t+e e3uili,rium (rice -ill ,e a. P0. ,. P1. c. P2. %. None of t+e a,o)e is correct.
#+a(ter 109E&ternalities ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 2..
156
Re$er t& Fi'(re 10!+* *+at (rice an% 3uantity com,ination ,est re(resents t+e o(timum (rice an% num,er of concerts t+at s+oul% ,e or0ani2e%B a. P1$ Q1 ,. P2$ Q0 c. P2$ Q1 %. T+e o(timum 3uantity is 2ero concerts as lon0 as resi%ents in surroun%in0 nei0+,or+oo%s are a%)ersely affecte% ,y noise an% con0estion.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e Figure 10-4
21.
Re$er t& Fi'(re 10!,* If t+is market is currently (ro%ucin0 at C1$ t+en total economic -ell ,ein0 -oul% ,e ma&imi2e% if out(ut a. %ecrease% to Q1. ,. %ecrease% to Q2. c. %ecrease% to Q.. %. staye% at Q1.
ANS: / DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 24. Re$er t& Fi'(re 10!,* T+is market is c+aracteri2e% ,y a. 0o)ernment inter)ention. ,. a (ositi)e e&ternality. c. a ne0ati)e e&ternality. %. None of t+e a,o)e is correct.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 25. Re$er t& Fi'(re 10!,* *it+out 0o)ernment inter)ention$ t+e e3uili,rium 3uantity -oul% ,e a. Q1. ,. Q2. c. Q.. %. Q1.
157
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 26. Re$er t& Fi'(re 10!,* T+e socially o(timal 3uantity -oul% ,e a. Q1. ,. Q2. c. Q.. %. Q1.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 27. Re$er t& Fi'(re 10!,* T+is market a. +as no nee% for 0o)ernment inter)ention. ,. -oul% ,enefit from a ta& on t+e (ro%uct. c. -oul% ,enefit from a su,si%y for t+e (ro%uct. %. -oul% ma&imi2e total -ell ,ein0 at Q..
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 28. Re$er t& Fi'(re 10!,* If t+is market is currently (ro%ucin0 at Q2$ t+en total economic -ell ,ein0 -oul% increase if out(ut a. increase% ,eyon% Q1. ,. %ecrease% to Q1. c. increase% to Q.. %. staye% at Q2.
ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e .0. Re$er t& Fi'(re 10!,* If all e&ternal costs -ere internali2e%$ t+en t+e marketJs e3uili,rium out(ut -oul% ,e a. Q1. ,. Q2. c. Q.. %. Q1.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e .1. Re$er t& Fi'(re 10!,* At Q. a. t+e mar0inal consumer )alues t+is (ro%uct less t+an t+e social cost of (ro%ucin0 it. ,. e)ery consumer )alues t+is (ro%uct less t+an t+e social cost of (ro%ucin0 it. c. t+e cost to society is e3ual to t+e )alue to society. %. t+e mar0inal consumer )alues t+is (ro%uct more t+an t+e (ri)ate cost.
ANS: A DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e .2. Re$er t& Fi'(re 10!,* T+is market a. +as no nee% for 0o)ernment inter)ention. ,. -oul% ,enefit from a ta& on t+e (ro%uct. c. -oul% ,enefit from a su,si%y for t+e (ro%uct. %. -oul% ma&imi2e total -ell ,ein0 at Q..
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e
#+a(ter 109E&ternalities ... Re$er t& Fi'(re 10!,* E&ternalities in t+is market coul% ,e internali2e% if a. t+ere -ere a ta& on t+e (ro%uct. ,. t+ere -ere a su,si%y for t+e (ro%uct. c. (ro%uction -ere sto((e%. %. t+e #oase t+eorem faile%.
158
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e Figure 10-5
.1.
Re$er t& Fi'(re 10!-* *+ic+ (rice an% 3uantity com,ination re(resents t+e social o(timumB a. P0 an% Q1. ,. P2 an% Q1. c. P1 an% Q0. %. P2 an% Q0.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e .4. Re$er t& Fi'(re 10!-* *+ic+ of t+e follo-in0 statements is correctB a. T+e mar0inal ,enefit of t+e (ositi)e e&ternality is measure% ,y '. '1. ,. T+e mar0inal cost of t+e ne0ati)e e&ternality is measure% ,y '. '2. c. T+e mar0inal cost of t+e ne0ati)e e&ternality is measure% ,y '. '1. %. T+e mar0inal cost of t+e ne0ati)e e&ternality is measure% ,y '. '0.
ANS: # DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e
160
Price
Figure 10-6
S
E&ternal #ost
'E '
D CE C
Quantity
.5.
Re$er t& Fi'(re 10!.. *+ic+ (rice re(resents t+e e3uili,rium (rice of t+e (ro%uct in t+is marketB a. ' ,. 'J c. Eit+er ' or 'J. It is necessary to kno- -+et+er t+e e&ternality is (ositi)e or ne0ati)e to %etermine -+ic+ of t+ese is t+e e3uili,rium (rice. %. Some (rice ,et-een ' an% 'J. T+e e3uili,rium (rice %e(en%s on t+e ne0otiatin0 skills of t+e intereste% (arties.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e .6. Re$er t& Fi'(re 10!.* *+ic+ 3uantity re(resents t+e socially o(timal 3uantity of out(ut in t+is marketB a. C ,. CJ c. Eit+er C or CJ. It is necessary to kno- -+et+er t+e e&ternality is (ositi)e or ne0ati)e to %etermine t+e socially o(timal 3uantity. %. Some 3uantity ,et-een C an% CJ. T+e socially o(timal 3uantity %e(en%s on t+e ne0otiatin0 skills of t+e intereste% (arties.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e Table 10-1 T+e follo-in0 ta,le s+o-s t+e (ri)ate )alue$ (ri)ate cost$ an% e&ternal cost for )arious 3uantities of out(ut in a market. Quantity 1 2 . 1 4 5 6 .7. Private Value 11 1. 12 11 10 8 7 Private Cost 10 11 12 1. 11 14 15 External Cost 2 2 2 2 2 2 2
Re$er t& Ta/le 10!1* *+at is t+e e3uili,rium 3uantity of out(ut in t+e marketB a. 2 units ,. . units c. 1 units %. 4 units
#+a(ter 109E&ternalities ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e .8. Re$er t& Ta/le 10!1* *+at is t+e socially o(timal 3uantity of out(ut in t+is marketB a. 1 unit ,. 2 units c. . units %. 1 units DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
161
Re$er t& Ta/le 10!1* Ao- lar0e -oul% a correcti)e ta& nee% to ,e to mo)e t+is market from t+e e3uili,rium outcome to t+e socially o(timal outcomeB a. 2 ,. . c. 8 %. 10
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 11. Ne0ati)e e&ternalities occur -+en one (ersonEs actions a. cause anot+er (erson to lose money in a stock market transaction. ,. cause +is or +er em(loyer to lose ,usiness. c. re)eal +is or +er (reference for forei0n (ro%uce% 0oo%s. %. a%)ersely affect t+e -ell ,ein0 of a ,ystan%er -+o is not (arty to t+e action.
ANS: D DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Definitional 12. A ne0ati)e e&ternality a. is an a%)erse im(act on a ,ystan%er. ,. causes t+e (ro%uct in a market to ,e un%er (ro%uce%. c. is an a%)erse im(act on market (artici(ants. %. is (resent in markets -+ere t+e 0oo% or ser)ice %oes not +a)e any im(act on ,ystan%ers.
ANS: A DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Definitional 1.. A ne0ati)e e&ternality a. is a cost to a ,ystan%er. ,. is a cost to t+e ,uyer. c. is a cost to t+e seller. %. e&ists -it+ all market transactions.
ANS: A DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Definitional 11. *+ic+ of t+e follo-in0 illustrates t+e conce(t of a ne0ati)e e&ternalityB a. A colle0e (rofessor (lays a )i0orous 0ame of rac3uet ,all -it+ t+e rac3uet +e recently (urc+ase%. ,. A floo% -i(es out a farmerEs corn cro(. c. A colle0e stu%ent (lays lou% music on +is ne- stereo system at 2:00 a.m. %. A Hanitor eats a +am,ur0er %urin0 +is lunc+ ,reak.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e
162
14.
#+a(ter 109E&ternalities *+en a ne0ati)e e&ternality e&ists in a market$ t+e cost to (ro%ucers a. is 0reater t+an t+e cost to society. ,. -ill ,e t+e same as t+e cost to society. c. -ill ,e less t+an t+e cost to society. %. -ill %iffer from t+e cost to society$ re0ar%less of -+et+er an e&ternality is (resent.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 15. *+en ne0ati)e e&ternalities are (resent in a market a. (ri)ate costs -ill ,e 0reater t+an social costs. ,. social costs -ill ,e 0reater t+an (ri)ate costs. c. only 0o)ernment re0ulation -ill sol)e t+e (ro,lem. %. t+e market -ill not ,e a,le to reac+ any e3uili,rium.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 16. Ne0ati)e e&ternalities lea% markets to (ro%uce a. 0reater t+an efficient out(ut le)els an% (ositi)e e&ternalities lea% markets to (ro%uce smaller t+an efficient out(ut le)els. ,. smaller t+an efficient out(ut le)els an% (ositi)e e&ternalities lea% markets to (ro%uce 0reater t+an efficient out(ut le)els. c. 0reater t+an efficient out(ut le)els an% (ositi)e e&ternalities lea% markets to (ro%uce efficient out(ut le)els. %. efficient out(ut le)els an% (ositi)e e&ternalities lea% markets to (ro%uce 0reater t+an efficient out(ut le)els.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 17. Su((ose t+at lar0e scale (ork (ro%uction +as t+e (otential to create 0roun% -ater (ollution. *+y mi0+t t+is ty(e of (ollution ,e consi%ere% an e&ternalityB a. T+e 0roun%-ater (ollution re%uces t+e cost of lar0e scale (ork (ro%uction. ,. T+e economic im(act of a lar0e scale (ork (ro%uction facility is locali2e% in a small 0eo0ra(+ic area. c. T+e (ollution +as t+e (otential for creatin0 a +ealt+ risk for -ater users in t+e re0ion surroun%in0 t+e (ork (ro%uction facility. %. #onsumers -ill not rea( t+e ,enefits of lo-er (ro%uction cost from lar0e scale (ork (ro%uction.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 18. Markets are often inefficient -+en ne0ati)e e&ternalities are (resent ,ecause a. (ri)ate costs e&cee% social costs at t+e (ri)ate market solution. ,. e&ternalities cannot ,e correcte% -it+out 0o)ernment re0ulation. c. social costs e&cee% (ri)ate costs at t+e (ri)ate market solution. %. (ro%uction e&ternalities lea% to consum(tion e&ternalities.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 40. *+en t+e social cost cur)e is a,o)e a (ro%uctEs su((ly cur)e$ a. t+e 0o)ernment +as inter)ene% in t+e market. ,. a ne0ati)e e&ternality e&ists in t+e market. c. a (ositi)e e&ternality e&ists in t+e market. %. t+e %istri,ution of resources is unfair.
#+a(ter 109E&ternalities ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 41.
16.
Su((ose t+at a steel factory emits a certain amount of air (ollution$ -+ic+ constitutes a ne0ati)e e&ternality. If t+e market %oes not internali2e t+e e&ternality$ a. t+e su((ly cur)e -oul% a%e3uately reflect t+e mar0inal social cost of (ro%uction. ,. consumers -ill ,e re3uire% to (ay a +i0+er (rice for steel t+an t+ey -oul% +a)e if t+e e&ternality -ere internali2e%. c. t+e market e3uili,rium 3uantity -ill not ,e t+e socially o(timal 3uantity. %. (ro%ucers -ill (ro%uce less steel t+an t+ey ot+er-ise -oul% if t+e e&ternality -ere internali2e%.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 42. *+en (ro%ucers o(erate in a market c+aracteri2e% ,y ne0ati)e e&ternalities$ a ta& t+at forces t+em to internali2e t+e e&ternality -ill a. 0i)e sellers t+e incenti)e to account for t+e e&ternal effects of t+eir actions. ,. increase %eman%. c. increase t+e amount of t+e commo%ity e&c+an0e% in market e3uili,rium. %. restrict t+e (ro%ucersE a,ility to take t+e costs of t+e e&ternality into account -+en %eci%in0 +omuc+ to su((ly.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 4.. *+en !isa %ri)es to -ork e)ery mornin0$ s+e %ri)es on a con0este% +i0+-ay. *+at !isa %oes not reali2e is t+at -+en s+e enters t+e +i0+-ay eac+ mornin0 s+e increases t+e tra)el time of all ot+er %ri)ers on t+e +i0+-ay. In t+is case$ t+e e&ternal cost of !isaJs +i0+-ay tri( a. increases t+e social cost a,o)e t+e (ri)ate cost. ,. lo-ers t+e social cost ,elo- t+e (ri)ate cost. c. increases t+e social )alue a,o)e t+e (ri)ate ,enefit. %. %ecreases t+e social )alue ,elo- t+e (ri)ate ,enefit.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 41. An o(timal ta& on (ollution -oul% result in -+ic+ of t+e follo-in0B a. 'ro%ucers -ill c+oose not to (ro%uce any (ollution. ,. 'ro%ucers -ill internali2e t+e cost of t+e (ollution. c. 'ro%ucers -ill ma&imi2e (ro%uction. %. T+e )alue to consumers at market e3uili,rium -ill e&cee% t+e social cost of (ro%uction.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 44. *+ic+ of t+e follo-in0 statements is correctB a. Internali2in0 a ne0ati)e e&ternality -ill cause an in%ustry to %ecrease t+e 3uantity it su((lies to t+e market an% %ecrease t+e (rice of t+e 0oo% (ro%uce%. ,. Internali2in0 a ne0ati)e e&ternality -ill cause an in%ustry to %ecrease t+e 3uantity it su((lies to t+e market an% increase t+e (rice of t+e 0oo% (ro%uce%. c. Internali2in0 a ne0ati)e e&ternality -ill cause an in%ustry to increase t+e 3uantity it su((lies to t+e market an% %ecrease t+e (rice of t+e 0oo% (ro%uce%. %. Internali2in0 a ne0ati)e e&ternality -ill cause an in%ustry to increase t+e 3uantity it su((lies to t+e market an% increase t+e (rice of t+e 0oo% (ro%uce%.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical
161
45.
#+a(ter 109E&ternalities A ne0ati)e e&ternality -ill cause a (ri)ate market to (ro%uce a. less t+an is socially %esira,le. ,. more t+an is socially %esira,le. c. e&actly t+e 3uantity t+at is socially %esira,le. %. less t+an t+e same market -oul% (ro%uce in t+e (resence of a (ositi)e e&ternality.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 46. 'ri)ate markets fail to reac+ a socially o(timal e3uili,rium -+en ne0ati)e e&ternalities are (resent ,ecause a. social costs e3ual (ri)ate costs at t+e (ri)ate market solution. ,. (ri)ate costs e&cee% social costs at t+e (ri)ate market solution. c. social costs e&cee% (ri)ate costs at t+e (ri)ate market solution. %. t+ey internali2e e&ternalities.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 47. *+en ne0ati)e e&ternalities are (resent in a market$ a. (ro%ucers -ill ,e affecte% ,ut consumers -ill not. ,. (ro%ucers -ill su((ly too muc+ of t+e (ro%uct. c. %eman% -ill ,e too +i0+. %. t+e market -ill still ma&imi2e total ,enefits.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 48. *+ic+ of t+e follo-in0 -oul% not ,e consi%ere% a ne0ati)e e&ternalityB a. Smelter$ Inc. creates steel an% (ollution. ,. >our frien% ,uys a ne- (u((y t+at ,arks e)ery ni0+t. c. >ou +a)e an a%)erse reaction to a me%ication your %octor (rescri,e% for you. %. >our nei0+,or (lays lou% music t+at you %islike t+rou0+ stereo s(eakers set u( on +is %eck.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 50. Su((ose t+at meat (ro%ucers create a ne0ati)e e&ternality. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of meat to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 51. Su((ose t+at electricity (ro%ucers create a ne0ati)e e&ternality e3ual to I4 (er unit. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of electricity to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical
#+a(ter 109E&ternalities 52. Su((ose t+at smokin0 creates a ne0ati)e e&ternality. If t+e 0o)ernment %oes not interfere in t+e ci0arette market$ t+en a. t+e e3uili,rium 3uantity of ci0arettes smoke% -ill e3ual t+e socially o(timal 3uantity of ci0arettes smoke%. ,. t+e e3uili,rium 3uantity of ci0arettes smoke% -ill ,e 0reater t+an t+e socially o(timal 3uantity of ci0arettes smoke%. c. t+e e3uili,rium 3uantity of ci0arettes smoke% -ill ,e less t+an t+e socially o(timal 3uantity of ci0arettes smoke%. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
164
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 5.. Su((ose t+at a firm (ro%uces electricity ,y ,urnin0 coal. T+e (ro%uction (rocess creates a ne0ati)e e&ternality of air (ollution. If t+e firm %oes not internali2e t+e cost of t+e e&ternality$ it -ill (ro%uce -+ere a. t+e )alue of electricity to consumers e3uals t+e (ri)ate cost of (ro%ucin0 electricity. ,. t+e )alue of electricity to consumers e3uals t+e social cost of (ro%ucin0 electricity. c. t+e cost of t+e e&ternality is ma&imi2e%. %. t+e transaction costs of (ri)ate ,ar0ainin0 are minimi2e%.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 51. Su((ose t+at a ne0ati)e e&ternality is create% ,y t+e (ro%uction of 0oo% K. *+ic+ of t+e follo-in0 statements is correctB a. T+e social cost of (ro%ucin0 0oo% K inclu%es t+e (ri)ate cost (lus t+e cost to ,ystan%ers of t+e e&ternality. ,. T+e increase% social cost can ,e 0ra(+e% as a %ecrease in %eman%. c. T+e market e3uili,rium 3uantity -ill ,e t+e socially o(timal 3uantity as lon0 as t+e 0o)ernment %oes not interfere. %. /ot+ a an% , are correct.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 54. *+ic+ of t+e follo-in0 is N"T an e&am(le of a ne0ati)e e&ternalityB a. air (ollution from a manufacturin0 (lant. ,. %isru(te% slee( from a nei0+,orJs lou% music. c. an illness cause% ,y secon%+an% ci0arette smoke. %. a %ecrease in your (ro(erty )alue from ne0lectin0 your la-n an% 0ar%en.
ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 55. A (a(er (lant (ro%uces -ater (ollution %urin0 t+e (ro%uction (rocess. If t+e 0o)ernment forces t+e (lant to internali2e t+e ne0ati)e e&ternality$ t+en t+e a. su((ly cur)e for (a(er -oul% s+ift to t+e ri0+t. ,. su((ly cur)e for (a(er -oul% s+ift to t+e left. c. %eman% cur)e for (a(er -oul% s+ift to t+e ri0+t. %. %eman% cur)e for (a(er -oul% s+ift to t+e left.
ANS: / DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical
165
Figure 10-
56.
Re$er t& Fi'(re 10!0* *+ic+ 3uantity re(resents t+e social o(timum for t+is marketB a. Q1. ,. Q2. c. Q.. %. Q1.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 57. Re$er t& Fi'(re 10!0* To internali2e t+e e&ternality in t+is market$ t+e 0o)ernment s+oul% a. im(ose a ta& on t+is (ro%uct. ,. (ro)i%e a su,si%y for t+is (ro%uct. c. for,i% (ro%uction. %. (ro%uce t+e (ro%uct itself.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical
#+a(ter 109E&ternalities Figure 10-!

Price 25 21 22 20 17 15 11 12 10 7 5 1 2 2 1 5
166
Su((ly
Deman% Social Lalue

7 10 12 11 15 17 20 22 Quantity
58.
Re$er t& Fi'(re 10!1* *+at is t+e e3uili,rium (rice in t+is marketB a. I7 ,. /et-een I7 an% I10 c. I10 %. More t+an I10
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 60. Re$er t& Fi'(re 10!1* *+at is t+e socially o(timal 3uantity of out(ut in t+is marketB a. 7 units ,. /et-een 7 an% 10 units c. 10 units %. More t+an 10 units
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 61. Re$er t& Fi'(re 10!1* If t+e 0o)ernment -ante% to su,si%i2e t+is market to ac+ie)e t+e socially o(timal le)el of out(ut$ +o- lar0e -oul% t+e su,si%y nee% to ,eB a. !ess t+an I2 ,. I2 c. More t+an I2 %. T+e si2e of t+e su,si%y cannot ,e %etermine% from t+e fi0ure.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e Table 10-2 T+e follo-in0 ta,le s+o-s t+e (ri)ate )alue$ (ri)ate cost$ an% social )alue for a market -it+ a (ositi)e e&ternality. Quantity 1 2 . 1 4 5 Private Value 26 21 21 17 14 12 Private Cost 5 10 11 17 22 25 "o#ial Value .1 .1 27 24 22 18
167
62.
#+a(ter 109E&ternalities Re$er t& Ta/le 10!)* *+at is t+e e3uili,rium 3uantity of out(ut in t+is marketB a. . units ,. 1 units c. 4 units %. 5 units
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 6.. Re$er t& Ta/le 10!)* *+at is t+e socially o(timal le)el of out(ut in t+is marketB a. . units ,. 1 units c. 4 units %. 5 units
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 61. Re$er t& Ta/le 10!)* Ao- lar0e -oul% a su,si%y nee% to ,e in t+is market to mo)e t+e market from t+e e3uili,rium le)el of out(ut to t+e socially o(timal le)el of out(utB a. I. ,. I4 c. I6 %. I8
ANS: # DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 64. *+ic+ of t+e follo-in0 is an e&am(le of a (ositi)e e&ternalityB a. A colle0e stu%ent ,uys a ne- car -+en s+e 0ra%uates. ,. T+e mayor of a small to-n (lants flo-ers in t+e city (ark. c. !ocal +i0+ sc+ool teac+ers +a)e (i22a %eli)ere% e)ery Fri%ay for lunc+. %. An a)i% fis+erman ,uys ne- fis+in0 0ear for +is ne&t fis+in0 tri(.
ANS: / DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 65. *+ic+ of t+e follo-in0 is an e&am(le of a (ositi)e e&ternalityB a. air (ollution ,. a (erson litterin0 in a (u,lic (ark c. a nice 0ar%en in front of your nei0+,orEs +ouse %. t+e (ollution of a stream
ANS: # DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 66. Internali2in0 a (ositi)e e&ternality -ill cause t+e %eman% cur)e to a. s+ift to t+e ri0+t. ,. s+ift to t+e left. c. ,ecome more elastic. %. remain unc+an0e%.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical
#+a(ter 109E&ternalities 67. 'ositi)e e&ternalities a. result in a lar0er t+an efficient e3uili,rium 3uantity. ,. result in smaller t+an efficient e3uili,rium 3uantity. c. result in an efficient e3uili,rium 3uantity. %. can ,e internali2e% -it+ a correcti)e ta&.
168
ANS: / DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 68. A (ositi)e e&ternality a. is a ,enefit to t+e (ro%ucer of t+e 0oo%. ,. is a ,enefit to t+e consumer of t+e 0oo%. c. is a ,enefit to someone ot+er t+an t+e (ro%ucer an% consumer of t+e 0oo%. %. results in an o(timal le)el of out(ut.
ANS: # DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Definitional 70. If a market is c+aracteri2e% ,y a (ositi)e e&ternality t+at is not t+e result of a tec+nolo0y s(illo)er$ a. t+e socially o(timal le)el of out(ut is less t+an t+e e3uili,rium le)el of out(ut$ an% t+e o(timal (rice is 0reater t+an t+e e3uili,rium (rice. ,. t+e socially o(timal le)el of out(ut is 0reater t+an t+e e3uili,rium le)el of out(ut$ an% t+e socially o(timal (rice is less t+an t+e e3uili,rium (rice. c. t+e socially o(timal le)el of out(ut is 0reater t+an t+e e3uili,rium le)el of out(ut$ an% t+e socially o(timal (rice is 0reater t+an t+e e3uili,rium (rice. %. t+e socially o(timal le)el of out(ut is less t+an t+e e3uili,rium le)el of out(ut$ an% t+e socially o(timal (rice is less t+an t+e e3uili,rium (rice.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 71. To en+ance t+e -ell ,ein0 of society$ a social (lanner -ill encoura0e firms to increase (ro%uction -+en a. t+e firms are (ro%ucin0 ,asic 0oo%s. ,. t+ere is a s+orta0e in t+e market. c. tec+nolo0y s(illo)ers are associate% -it+ (ro%uction. %. ne0ati)e e&ternalities Fs(ill o)erG into (ro%uction.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 72. *+en t+e (ro%uction of a 0oo% results in a (ositi)e e&ternality$ t+e social )alue cur)e is: a. ,elo- t+e %eman% cur)e$ in%icatin0 t+e total )alue to society is less t+an t+e (ri)ate ,enefit. ,. a,o)e t+e %eman% cur)e$ in%icatin0 t+e total )alue to society is 0reater t+an t+e (ri)ate ,enefit. c. i%entical to t+e %eman% cur)e$ in%icatin0 t+e total cost to society is t+e e3ual to t+e (ri)ate ,enefit. %. a,o)e t+e su((ly cur)e$ in%icatin0 t+e total cost to society e&cee%s t+e (ri)ate cost.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 7.. A (ositi)e e&ternality -ill cause a market to (ro%uce a. more t+an is socially %esira,le. ,. less t+an is socially %esira,le. c. t+e socially o(timal e3uili,rium amount. %. more t+an t+e same market -oul% (ro%uce in t+e (resence of a ne0ati)e e&ternality.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e
170
71.
#+a(ter 109E&ternalities A (ositi)e e&ternality a. causes t+e (ro%uct to ,e o)er(ro%uce%. ,. (ro)i%es an a%%itional ,enefit to market (artici(ants. c. ,enefits consumers ,ecause it results in a lo-er e3uili,rium (rice. %. is a ,enefit to a market ,ystan%er.
ANS: D DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Definitional 74. A (ositi)e e&ternality occurs -+en a. Mack recei)es a ,enefit from Mo+nEs consum(tion of a certain 0oo%. ,. Mack recei)es (ersonal ,enefits from +is o-n consum(tion of a certain 0oo%. c. MackEs ,enefit e&cee%s Mo+nEs ,enefit -+en t+ey eac+ consume t+e same 0oo%. %. MackEs recei)es a loss from Mo+nJs consum(tion of a certain 0oo%.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 75. *+en a market e&(eriences a (ositi)e e&ternality$ a. t+e %eman% cur)e %oes not reflect t+e )alue to society of t+e 0oo%. ,. too muc+ of t+e 0oo% is ,ein0 (ro%uce%. c. t+e 0o)ernment can internali2e t+e e&ternality ,y im(osin0 a ta& on t+e (ro%uct. %. t+e (ri)ate )alue is 0reater t+an t+e social )alue.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 76. 'ri)ate markets fail to reac+ a socially o(timal e3uili,rium -+en (ositi)e e&ternalities are (resent ,ecause t+e a. (ri)ate ,enefit e3uals t+e social ,enefit at t+e (ri)ate market solution. ,. (ri)ate cost e&cee%s t+e (ri)ate ,enefit at t+e (ri)ate market solution. c. social )alue e&cee%s t+e (ri)ate )alue at t+e (ri)ate market solution. %. (ri)ate cost e&cee%s t+e social ,enefit at t+e (ri)ate market solution.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 77. *+ic+ of t+e follo-in0 (olicies is t+e 0o)ernment most incline% to use -+en face% -it+ a (ositi)e e&ternalityB a. ta&ation ,. (ermits c. su,si%ies %. usa0e fees
ANS: # DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 78. If e%ucation (ro%uces (ositi)e e&ternalities$ -e -oul% e&(ect a. t+e 0o)ernment to ta& e%ucation. ,. t+e 0o)ernment to su,si%i2e e%ucation. c. (eo(le to reali2e t+e ,enefits$ -+ic+ -oul% increase t+e %eman% for e%ucation. %. colle0es to rela& a%mission re3uirements.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e
171
If e%ucation (ro%uces (ositi)e e&ternalities an% t+e 0o)ernment %oes not inter)ene in t+e market$ -e -oul% e&(ect a. t+e e3uili,rium (rice to ,e +i0+er t+an t+e o(timal (rice. ,. t+e e3uili,rium 3uantity to ,e lo-er t+an t+e o(timal le)el. c. t+e e3uili,rium 3uantity to ,e +i0+er t+an t+e o(timal le)el. %. ,ot+ a an% , are correct
ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 81. Su((ose t+at cookie (ro%ucers create a (ositi)e e&ternality e3ual to I2 (er %o2en. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of cookies to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 82. Su((ose t+at flo-er 0ar%ens create a (ositi)e e&ternality e3ual to I1 (er (lant. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of (lants 0ro-nB a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 8.. Su((ose t+at flu s+ots create a (ositi)e e&ternality e3ual to I12 (er s+ot. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of flu s+ots (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 81. Su((ose t+at elementary e%ucation creates a (ositi)e e&ternality. If t+e 0o)ernment %oes not su,si%i2e e%ucation$ t+en a. t+e e3uili,rium 3uantity of e%ucation -ill ,e e3ual t+e socially o(timal 3uantity of e%ucation. ,. t+e e3uili,rium 3uantity of e%ucation -ill ,e 0reater t+an t+e socially o(timal 3uantity of e%ucation. c. t+e e3uili,rium 3uantity of e%ucation -ill ,e less t+an t+e socially o(timal 3uantity of e%ucation. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 84. *+ic+ of t+e follo-in0 is an e&am(le of a (ositi)e e&ternalityB a. Sue not catc+in0 t+e flu ,ecause s+e 0ot a flu )accine. ,. Mary not catc+in0 t+e flu from Sue ,ecause Sue 0ot a flu )accine. c. Sue catc+in0 t+e flu ,ecause s+e %i% not 0et a flu )accine.. %. Mary catc+in0 t+e flu from Sue ,ecause Sue %i% not 0et a flu )accine.
ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e
172
85.
#+a(ter 109E&ternalities <ni)ersity researc+ers create a (ositi)e e&ternality ,ecause -+at t+ey %isco)er in t+eir researc+ la,s can easily ,e learne% ,y ot+ers -+o +a)enEt contri,ute% to t+e researc+ costs. If t+ere are no su,si%ies$ -+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity of uni)ersity researc+ an% t+e o(timal 3uantity of uni)ersity researc+ (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 86. Flu s+ots (ro)i%e a (ositi)e e&ternality. Su((ose t+at t+e market for )accinations is (erfectly com(etiti)e. *it+out 0o)ernment inter)ention in t+e )accination market$ -+ic+ of t+e follo-in0 statements is correctB a. At t+e current out(ut le)el$ t+e mar0inal social ,enefit e&cee%s t+e mar0inal (ri)ate ,enefit. ,. T+e current out(ut le)el is inefficiently lo-. c. A (er s+ot su,si%y coul% turn an inefficient situation into an efficient one. %. All of t+e a,o)e are correct.
ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 87. /ecause t+ere are (ositi)e e&ternalities from +i0+er e%ucation$ a. (ri)ate markets -ill un%er su((ly colle0e classes. ,. (ri)ate markets -ill o)er su((ly colle0e classes. c. t+e 0o)ernment s+oul% im(ose a ta& on colle0e stu%ents. %. 0o)ernment inter)ention cannot im(ro)e t+e market for colle0e classes.
ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 88. *+ic+ of t+e follo-in0 is true of markets c+aracteri2e% ,y (ositi)e e&ternalitiesB a. Social )alue e&cee%s (ri)ate )alue$ an% market 3uantity e&cee%s t+e socially o(timal 3uantity. ,. Social )alue is less t+an (ri)ate )alue$ an% market 3uantity e&cee%s t+e socially o(timal 3uantity. c. Social )alue e&cee%s (ri)ate )alue$ an% market 3uantity is less t+an t+e socially o(timal 3uantity. %. Social )alue sel%om e&cee%s (ri)ate )alueN t+erefore$ social 3uantity is less t+an (ri)ate 3uantity.
ANS: # DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 100. In t+e case of a tec+nolo0y s(illo)er$ internali2in0 a (ositi)e e&ternality -ill cause t+e su((ly cur)e of an in%ustry to a. s+ift to t+e ri0+t. ,. s+ift to t+e left. c. ,ecome more elastic. %. remain unc+an0e%. ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities ; Tec+nolo0y s(illo)ers MS#: Analytical 101. *+ic+ of t+e follo-in0 statements is not correctB a. A (atent is a -ay for t+e 0o)ernment to encoura0e t+e (ro%uction of a 0oo% -it+ tec+nolo0y s(illo)ers. ,. A ta& is a -ay for t+e 0o)ernment to re%uce t+e (ro%uction of a 0oo% -it+ a ne0ati)e e&ternality. c. A ta& t+at accurately reflects social costs (ro%uces t+e socially o(timal outcome. %. :o)ernment (olicies cannot im(ro)e u(on (ri)ate market outcomes. ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities ; Tec+nolo0y s(illo)ers MS#: Inter(reti)e
#+a(ter 109E&ternalities 102. Tec+nolo0y s(illo)er is one ty(e of a. ne0ati)e e&ternality. ,. (ositi)e e&ternality. c. su,si%y. %. (ro%ucer sur(lus. ANS: / DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e
17.
10.. *+ic+ of t+e follo-in0 ,est %efines t+e situation -+ere one firmEs researc+ yiel%s kno-le%0e t+at is use% ,y society as a -+oleB a. social cost ,. o((ortunity cost of tec+nolo0y c. internali2ation of an e&ternality %. tec+nolo0y s(illo)er ANS: D DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Definitional 101. :o)ernment inter)ention t+at aims to (romote tec+nolo0y en+ancin0 in%ustries is calle% a. assiste% tec+nolo0y. ,. inter)ention (olicy. c. in%ustrial tec+nolo0y assistance. %. in%ustrial (olicy. ANS: D DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Definitional 104. Tec+nolo0y s(illo)er occurs -+en a. a firm (asses t+e +i0+ costs of tec+nical researc+ on to society t+rou0+ +i0+er (rices. ,. a firmEs researc+ yiel%s tec+nical kno-le%0e t+at is use% ,y society as a -+ole. c. t+e 0o)ernment su,si%i2es firms en0a0e% in +i0+ tec+ researc+. %. co(yri0+t la-s (ro+i,it firms from (rofitin0 from t+e researc+ of ot+ers. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Definitional 105. *+en tec+nolo0y s(illo)er occurs$ a. it is t+e 0o)ernmentEs res(onsi,ility to o-n firms t+at are en0a0e% in +i0+ tec+ researc+. ,. a firmEs researc+ yiel%s tec+nolo0ical kno-le%0e t+at can t+en ,e use% ,y society as a -+ole. c. t+ose firms en0a0e% in tec+nolo0y researc+ s+oul% ,e ta&e% ,y t+e 0o)ernment. %. -+en firms in)est in t+e latest (ro%uction tec+nolo0y$ t+e cost of t+at tec+nolo0y Ds(ills o)erD to t+e (rices consumers must (ay for t+e (ro%uct. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Definitional 106. Researc+ into ne- tec+nolo0ies a. (ro)i%es (ositi)e e&ternalities ,ecause it creates kno-le%0e ot+ers can use. ,. results in ne0ati)e e&ternalities ,ecause 0o)ernment fun%in0 for researc+ causes less 0o)ernment s(en%in0 in ot+er areas. c. is (rotecte% ,y (atent la-s$ -+ic+ eliminates t+e nee% for 0o)ernment inter)ention. %. s+oul% only ,e fun%e% ,y t+e cor(orations t+at -ill recei)e t+e (rofits from t+e researc+. ANS: A NAT: Analytical T"': E&ternalities DIF: 2 REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
171
107. If t+e 0o)ernment -ante% to ensure t+at t+e market reac+es t+e socially o(timal e3uili,rium in t+e (resence of a tec+nolo0y s(illo)er$ it s+oul% a. im(ose a correcti)e ta& on any firm (ro%ucin0 a tec+nolo0y s(illo)er. ,. offer ta& cre%its to consumers -+o are a%)ersely affecte% ,y t+e ne- tec+nolo0y. c. su,si%i2e (ro%ucers ,y an amount e3ual to t+e )alue of t+e tec+nolo0y s(illo)er. %. (ro)i%e researc+ 0rants to t+ose firms not currently en0a0in0 in researc+ to increase com(etition in t+e in%ustry. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 108. *+en an in%ustry is c+aracteri2e% ,y tec+nolo0y s(illo)er$ -+at s+oul% t+e 0o)ernment %o to ensure t+at t+e market e3uili,rium e3uals t+e socially o(timal e3uili,riumB a. Im(ose a ta& 0reater t+an t+e )alue of t+e tec+nolo0y s(illo)er. ,. Not allo- (ro%uction of any (ro%uct t+at causes a tec+nolo0y s(illo)er. c. 'ro)i%e a su,si%y e3ual to t+e )alue of t+e tec+nolo0y s(illo)er. %. Re3uire (ro%ucers to Dclean u(D any s(illo)er t+at results from t+eir (ro%uction (rocess. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 110. In t+e case of a tec+nolo0y s(illo)er$ t+e 0o)ernment can encoura0e firms to internali2e a (ositi)e e&ternality ,y a. ta&in0 (ro%uction$ -+ic+ -oul% %ecrease su((ly. ,. ta&in0 (ro%uction$ -+ic+ -oul% increase su((ly. c. su,si%i2in0 (ro%uction$ -+ic+ -oul% %ecrease su((ly. %. su,si%i2in0 (ro%uction$ -+ic+ -oul% increase su((ly. ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities ; Tec+nolo0y s(illo)ers MS#: A((licati)e 111. In t+e case of a tec+nolo0y s(illo)er$ internali2in0 a (ositi)e e&ternality t+rou0+ a 0o)ernment su,si%y -ill cause t+e in%ustryEs su((ly cur)e to a. s+ift u( ,y an amount e3ual to t+e su,si%y. ,. s+ift %o-n ,y an amount less t+an t+e su,si%y. c. s+ift %o-n ,y an amount e3ual to t+e su,si%y. %. s+ift %o-n ,y an amount 0reater t+an t+e su,si%y. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities ; Tec+nolo0y s(illo)ers MS#: A((licati)e 112. *+ic+ of t+e follo-in0 is N"T a -ay of internali2in0 tec+nolo0y s(illo)ersB a. su,si%ies ,. (atent (rotection c. in%ustrial (olicy %. ta&es ANS: D DIF: 1 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Inter(reti)e 11.. If t+e (ro%uction of com(uter c+i(s yiel%s 0reater tec+nolo0y s(illo)ers t+an t+e (ro%uction of (otato c+i(s$ t+e 0o)ernment s+oul% a. encoura0e t+e (ro%uction of com(uter c+i(s -it+ su,si%ies. ,. %iscoura0e t+e (ro%uction of (otato c+i(s -it+ ta&es. c. encoura0e t+e (ro%uction of (otato c+i(s -it+ su,si%ies. %. %iscoura0e t+e (ro%uction of com(uter c+i(s -it+ ta&es. ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e
#+a(ter 109E&ternalities 111. "ne %ra-,ack to in%ustrial (olicy is t+at a. tec+nolo0y s(illo)ers are too e&(ensi)e to control. ,. measurin0 t+e si2e of s(illo)ers from %ifferent markets is %ifficult. c. s(illo)ers often occur in in%ustries t+at (ro%uce un%esira,le (ro%ucts for society. %. (ositi)e si%e effects are often out-ei0+e% ,y ne0ati)e si%e effects. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 114. T+e 0oal of in%ustrial (olicy s+oul% ,e t+at a. in%ustries yiel%in0 t+e lar0est (ositi)e e&ternalities s+oul% recei)e t+e ,i00est su,si%ies. ,. any in%ustry t+at (ro%uces ne0ati)e e&ternalities s+oul% ,e +ea)ily ta&e%. c. any (ro%uction (rocess t+at (ro%uces ne0ati)e e&ternalities s+oul% ,e s+ut %o-n. %. all in%ustries t+at (ro%uce (ositi)e e&ternalities s+oul% ,e e3ually su,si%i2e%. ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: Inter(reti)e 115. *+ic+ of t+e follo-in0 is t+e most effecti)e -ay to internali2e a tec+nolo0y s(illo)erB a. ta&es ,. (atents c. 0o)ernment re0ulations %. free markets ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 116. A (atent is use% to a. %isseminate information. ,. offset t+e ne0ati)e effects of ta&es. c. (rotect in)entors for as lon0 as t+ey li)e. %. assi0n (ro(erty ri0+ts. ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e 117. 'atents %o not a. (ro)i%e firms an incenti)e to researc+. ,. assi0n (ro(erty ri0+ts to in)entors. c. (rotect t+e ri0+ts of in)entors for t+eir lifetimes. %. internali2e e&ternalities. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Tec+nolo0y s(illo)ers MS#: A((licati)e
174
175
Figure 10-$
Price
anel 2a3
Su((ly
'1
Deman% C1
Price Quantity
Price
anel 2/3
'.a '2 '.,
Social cost
anel 2c3
Su((ly '1a '4 '1,
Su((ly
Social )alue Deman% C2 C.

Quantity
Deman% C1 C4
Quantity
118. Re$er t& Fi'(re 10!4* *+ic+ 0ra(+ re(resents a market -it+ no e&ternalityB a. 'anel ?a@ ,. 'anel ?,@ c. 'anel ?c@ %. None of t+e a,o)e is correct. ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Markets ; E&ternalities MS#: Inter(reti)e 120. Re$er t& Fi'(re 10!4* *+ic+ 0ra(+ re(resents a market -it+ a (ositi)e e&ternalityB a. 'anel ?a@ ,. 'anel ?,@ c. 'anel ?c@ %. /ot+ ?,@ an% ?c@ are correct. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e
#+a(ter 109E&ternalities 121. Re$er t& Fi'(re 10!4* *+ic+ 0ra(+ re(resents a market -it+ a ne0ati)e e&ternalityB a. 'anel ?a@ ,. 'anel ?,@ c. 'anel ?c@ %. /ot+ ?,@ an% ?c@ are correct. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 122. Re$er t& Fi'(re 10!45 anel 2/3* T+e market e3uili,rium 3uantity is a. C2$ -+ic+ is t+e socially o(timal 3uantity. ,. C.$ -+ic+ is t+e socially o(timal 3uantity. c. C2$ an% t+e socially o(timal 3uantity is C.. %. C.$ an% t+e socially o(timal 3uantity is C2. ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 12.. Re$er t& Fi'(re 10!45 anel 2/3* T+e market e3uili,rium (rice is a. '2. ,. '.a. c. '.,. %. '.a '.,. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Inter(reti)e 121. Re$er t& Fi'(re 10!45 anel 2c3* T+e market e3uili,rium 3uantity is a. C1$ -+ic+ is t+e socially o(timal 3uantity. ,. C4$ -+ic+ is t+e socially o(timal 3uantity. c. C1$ an% t+e socially o(timal 3uantity is C4. %. C4$ an% t+e socially o(timal 3uantity is C1. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 124. Re$er t& Fi'(re 10!45 anel 2c3* T+e market e3uili,rium (rice is a. '1a. ,. '1,. c. '4. %. '1a '1,. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Inter(reti)e 125. Re$er t& Fi'(re 10!4* T+e o)eruse of anti,iotics lea%s to t+e %e)elo(ment of anti,iotic resistant %iseases. T+erefore$ t+e market for anti,iotics is s+o-n in a. 'anel ?a@. ,. 'anel ?,@. c. 'anel ?c@. %. /ot+ ?,@ an% ?c@ are correct. ANS: / DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e
176
177
126. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e o)eruse of anti,iotics lea%s to t+e %e)elo(ment of anti,iotic resistant %iseases. T+erefore$ t+e socially o(timal 3uantity of anti,iotics is re(resente% ,y (oint a. C2. ,. C.. c. C1. %. C4. ANS: A DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 127. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e o)eruse of anti,iotics lea%s to t+e %e)elo(ment of anti,iotic resistant %iseases. T+erefore$ t+e e&ternal cost of anti,iotic o)eruse is re(resente% ,y a. C. C2. ,. C4 C1. c. '.a '.,. %. '1a '1,. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: A((licati)e 128. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e o)eruse of anti,iotics lea%s to t+e %e)elo(ment of anti,iotic resistant %iseases. T+erefore$ a 0o)ernment (olicy t+at internali2e% t+e e&ternality -oul% mo)e t+e 3uantity of anti,iotics use% from (oint a. C2 to (oint C.. ,. C. to (oint C2. c. C1 to (oint C4. %. C4 to (oint C1. ANS: / DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 1.0. Re$er t& Fi'(re 10!4* T+e installation of a scru,,er in a smokestack re%uces t+e emission of +armful c+emicals from t+e smokestack. T+erefore$ t+e market for smokestack scru,,ers is s+o-n in a. 'anel ?a@. ,. 'anel ?,@. c. 'anel ?c@. %. /ot+ ?,@ an% ?c@ are correct. ANS: # DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 1.1. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e installation of a scru,,er in a smokestack re%uces t+e emission of +armful c+emicals from t+e smokestack. T+erefore$ t+e socially o(timal 3uantity of smokestack scru,,ers is re(resente% ,y (oint a. C2. ,. C.. c. C1. %. C4. ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e 1.2. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e installation of a scru,,er in a smokestack re%uces t+e emission of +armful c+emicals from t+e smokestack. T+erefore$ t+e e&ternal ,enefit of smokestack scru,,er installation is re(resente% ,y a. C. C2. ,. C4 C1. c. '.a '.,. %. '1a '1,.
#+a(ter 109E&ternalities ANS: D DIF: 2 REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: A((licati)e
178
1... Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* T+e installation of a scru,,er in a smokestack re%uces t+e emission of +armful c+emicals from t+e smokestack. T+erefore$ a 0o)ernment (olicy t+at internali2e% t+e e&ternality -oul% mo)e t+e 3uantity of smokestack scru,,ers installe% from (oint a. C2 to (oint C.. ,. C. to (oint C2. c. C1 to (oint C4. %. C4 to (oint C1. ANS: # DIF: . REF: 10 1 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': 'ositi)e e&ternalities MS#: Analytical 1.1. Re$er t& Fi'(re 10!45 anel 2/3 an" anel 2c3* *+ic+ of t+e follo-in0 is correctB a. A ta& -oul% mo)e t+e market in 'anel ?,@ an% t+e market in 'anel ?c@ closer to t+e socially o(timal outcome. ,. A su,si%y -oul% mo)e t+e market in 'anel ?,@ an% t+e market in 'anel ?c@ closer to t+e socially o(timal outcome. c. A ta& -oul% mo)e t+e market in 'anel ?,@ closer to t+e socially o(timal outcome$ ,ut a su,si%y -oul% mo)e t+e market in 'anel ?c@ closer to t+e socially o(timal outcome. %. A su,si%y -oul% mo)e t+e market in 'anel ?,@ closer to t+e socially o(timal outcome$ ,ut a ta& -oul% mo)e t+e market in 'anel ?c@ closer to t+e socially o(timal outcome. ANS: # NAT: Analytical T"': E&ternalities DIF: . REF: 10 1 !"#: Markets$ market failure$ an% e&ternalities MS#: Analytical
180
Sec0)! (/lic &licies T&6ar" Externalities

MULTI LE CHOICE Figure 10-2
7.4 7 6.4 6 5.4 5 4.4 4 1.4 1 ..4 . 2.4 2 1.4 1 0.4 100 200 .00 100 400 500 600 700 800 Quantity Deman% ' ri)ate #ost Social #ost Price
1.
Re$er t& Fi'(re 10!)* Assume t+e (ro%uction of (lastic im(oses a cost on society of I2.00 (er unit. If t+e free market e3uili,rium out(ut is 540 units$ t+e 0o)ernment s+oul% a. im(ose a ta& of I1.40 (er unit. ,. increase t+e out(ut of t+e firm ,y 40 units. c. offer a su,si%y of I2.00 (er unit.. %. im(ose a ta& of I2.00 (er unit.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Analytical 2. Re$er t& Fi'(re 10!)* Su((ose t+at t+e (ro%uction of (lastic creates a social cost -+ic+ is %e(icte% in t+e 0ra(+ a,o)e. If t+e 0o)ernment -ante% to force t+e firm to internali2e t+e cost of t+e e&ternality$ -+at action s+oul% it takeB a. Im(ose a ta& of I1.40 (er unit of (lastic. ,. Im(ose a ta& of I2 (er unit of (lastic. c. Im(ose a ta& of I5 (er unit of (lastic. %. "ffer a su,si%y of I1.40 (er unit of (lastic.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Analytical
#+a(ter 109E&ternalities Figure 10-5
181
..
Re$er t& Fi'(re 10!-* *+ic+ of t+e follo-in0 statements is correctB a. To in%uce firms to internali2e t+e e&ternality in t+is market$ t+e 0o)ernment s+oul% im(ose a ta& measure% ,y '2 '0. ,. To in%uce firms to internali2e t+e e&ternality in t+is market$ t+e 0o)ernment s+oul% offer a su,si%y measure% ,y '2 '0. c. To in%uce firms to internali2e t+e e&ternality in t+is market$ t+e 0o)ernment s+oul% im(ose a ta& measure% ,y '2 '1. %. T+ere is no e&ternality in t+is market.
ANS: A DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Ne0ati)e e&ternalities MS#: Analytical 1. Su((ose t+at an M/A %e0ree creates no e&ternality ,ecause t+e ,enefits of an M/A are internali2e% ,y t+e stu%ent in t+e form of +i0+er -a0es. If t+e 0o)ernment offers su,si%ies for M/As$ t+en -+ic+ of t+e follo-in0 statements is correctB a. T+e e3uili,rium 3uantity of M/As -ill e3ual t+e socially o(timal 3uantity of M/As. ,. T+e e3uili,rium 3uantity of M/As -ill ,e 0reater t+an t+e socially o(timal 3uantity of M/As. c. T+e e3uili,rium 3uantity of M/As -ill ,e less t+an t+e socially o(timal 3uantity of M/As. %. T+ere is not enou0+ information to ans-er t+e 3uestion. DIF: . REF: 10 1 ; 10 2 !"#: Markets$ market failure$ e&ternalities MS#: Analytical
Su((ose t+at an M/A %e0ree creates no e&ternality ,ecause t+e ,enefits of an M/A are internali2e% ,y t+e stu%ent in t+e form of +i0+er -a0es. If t+ere are no 0o)ernment su,si%ies for M/As$ t+en -+ic+ of t+e follo-in0 statements is correctB a. T+e e3uili,rium 3uantity of M/As -ill e3ual t+e socially o(timal 3uantity of M/As. ,. T+e e3uili,rium 3uantity of M/As -ill ,e 0reater t+an t+e socially o(timal 3uantity of M/As. c. T+e e3uili,rium 3uantity of M/As -ill ,e less t+an t+e socially o(timal 3uantity of M/As. %. T+ere is not enou0+ information to ans-er t+e 3uestion. DIF: . REF: 10 1 ; 10 2 !"#: Markets$ market failure$ e&ternalities MS#: Analytical
Since almost all forms of trans(ortation (ro%uce some ty(e of (ollution$ a. t+e 0o)ernment s+oul% ,an all trans(ortation. ,. t+e 0o)ernment s+oul% ,an all (ollution. c. society +as to -ei0+ t+e cost an% ,enefits -+en %eci%in0 +o- muc+ (ollution to allo-. %. refrain from inter)enin0 ,ecause t+e market can ,est sol)e t+is (ro,lem.
182
#+a(ter 109E&ternalities DIF: 2 REF: 10 2 !"#: Markets$ market failure$ e&ternalities MS#: Inter(reti)e
Some en)ironmentalists ar0ue t+at -e s+oul% (rotect t+e en)ironment as muc+ as (ossi,le$ re0ar%less of cost. *+ic+ of t+e follo-in0 is not a likely outcome of (ursuin0 suc+ a course of actionB a. lo-er le)els of nutrition$ +ealt+ care$ an% +ousin0 ,. a lo-er stan%ar% of li)in0 c. slo-in0 or re)ersin0 tec+nolo0ical a%)ancement %. t+e elimination of all (ollution DIF: 2 REF: 10 2 !"#: Markets$ market failure$ e&ternalities MS#: A((licati)e
T+e ,est reme%y for market failure is often a. a market ,ase% solution. ,. s+ut%o-n of t+e market. c. no 0o)ernment inter)ention. %. e&ternali2in0 t+e e&ternalities. DIF: 2 REF: 10 2 !"#: Markets$ market failure$ e&ternalities MS#: Inter(reti)e
*+ic+ of t+e follo-in0 statements is correctB a. /ecause a clean en)ironment is a (u,lic 0oo%$ a feasi,le 0oal is to eliminate all (ollution$ re0ar%less of t+e cost. ,. Ric+ countries usually +a)e cleaner en)ironments t+an (oor countries ,ecause a clean en)ironment is like ot+er normal 0oo%s in t+at it +as a (ositi)e income elasticity. c. #lean -ater an% clean air are (riceless 0oo%s. %. All of t+e a,o)e are correct. DIF: 2 REF: 10 2 !"#: Markets$ market failure$ e&ternalities MS#: Inter(reti)e
A comman% an% control (olicy is anot+er term for a a. (ollution (ermit. ,. 0o)ernment re0ulation. c. correcti)e ta&. %. /ot+ a an% , are correct.
ANS: / DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: Definitional 11. If t+e 0o)ernment -ere to limit t+e release of air (ollution (ro%uce% ,y a steel mill to 64 (arts (er million$ t+e (olicy -oul% ,e consi%ere% a a. re0ulation. ,. correcti)e ta&. c. su,si%y. %. market ,ase% (olicy.
ANS: A DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: A((licati)e 12. *+en t+e 0o)ernment uses a comman% an% control (olicy to sol)e an e&ternality$ it a. is usually t+e most effecti)e (olicy o(tion a)aila,le. ,. creates (olicies t+at %irectly re0ulate ,e+a)ior. c. usually in)ol)es ta&in0 t+e consum(tion of a commo%ity. %. ty(ically refers to t+e #oase t+eorem to structure t+e (olicy.
#+a(ter 109E&ternalities ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: Inter(reti)e 1.. A local manufacturin0 (lant t+at emitte% sulfur %io&i%e -as force% to sto( (ro%uction ,ecause it %i% not com(ly -it+ local clean air stan%ar%s. T+is %ecision (ro)i%es an e&am(le of a. a %irect re0ulation of an e&ternality. ,. correcti)e ta&es. c. a #oase t+eorem solution to an e&ternality. %. t+e misuse of a su,si%y.
18.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: A((licati)e 11. Emission controls on automo,iles are an e&am(le of a a. correcti)e ta&. ,. comman% an% control (olicy to increase social efficiency. c. (olicy t+at re%uces (ollution ,y allocatin0 resources t+rou0+ market mec+anisms. %. (olicy to re%uce con0estion on ur,an free-ays.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: A((licati)e 14. If it is ille0al for a ,ioc+emical manufacturer to release its -aste into a near,y stream$ t+en t+is is an e&am(le of a. a market ,ase% (olicy. ,. a comman% an% control (olicy. c. tra%a,le (ollution (ermits. %. transaction costs.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: A((licati)e 15. If t+e 0o)ernment -ere to im(ose a fine of I1$000 for eac+ unit of air (ollution release% ,y a steel mill$ t+e (olicy -oul% ,e consi%ere% a. a su,si%y. ,. a re0ulation. c. a correcti)e ta&. %. an a((lication of t+e #oase t+eorem.
ANS: # DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 16. A 0asoline ta& is %esi0ne% to correct eac+ of t+e follo-in0 (ro,lems except a. traffic con0estion. ,. traffic acci%ents. c. air (ollution. %. E'A re0ulations.
ANS: D DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 17. *+ic+ of t+e follo-in0 statements is correctB a. :asoline ta&es are an e&am(le of an E'A re0ulation. ,. :asoline ta&es are +i0+er in many Euro(ean countries t+an in t+e <nite% States. c. :asoline ta&es contri,ute to 0lo,al -armin0. %. :asoline ta&es are an e&am(le of a comman% an% control (olicy.
181
ANS: / DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 18. T+e ta& on 0asoline is an e&am(le of a. a consum(tion ta&. ,. a correcti)e ta&. c. an income ta&. %. a comman% an% control (olicy.
ANS: / DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 20. *+ic+ of t+e follo-in0 statements is correctB a. Automoti)e manufacturers (refer stricter fuel economy re0ulations to +i0+er 0asoline ta&es. ,. Ai0+er 0asoline ta&es +a)e (ro)i%e% a market ,ase% incenti)e for Euro(eans to ,uy more fuel efficient )e+icles. c. Ai0+er 0asoline ta&es +a)e +a% no effect on t+e <.S. %eman% for 0asoline ,ecause t+e %eman% for 0asoline is (erfectly inelastic. %. Fuel efficiency re0ulations are more effecti)e t+an 0asoline ta&es in re%ucin0 t+e %eman% for 0asoline in t+e <nite% States an% Euro(e.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 21. *+ic+ of t+e follo-in0 is not an a%)anta0e of correcti)e ta&esB a. T+ey raise re)enues for t+e 0o)ernment. ,. T+ey en+ance economic efficiency. c. T+ey su,si%i2e t+e (ro%uction of 0oo%s -it+ (ositi)e e&ternalities. %. T+ey mo)e t+e allocation of resources closer to t+e social o(timum.
ANS: # DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 22. *+ic+ of t+e follo-in0 statements is not correctB a. #orrecti)e ta&es can ,e use% to (lace a (rice on t+e ri0+t to (ollute. ,. #orrecti)e ta&es allocate (ollution to t+ose (ro%ucers -+o face t+e +i0+est cost of re%ucin0 (ollution. c. #orrecti)e ta&es (ro)i%e incenti)es to %e)elo( cleaner tec+nolo0ies. %. #orrecti)e ta&es re3uire t+e 0o)ernment to set a tar0et le)el of (ollution.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 2.. Most ta&es %istort incenti)es an% mo)e t+e allocation of resources a-ay from t+e social o(timum. *+y %o correcti)e ta&es a)oi% t+e %isa%)anta0es of most ot+er ta&esB a. #orrecti)e ta&es a((ly only to 0oo%s t+at are ,a% for (eo(leEs +ealt+$ suc+ as ci0arettes an% alco+ol. ,. /ecause correcti)e ta&es correct for market e&ternalities$ t+ey take into consi%eration t+e -ell ,ein0 of ,ystan%ers. c. #orrecti)e ta&es (ro)i%e incenti)es for t+e conser)ation of natural resources. %. #orrecti)e ta&es %o not affect %ea%-ei0+t loss.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e
#+a(ter 109E&ternalities 21. #orrecti)e ta&es %iffer from most ta&es in t+at correcti)e ta&es a. en+ance economic efficiency. ,. %o not raise re)enue for t+e 0o)ernment. c. cause %ea%-ei0+t loss. %. cannot ,e %i)i%e% ,et-een t+e ,uyer an% seller.
184
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 24. A correcti)e ta& a. allocates (ollution to t+ose factories t+at face t+e +i0+est cost of re%ucin0 it. ,. is a form of re0ulation. c. -orks -ell for all ty(es of e&ternalities. %. is inferior to re0ulatory (olicy accor%in0 to most economists.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 25. #orrecti)e ta&es are unlike most ot+er ta&es ,ecause t+ey a. %istort incenti)es. ,. mo)e t+e allocation of resources a-ay from t+e social o(timum. c. raise re)enue for t+e 0o)ernment. %. mo)e t+e allocation of resources closer to t+e social o(timum.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e 26. In Sin0a(ore$ litterin0 fines are strictly enforce%. T+is is an e&am(le of a (olicy t+at a. relies on moral co%es to re%uce t+e (ollution e&ternality. ,. relies on t+e #oase T+eorem. c. %iscriminates a0ainst forei0ners. %. relies on incenti)es to re%uce t+e (ollution e&ternality.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 27. #orrecti)e ta&es are ty(ically a%)ocate% to correct for t+e effects of a. (ositi)e e&ternalities. ,. ne0ati)e e&ternalities. c. (atents. %. All of t+e a,o)e are correct.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 28. *it+ a correcti)e ta&$ t+e su((ly cur)e for (ollution is a. (erfectly inelastic. ,. (erfectly elastic. c. u(-ar% slo(in0. %. %o-n-ar% slo(in0.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Analytical .0. A correcti)e ta& is also kno-n as: a. a comman% an% control re0ulation. ,. a #oase ta&. c. a 'i0ou)ian ta&. %. a Smit+ian ta&.
185
ANS: # DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Definitional .1. #orrecti)e ta&es a. encoura0e consumers to a)oi% sales ta&es ,y s+o((in0 online. ,. are fre3uently use% to %iscoura0e im(orts. c. are less efficient t+an %irect re0ulation. %. 0i)e factory o-ners an economic incenti)e to re%uce (ollution.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e .2. Su((ose t+at ci0arette smokers create a ne0ati)e e&ternality. Furt+er su((ose t+at t+e 0o)ernment im(oses a ta& on ci0arettes e3ual to t+e (er unit e&ternality. *+at is t+e relations+i( ,et-een t+e after ta& e3uili,rium 3uantity an% t+e socially o(timal 3uantity of ci0arettesB a. T+ey are e3ual. ,. T+e after ta& e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e after ta& e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: ...
Analytical
Su((ose t+at alco+ol consum(tion creates a ne0ati)e e&ternality. *+at can t+e 0o)ernment %o to e3uate t+e e3uili,rium 3uantity of alco+ol an% t+e socially o(timal 3uantity of alco+olB a. im(ose a ta& on alco+ol t+at is e3ual to t+e (er unit e&ternality ,. offer a su,si%y on alco+ol t+at is e3ual to t+e (er unit e&ternality c. im(ose a re0ulation limitin0 t+e amount of alco+ol t+at eac+ consumer can (urc+ase %. not+in0
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: .1.
Analytical
Su((ose t+at smokin0 creates a ne0ati)e e&ternality. If t+e 0o)ernment im(oses a (er ci0arette ta& e3ual to t+e (er ci0arette e&ternality$ t+en a. t+e after ta& e3uili,rium 3uantity of ci0arettes smoke% -ill ,e less t+an t+e socially o(timal 3uantity of ci0arettes smoke%. ,. t+e after ta& e3uili,rium 3uantity of ci0arettes smoke% -ill ,e 0reater t+an t+e socially o(timal 3uantity of ci0arettes smoke%. c. t+e after ta& e3uili,rium 3uantity of ci0arettes smoke% -ill e3ual t+e socially o(timal 3uantity of ci0arettes smoke%. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: .4.
Analytical
Su((ose t+at electricity (ro%ucers create a ne0ati)e e&ternality e3ual to I4 (er unit. Furt+er su((ose t+at t+e 0o)ernment im(ose a I4 (er unit ta& on t+e (ro%ucers. *+at is t+e relations+i( ,et-een t+e after ta& e3uili,rium 3uantity an% t+e socially o(timal 3uantity of electricity to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e after ta& e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e after ta& e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#:
Analytical
#+a(ter 109E&ternalities .5.
186
#orrecti)e ta&es t+at are im(ose% u(on t+e (ro%ucer of a nasty smell can ,e successful in re%ucin0 t+at smell ,ecause t+e ta& makes t+e (ro%ucer a. e&ternali2e t+e (ositi)e e&ternality. ,. e&ternali2e t+e ne0ati)e e&ternality. c. internali2e t+e (ositi)e e&ternality. %. internali2e t+e ne0ati)e e&ternality.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: .6.
Inter(reti)e
Su((ose t+at electricity (ro%ucers create a ne0ati)e e&ternality e3ual to I4 (er unit. Furt+er su((ose t+at t+e 0o)ernment 0i)es a I4 (er unit su,si%y to (ro%ucers. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of electricity to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: .7.
Analytical
Su((ose t+at electricity (ro%ucers create a ne0ati)e e&ternality e3ual to I5 (er unit. Furt+er su((ose t+at t+e 0o)ernment im(oses a I7 (er unit ta& on t+e (ro%ucers. *+at is t+e relations+i( ,et-een t+e after ta& e3uili,rium 3uantity an% t+e socially o(timal 3uantity of electricity to ,e (ro%uce%B a. T+ey are e3ual. ,. T+e after ta& e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e after ta& e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Ne0ati)e e&ternalities MS#: .8.
Analytical
Su((ose t+at elementary e%ucation creates a (ositi)e e&ternality. If t+e 0o)ernment su,si%i2es e%ucation ,y an amount e3ual to t+e (er unit e&ternality it creates$ t+en a. t+e e3uili,rium 3uantity of e%ucation -ill e3ual t+e socially o(timal 3uantity of e%ucation. ,. t+e e3uili,rium 3uantity of e%ucation -ill ,e 0reater t+an t+e socially o(timal 3uantity of e%ucation. c. t+e e3uili,rium 3uantity of e%ucation -ill ,e less t+an t+e socially o(timal 3uantity of e%ucation. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 10.
Analytical
<ni)ersity researc+ers create a (ositi)e e&ternality ,ecause -+at t+ey %isco)er in t+eir researc+ la,s can easily ,e learne% ,y ot+ers -+o +a)enEt contri,ute% to t+e researc+ costs. *+at coul% t+e fe%eral 0o)ernment %o to e3uate t+e e3uili,rium 3uantity of uni)ersity researc+ an% t+e socially o(timal 3uantity of uni)ersity researc+ (ro%uce%B a. ta& uni)ersity researc+ers ,. offer 0rants to uni)ersity researc+ers c. eliminate su,si%i2e% stu%ent loans %. not+in0
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#:
Analytical
187
11.
#+a(ter 109E&ternalities <ni)ersity researc+ers create a (ositi)e e&ternality ,ecause -+at t+ey %isco)er in t+eir researc+ la,s can easily ,e learne% ,y ot+ers -+o +a)enEt contri,ute% to t+e researc+ costs. Su((ose t+at t+e fe%eral 0o)ernment 0i)es 0rants to t+ese researc+ers e3ual to t+e t+eir (er unit (ro%uction e&ternality. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity of uni)ersity researc+ an% t+e socially o(timal 3uantity of uni)ersity researc+ (ro%uce%B a. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. ,. T+ey are e3ual. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 12.
Analytical
Su((ose t+at (lantin0 trees creates a (ositi)e e&ternality e3ual to I24 (er tree. Furt+er su((ose t+at t+e local 0o)ernment offers a I24 (er tree su,si%y to (lanters. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of trees (lante%B a. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+ey are e3ual. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 1..
Analytical
Su((ose t+at cookie (ro%ucers create a (ositi)e e&ternality e3ual to I2 (er %o2en. Furt+er su((ose t+at t+e 0o)ernment offers a I2 (er %o2en su,si%y to t+e (ro%ucers. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of cookies to ,e (ro%uce%B a. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. ,. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. c. T+ey are e3ual. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: # DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 11.
Analytical
Su((ose t+at flu s+ots create a (ositi)e e&ternality e3ual to I12 (er s+ot. Furt+er su((ose t+at t+e 0o)ernment offers a I12 (er s+ot su,si%y to (ro%ucers. *+at is t+e relations+i( ,et-een t+e e3uili,rium 3uantity an% t+e socially o(timal 3uantity of flu s+ots (ro%uce%B a. T+ey are e3ual. ,. T+e e3uili,rium 3uantity is 0reater t+an t+e socially o(timal 3uantity. c. T+e e3uili,rium 3uantity is less t+an t+e socially o(timal 3uantity. %. T+ere is not enou0+ information to ans-er t+e 3uestion.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 14.
Analytical
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#:
Analytical
188
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; 'ositi)e e&ternalities MS#: 16.
Analytical
*+ic+ of t+e follo-in0 statements is not correctB a. Tra%a,le (ollution (ermits +a)e an a%)anta0e o)er correcti)e ta&es if t+e 0o)ernment is uncertain as to t+e o(timal si2e of t+e ta& necessary to re%uce (ollution to a s(ecific le)el. ,. /ot+ correcti)e ta&es an% tra%a,le (ollution (ermits (ro)i%e market ,ase% incenti)es for firms to re%uce (ollution. c. #orrecti)e ta&es set t+e ma&imum 3uantity of (ollution$ -+ereas tra%a,le (ollution (ermits fi& t+e (rice of (ollution. %. /ot+ correcti)e ta&es an% tra%a,le (ollution (ermits re%uce t+e cost of en)ironmental (rotection an% t+us s+oul% increase t+e (u,licEs %eman% for a clean en)ironment.
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e Figure 10-10
17.
Re$er t& Fi'(re 10!10* *+ic+ 0ra(+ illustrates a (ollution (ermit (ro0ramB a. t+e left 0ra(+ ,. t+e ri0+t 0ra(+ c. ,ot+ 0ra(+s %. neit+er 0ra(+
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: Analytical 18. Re$er t& Fi'(re 10!10* *+ic+ 0ra(+ illustrates a correcti)e ta&B a. t+e left 0ra(+ ,. t+e ri0+t 0ra(+ c. ,ot+ 0ra(+s %. neit+er 0ra(+
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Analytical
200
40.
#+a(ter 109E&ternalities Re$er t& Fi'(re 10!10* *+ic+ of t+e follo-in0 is not necessary in or%er for t+e correcti)e ta& an% (ollution (ermit to +a)e e3ui)alent effectsB a. '/ must ,e e3ui)alent to t+e correcti)e ta&. ,. CA must ,e e3ui)alent to t+e amount of (ollution allo-e% to t+e (ollution (ermit +ol%ers. c. T+e e3uili,rium (rice an% 3uantity of (ollution must ,e t+e same in ,ot+ 0ra(+s. %. T+e amount of (ollution emitte% ,y eac+ firm must ,e t+e same.
ANS: D DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Tra%a,le (ollution (ermits MS#: 41. Re$er t& Fi'(re 10!10* T+e su((ly of (ollution (ermits is a. elastic an% re(resente% ,y line A. ,. inelastic an% re(resente% ,y line A. c. elastic an% re(resente% ,y line F %. inelastic an% re(resente% ,y line F.
Analytical
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 42. *+ic+ of t+e follo-in0 statements is correctB a. #orrecti)e ta&es are often (referre% o)er %irect re0ulation ,ecause t+ey ty(ically re%uce e&ternalities at a lo-er cost. ,. #orrecti)e ta&es %istort economic incenti)es. c. #orrecti)e ta&es are often (referre% o)er %irect re0ulation ,ecause t+ey ty(ically re%uce e&ternalities at a faster rate. %. /ot+ a an% , are correct.
ANS: A DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; #omman% an% control (olicies 4..
MS#: Analytical
Re0ulations to re%uce (ollution a. cause (ollution le)els to %ro( ,elo- t+e re0ulate% amount. ,. are a more costly solution to society t+an a correcti)e ta&. c. allo- firms -it+ t+e lo-est cost to re%uce (ollution ,y more t+an t+ose -it+ +i0+est costs. %. are a ,etter solution for t+e en)ironment t+an a correcti)e ta&.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies ; #orrecti)e ta&es 41. A correcti)e ta& a. causes eac+ factory to re%uce (ollution ,y t+e same amount. ,. assi0ns a le0al (ollution limit for firms. c. (laces a (rice on t+e ri0+t to (ollute. %. costs society more t+an (ollution re0ulations.
MS#: A((licati)e
ANS: # DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; #omman% an% control (olicies 44. A correcti)e ta& a. can ,e use% to internali2e a ne0ati)e e&ternality. ,. im(ose% on sellers s+ifts t+e su((ly cur)e to t+e left. c. im(ose% on ,uyers s+ifts t+e %eman% cur)e to t+e left. %. All of t+e a,o)e.
MS#: A((licati)e
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e
#+a(ter 109E&ternalities 45. Most economists (refer correcti)e ta&es to re0ulation to correct t+e (ollution (ro,lem ,ecause: a. t+e market ,ase% solution is less costly to society. ,. t+e market ,ase% solution can result in a 0reater re%uction in (ollution. c. t+e market ,ase% solution raises re)enue for t+e 0o)ernment. %. all of t+e a,o)e.
201
ANS: D DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es 46. *+ic+ of t+e follo-in0 statements is correctB a. Ta&es are more %ifficult to a%minister t+an re0ulations. ,. Ta&es (ro)i%e incenti)es for firms to a%o(t ne- met+o%s to re%uce ne0ati)e e&ternalities. c. #omman% an% control (olicies (ro)i%e incenti)es for (ri)ate %ecisionmakers to sol)e t+eir (ro,lems on t+eir o-n. %. #orrecti)e ta&es %istort incenti)es.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; #omman% an% control (olicies 47.
MS#: Inter(reti)e
*+ic+ of t+e follo-in0 is not an effecti)e met+o% to re%uce ne0ati)e e&ternalitiesB a. relyin0 on )oluntary com(liance ,. ta&in0 t+e out(ut of in%ustries t+at (ollute c. creatin0 le0al en)ironmental stan%ar%s %. increasin0 (u,lic s(en%in0 on cleanu( an% re%uction of (ollution
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; #omman% an% control (olicies 48.
MS#: A((licati)e
*+at is t+e %ifference ,et-een comman% an% control (olicies an% market ,ase% (olicies to-ar% e&ternalitiesB a. #omman% an% control (olicies (ro)i%e incenti)es for (ri)ate %ecisionmakers to sol)e t+e (ro,lems on t+eir o-n$ -+ereas market ,ase% (olicies re0ulate ,e+a)ior %irectly. ,. #omman% an% control (olicies rely on ta&es$ -+ereas market ,ase% (olicies rely on 3uotas. c. #omman% an% control (olicies re0ulate ,e+a)ior %irectly$ -+ereas market ,ase% (olicies (ro)i%e incenti)es for (ri)ate %ecisionmakers to c+an0e t+eir ,e+a)ior. %. #omman% an% control (olicies are efficient$ -+ereas market ,ase% (olicies are inefficient.
ANS: # DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #omman% an% control (olicies MS#: Definitional 50. *+ic+ of t+e follo-in0 statements is not correctB a. 'atents +el( internali2e t+e e&ternalities associate% -it+ tec+nolo0ical a%)ances. ,. Economists ty(ically (refer re0ulations to correcti)e ta&es ,ecause re0ulations (ro)i%e more incenti)es for firms to seek continue% re%uctions in (ollution. c. Allo-in0 firms to tra%e (ollution (ermits -ill lo-er t+e total cost of re%ucin0 (ollution. %. A ,i0 im(e%iment to im(lementin0 t+e #oase t+eorem in many cases is +i0+ transactions costs. / DIF: . REF: 10 2 Analytical !"#: Markets$ market failure$ e&ternalities #omman% an% control (olicies ; Tra%a,le (ollution (ermits Analytical
ANS: NAT: T"': MS#: 51.
In many cases sellin0 (ollution (ermits is a ,etter met+o% for re%ucin0 (ollution t+an im(osin0 a correcti)e ta& ,ecause a. it is +ar% to estimate t+e market %eman% cur)e an% t+us c+ar0e t+e Dri0+tD correcti)e ta&. ,. sellin0 (ollution (ermits create a net increase in (ollution. c. #orrecti)e ta&es %istort incenti)es. %. #orrecti)e ta&es (ro)i%e 0reater fle&i,ility to firms t+at can re%uce (ollution at a lo- cost.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Tra%a,le (ollution (ermits MS#:
Inter(reti)e
202
52.
#+a(ter 109E&ternalities T+e %ifference ,et-een a correcti)e ta& an% a tra%a,le (ollution (ermit is t+at a. a correcti)e ta& sets t+e (rice of (ollution an% a (ermit sets t+e 3uantity of (ollution. ,. a correcti)e ta& creates a more efficient outcome t+an a (ermit. c. a correcti)e ta& sets t+e 3uantity of (ollution an% a (ermit sets t+e (rice of (ollution. %. a (ermit creates a more efficient outcome t+an a correcti)e ta&.
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es ; Tra%a,le (ollution (ermits MS#: 5..
Analytical
In some cases$ tra%a,le (ollution (ermits may ,e ,etter t+an a correcti)e ta& ,ecause a. (ollution (ermits allo- for a market solution -+ile a correcti)e ta& %oes not. ,. (ollution (ermits 0enerate more re)enue for t+e 0o)ernment t+an a correcti)e ta&. c. (ollution (ermits are ne)er (referre% o)er a correcti)e ta&. %. t+e 0o)ernment can set a ma&imum le)el of (ollution usin0 (ermits.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits ; #orrecti)e ta&es MS#: 51.
Inter(reti)e
*+ic+ of t+e follo-in0 +el(e% re%uce sulfur %io&i%e emissions$ a lea%in0 cause of aci% rainB ?i@ correcti)e ta&es ?ii@ tra%a,le (ollution (ermits ?iii@ amen%ments to t+e #lean Air Act a. ,. c. %. ?i@ only ,ot+ ?i@ an% ?ii@ ?iii@ only ,ot+ ?ii@ an% ?iii@
ANS: D DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits ; #orrecti)e ta&es MS#: 54. *it+ (ollution (ermits$ t+e su((ly cur)e for (ollution ri0+ts is a. (erfectly elastic. ,. (erfectly inelastic. c. u(-ar% slo(in0. %. %o-n-ar% slo(in0.
A((licati)e
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 55. Tra%a,le (ollution (ermits a. are -i%ely )ie-e% as a cost effecti)e -ay to re%uce (ollution. ,. +a)e +el(e% re%uce car,on emissions. c. +a)e +el(e% re%uce sulfur %io&i%e emissions. %. All of t+e a,o)e are correct.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e 56. "nce tra%a,le (ollution (ermits +a)e ,een allocate% to firms$ a. t+e 0o)ernment controls t+e (rice of (ermits. ,. firms t+at can re%uce (ollution only at +i0+ cost -ill ,e -illin0 to (ay t+e most for t+e (ollution (ermits. c. t+e )alue of (ollution sa)in0 tec+nolo0y -ill ,e lo-er t+an t+e market )alue of a (ollution (ermit. %. t+e #oase t+eorem is no lon0er a((lica,le as a solution to re%ucin0 (ollution.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Inter(reti)e
#+a(ter 109E&ternalities 57. Tra%a,le (ollution (ermits a. +a)e (rices t+at are set ,y t+e 0o)ernment. ,. -ill ,e more )alua,le to firms t+at can re%uce (ollution only at +i0+ costs. c. are likely to create a +i0+er le)el of total (ollution. %. are less %esira,le t+an correcti)e ta&es in re%ucin0 (ollution.
20.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 58. *+ic+ of t+e follo-in0 is not a c+aracteristic of (ollution (ermitsB a. 'rices are set ,y su((ly an% %eman%. ,. Allo-in0 firms to tra%e t+eir (ermits re%uces t+e total 3uantity of (ollution ,eyon% t+e initial allocation. c. Real -orl% markets for (ollution (ermits inclu%e sulfur %io&i%e an% car,on. %. Firms for -+om (ollution re%uction is )ery e&(ensi)e are -illin0 to (ay more for (ermits t+an firms for -+om (ollution re%uction is less e&(ensi)e.
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 60. *+en one firm sells its (ollution (ermit to anot+er firm$ a. ,ot+ firms ,enefit. ,. t+e total amount of (ollution remains t+e same. c. t+e total amount of (ollution %ecreases. %. /ot+ a an% , are correct.
ANS: D DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 61. *+ic+ of t+e follo-in0 is an a%)anta0e of tra%a,le (ollution (ermitsB a. Eac+ firm is allo-e% to (ollute e&actly t+e same amount. ,. Re)enue from t+e sale of (ermits is 0reater t+an re)enue from a correcti)e ta&. c. T+e initial allocation of (ermits to firms %oes not affect t+e efficiency of t+e market. %. Firms -ill en0a0e in Hoint researc+ efforts to re%uce (ollution.
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 62. *+ic+ of t+e follo-in0 is a -ay to a%%ress an e&ternality (ro,lemB a. comman% an% control solution ,. correcti)e ta& c. correcti)e su,si%y %. all of t+e a,o)e.
ANS: D DIF: 1 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Definitional 6.. *+ic+ of t+e follo-in0 is a %ifference ,et-een correcti)e ta&es an% tra%a,le (ollution (ermitsB a. #orrecti)e ta&es are a market ,ase% solution -+ile tra%a,le (ollution (ermits are a comman% an% control (olicy. ,. *it+ a correcti)e ta& t+e 0o)ernment sets t+e (rice of (ollutionN -it+ tra%a,le (ollution (ermits$ %eman% an% su((ly set t+e (rice of (ollution. c. *it+ correcti)e ta&es firms (ay for (ollutionN -it+ tra%a,le (ollution (ermits firms %o not. %. #orrecti)e ta&es internali2e t+e (ollution e&ternality -+ile tra%a,le (ollution (ermits %o not.
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Inter(reti)e
201
Figure 10-11
61.
Re$er t& Fi'(re 10!11* T+is 0ra(+ s+o-s t+e market for (ollution -+en (ermits are issue% to firms an% tra%e% in t+e market(lace. T+e e3uili,rium (rice of (ollution is a. I40 ,. I400 c. I1$000 %. I2$000
ANS: # DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 64. Re$er t& Fi'(re 10!11* T+is 0ra(+ s+o-s t+e market for (ollution -+en (ermits are issue% to firms an% tra%e% in t+e market(lace. T+e e3uili,rium num,er of (ermits is a. 40 ,. 100 c. 1$000 %. 2$000
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 65. Re$er t& Fi'(re 10!11* T+is 0ra(+ s+o-s t+e market for (ollution -+en (ermits are issue% to firms an% tra%e% in t+e market(lace. In t+e a,sence of a (ollution (ermit system$ t+e 3uantity of (ollution -oul% ,e a. 24 ,. 40 c. 64 %. 100
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical
204
T-o firms$ A an% /$ eac+ currently emit 100 tons of c+emicals into t+e air. T+e 0o)ernment +as %eci%e% to re%uce t+e (ollution an% from no- on -ill re3uire a (ollution (ermit for eac+ ton of (ollution emitte% into t+e air. T+e 0o)ernment 0i)es eac+ firm 10 (ollution (ermits$ -+ic+ it can eit+er use or sell to t+e ot+er firm. It costs Firm A I200 for eac+ ton of (ollution t+at it eliminates ,efore it is emitte% into t+e air$ an% it costs Firm / I100 for eac+ ton of (ollution t+at it eliminates ,efore it is emitte% into t+e air. After t+e t-o firms ,uy or sell (ollution (ermits from eac+ ot+er$ -e -oul% e&(ect t+at Firm A -ill emit a. 20 fe-er tons of (ollution into t+e air$ an% Firm / -ill emit 100 fe-er tons of (ollution into t+e air. ,. 100 fe-er tons of (ollution into t+e air$ an% Firm / -ill emit 20 fe-er tons of (ollution into t+e air. c. 40 fe-er tons of (ollution into t+e air$ an% Firm / -ill emit 40 fe-er tons of (ollution into t+e air. %. 20 more tons of (ollution into t+e air$ an% Firm / -ill emit 100 fe-er tons of (ollution into t+e air.
ANS: A DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 67. T-o firms$ A an% /$ eac+ currently emit 100 tons of c+emicals into t+e air. T+e 0o)ernment +as %eci%e% to re%uce t+e (ollution an% from no- on -ill re3uire a (ollution (ermit for eac+ ton of (ollution emitte% into t+e air. T+e 0o)ernment 0i)es eac+ firm 10 (ollution (ermits$ -+ic+ it can eit+er use or sell to t+e ot+er firm. It costs Firm A I200 for eac+ ton of (ollution t+at it eliminates ,efore it is emitte% into t+e air$ an% it costs Firm / I100 for eac+ ton of (ollution t+at it eliminates ,efore it is emitte% into t+e air. It is likely t+at a. Firm A -ill ,uy all of Firm /Es (ollution (ermits. Eac+ one -ill cost ,et-een I100 an% I200. ,. Firm / -ill ,uy all of Firm AEs (ollution (ermits. Eac+ one -ill cost ,et-een I100 an% I200. c. /ot+ firms -ill use t+eir o-n (ollution (ermits. %. Firm A -ill ,uy some of Firm /Es (ollution (ermits. Eac+ one -ill cost less t+an I100.
ANS: A DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 68. T-o firms$ A an% /$ eac+ currently %um( 40 tons of c+emicals into t+e local ri)er. T+e 0o)ernment +as %eci%e% to re%uce t+e (ollution an% from no- on -ill re3uire a (ollution (ermit for eac+ ton of (ollution %um(e% into t+e ri)er. It costs Firm A I100 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er$ an% it costs Firm / I40 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er. T+e 0o)ernment 0i)es eac+ firm 20 (ollution (ermits. :o)ernment officials are not sure -+et+er to allo- t+e firms to ,uy or sell t+e (ollution (ermits to eac+ ot+er. *+at is t+e total cost of re%ucin0 (ollution if firms are not allo-e% to ,uy an% sell (ollution (ermits from eac+ ot+erB *+at is t+e total cost of re%ucin0 (ollution if t+e firms are allo-e% to ,uy an% sell (ermits from eac+ ot+erB a. I.$000N I1$400 ,. I1$400N I.$400 c. I1$400N I1$000 %. I1$400N I2$400
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 70. T-o firms$ A an% /$ eac+ currently %um( 20 tons of c+emicals into t+e local ri)er. T+e 0o)ernment +as %eci%e% to re%uce t+e (ollution an% from no- on -ill re3uire a (ollution (ermit for eac+ ton of (ollution %um(e% into t+e ri)er. T+e 0o)ernment 0i)es eac+ firm 10 (ollution (ermits$ -+ic+ it can eit+er use or sell to t+e ot+er firm. It costs Firm A I100 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er$ an% it costs Firm / I40 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er. After t+e t-o firms ,uy or sell (ollution (ermits from eac+ ot+er$ -e -oul% e&(ect t+at a. Firm A -ill no lon0er (ollute$ an% Firm / -ill not re%uce its (ollution at all. ,. Firm / -ill no lon0er (ollute$ an% Firm A -ill not re%uce its (ollution at all. c. Firm A -ill %um( 10 tons of (ollution into t+e ri)er$ an% Firm / -ill %um( 10 tons of (ollution into t+e ri)er. %. Firm A -ill increase its (ollution an% Firm / -ill re%uce its (ollution.
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical
205
71.
#+a(ter 109E&ternalities T-o firms$ A an% /$ eac+ currently %um( 40 tons of c+emicals into t+e local ri)er. T+e 0o)ernment +as %eci%e% to re%uce t+e (ollution an% from no- on -ill re3uire a (ollution (ermit for eac+ ton of (ollution %um(e% into t+e ri)er. T+e 0o)ernment -ill sell 10 (ollution (ermits for I64 eac+. It costs Firm A I100 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er$ an% it costs Firm / I40 for eac+ ton of (ollution t+at it eliminates ,efore it reac+es t+e ri)er. Neit+er firm (ro%uces any less out(ut$ ,ut t+ey ,ot+ conform to t+e la-. It is likely t+at ,et-een t+e cost of (ermits an% t+e cost of a%%itional (ollution a,atement$ a. Firm / -ill s(en% I.$400. ,. Firm A -ill s(en% I1$000. c. Firm A -ill s(en% I1$400. %. Firm / -ill s(en% I.$000.
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: Analytical 72. *+ic+ of t+e follo-in0 re3uire firms to (ay to (olluteB ?i@ correcti)e ta&es ?ii@ tra%a,le (ollution (ermits ?iii@ (ollution re0ulations a. ,. c. %. ANS: NAT: T"': MS#: ?i@ only ,ot+ ?i@ an% ?ii@ ?iii@ only ,ot+ ?ii@ an% ?iii@ / DIF: 2 REF: 10 2 Analytical !"#: Markets$ market failure$ e&ternalities #orrecti)e ta&es ; Tra%a,le (ollution (ermits ; #omman% an% control (olicies A((licati)e
Price
Figure 10-6
SE S
E&ternal #ost
'E '
D CE C
Quantity
7..
Re$er t& Fi'(re 10!.* Ao- lar0e -oul% a correcti)e ta& nee% to ,e to mo)e t+is market from t+e e3uili,rium outcome to t+e socially o(timal outcomeB a. An amount e3ual to 'J minus '. ,. An amount e3ual to 'J. c. An amount e3ual to '. %. An amount e3ual to t+e e&ternal cost.
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: Analytical
#+a(ter 109E&ternalities Table 10-3
206
T+e follo-in0 ta,le s+o-s t+e mar0inal costs for eac+ of four firms ?A$ /$ #$ an% D@ to eliminate units of (ollution from t+eir (ro%uction (rocesses. For e&am(le$ for Firm A to eliminate one unit of (ollution$ it -oul% cost I41$ an% for Firm A to eliminate a secon% unit of (ollution it -oul% cost an a%%itional I56. Fir7 Unit to be eliminated First unit Secon% unit T+ir% unit Fourt+ unit 71. A 41 56 72 106 B 46 57 75 107 C 41 55 72 106 D 52 6. 81 111
Re$er t& Ta/le 10!+* If t+e 0o)ernment c+ar0e% a fee of I58 (er unit of (ollution$ +o- many units of (ollution -oul% t+e firms eliminate alto0et+erB a. 6 ,. 7 c. 8 %. 10
ANS: A DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 74. Re$er t& Ta/le 10!+* If t+e 0o)ernment c+ar0e% a fee of I71 (er unit of (ollution$ +o- many units of (ollution -oul% t+e firms eliminate alto0et+erB a. 6 ,. 7 c. 8 %. 10
ANS: D DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 75. Re$er t& Ta/le 10!+* If t+e 0o)ernment -ante% to re%uce (ollution from 15 units to 5 units$ -+ic+ of t+e follo-in0 fees (er unit of (ollution -oul% ac+ie)e t+at 0oalB a. I56 ,. I57 c. I71 %. I7.
ANS: D DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 76. Re$er t& Ta/le 10!+* If t+e 0o)ernment -ante% to eliminate e&actly 11 units of (ollution$ -+ic+ of t+e follo-in0 fees (er unit of (ollution -oul% ac+ie)e t+at 0oalB a. I64 ,. I76 c. I80 %. I105
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 77. Re$er t& Ta/le 10!+* Su((ose t+e 0o)ernment -ants to re%uce (ollution from 15 units to 7 units an% auctions off 7 (ollution (ermits to ac+ie)e t+is 0oal. *+ic+ of t+e follo-in0 is a likely auction (rice of t+e (ermitsB a. I58 ,. I71 c. I7. %. I86
207
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': Tra%a,le (ollution (ermits MS#: A((licati)e Table 10-4 T+e follo-in0 ta,le s+o-s t+e total costs for eac+ of four firms ?A$ /$ #$ an% D@ to eliminate units of (ollution from t+eir (ro%uction (rocesses. For e&am(le$ for Firm A to eliminate one unit of (ollution$ it -oul% cost I15$ an% for Firm A to eliminate t-o units of (ollution$ it -oul% cost a total of I10.. Fir7 Unit to be eliminated "ne unit T-o units T+ree units Four units 78. A 15 10. 170 272 B 14 100 16. 257 C 12 87 158 251 D 18 107 17. 270
Re$er t& Ta/le 10!,* If t+e 0o)ernment c+ar0e% a fee of I8. (er unit of (ollution$ +o- many units of (ollution -oul% t+e firms eliminate alto0et+erB a. 4 ,. 5 c. 12 %. 15
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 80. Re$er t& Ta/le 10!,* If t+e 0o)ernment c+ar0e% a fee of I101 (er unit of (ollution$ +o- many units of (ollution -oul% t+e firms eliminate alto0et+erB a. 8 ,. 12 c. 14 %. 15
ANS: # DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 81. Re$er t& Ta/le 10!,* Su((ose t+e 0o)ernment -ante% to re%uce (ollution from 15 units to e&actly 6 units. *+ic+ of t+e follo-in0 fees (er unit of (ollution -oul% ac+ie)e t+at 0oalB a. I47 ,. I72 c. I85 %. I102
ANS: A DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e 82. Re$er t& Ta/le 10!,* Su((ose t+e 0o)ernment -ante% to eliminate e&actly 10 units of (ollution. *+ic+ of t+e follo-in0 fees (er unit of (ollution -oul% ac+ie)e t+at 0oalB a. I57 ,. I61 c. I120 %. I1.1
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e
#+a(ter 109E&ternalities 8.. *+ic+ of t+e follo-in0 is not an ar0ument for im(osin0 a car,on ta& to a%%ress 0lo,al -armin0B a. Re)enue from a car,on ta& coul% ,e use% to re%uce (ayroll ta&es lea)in0 t+e total ta& ,ur%en unc+an0e% -+ile re%ucin0 car,on emissions. ,. A car,on ta& -oul% allo- t+e 0o)ernment to set t+e 3uantity of car,on %io&i%e (ollution. c. A car,on ta& -oul% ,e less costly to consumers an% result in 0reater car,on re%uction t+an re0ulations re3uirin0 increase% fuel efficiency. %. A 0lo,al car,on ta& -oul% ,e easier to ne0otiate -it+ forei0n 0o)ernments t+an t+e terms of a tra%a,le (ollution (ermit system.
208
ANS: / DIF: 2 REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ e&ternalities T"': #orrecti)e ta&es MS#: A((licati)e
Sec0+! ri8ate S&l(ti&ns t& Externalities

MULTI LE CHOICE 1. E&ternalities can ,e correcte% ,y eac+ of t+e follo-in0 except a. self interest. ,. moral co%es an% social sanctions. c. c+arity. %. normal market a%Hustments. DIF: 1 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
T+e :ol%en Rule is an e&am(le of a (ri)ate solution for a. su,si%i2in0 +i0+er e%ucation. ,. internali2in0 e&ternalities. c. increasin0 (ro%uction. %. re%ucin0 scarcity. DIF: 1 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
ANS: / NAT: Analytical T"': E&ternalities ..
T-o ty(es of private solutions to t+e (ro,lem of e&ternalities are a. c+arities an% t+e :ol%en Rule. ,. c+arities an% su,si%ies. c. t+e :ol%en Rule an% ta&es. %. ta&es an% su,si%ies. DIF: 1 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+en e&ternalities cause markets to ,e inefficient$ a. 0o)ernment action is al-ays nee%e% to sol)e t+e (ro,lem. ,. (ri)ate solutions can ,e %e)elo(e% to sol)e t+e (ro,lem. c. 0i)en enou0+ time$ e&ternalities can ,e sol)e% t+rou0+ normal market a%Hustments. %. t+ere is no -ay to eliminate t+e (ro,lem of e&ternalities in a market. DIF: 1 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
Aoney (ro%ucers (ro)i%e a (ositi)e e&ternality to orc+ar%s ,ecause a. t+e +oney (ro%ucers 0et more +oney. ,. t+e orc+ar% o-ner fre3uently 0ets stun0 ,y t+e +oney (ro%ucerEs ,ees. c. t+e orc+ar% o-ner %oes not +a)e to (urc+ase ,ees to (ollinate +is flo-ers. %. t+e +oney (ro%ucers +a)e to rent access to t+e orc+ar% 0roun%s.
210
#+a(ter 109E&ternalities DIF: 1 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
Since e&ternalities ten% to kee( markets from reac+in0 a socially o(timal e3uili,rium$ 0o)ernment action a. is al-ays nee%e% ,ecause (ri)ate solutions can ne)er ,e attaine%. ,. is nee%e% -+en (ri)ate solutions fail to arise. c. -ill ,e nee%e% only to correct for (ositi)e e&ternalities. %. -ill ,e nee%e% only to correct for ne0ati)e e&ternalities. DIF: 2 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: Inter(reti)e
Firms t+at are in)ol)e% in more t+an one ty(e of ,usiness coul% ,e e)i%ence of an attem(t to a. increase (ri)ate (rofit at t+e e&(ense of consumers. ,. internali2e some forms of (ositi)e e&ternalities. c. re%uce t+e im(act of 0o)ernment re0ulations on t+eir ,usiness. %. increase t+e (ri)ate mar0inal cost of (ro%uction. DIF: 2 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
'ri)ate contracts ,et-een (arties -it+ mutual interests a. -ill re%uce t+e -ell ,ein0 of society. ,. -ill lea% to market outcomes in -+ic+ t+e (u,lic interest is sacrifice% for (ersonal 0ain. c. can sol)e some inefficiencies associate% -it+ (ositi)e e&ternalities. %. -ill create ne0ati)e e&ternalities. DIF: 2 REF: 10 . !"#: Markets$ market failure$ an% e&ternalities MS#: A((licati)e
*+ic+ of t+e follo-in0 statements is not correctB a. 'ri)ate markets ten% to o)er (ro%uce (ro%ucts -it+ ne0ati)e e&ternalities. ,. 'ri)ate markets ten% to un%er (ro%uce (ro%ucts -it+ (ositi)e e&ternalities. c. 'ri)ate (arties can ,ar0ain to efficient outcomes e)en in t+e (resence of e&ternalities. %. 'ri)ate (arties are usually more successful in ac+ie)in0 efficient outcomes t+an 0o)ernment (olicies.
ANS: D DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': E&ternalities ; #oase t+eorem MS#: Inter(reti)e 10. 'ri)ate solutions may not ,e (ossi,le %ue to t+e costs of ne0otiatin0 an% enforcin0 t+ese solutions. Suc+ costs are calle% a. transaction costs. ,. correcti)e costs. c. in(ut costs. %. (ri)ate costs.
ANS: A DIF: 1 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional 11. Em(loyin0 a la-yer to %raft an% enforce a (ri)ate contract ,et-een (arties -is+in0 to sol)e an e&ternality (ro,lem is an e&am(le of a. an o((ortunity cost. ,. an im(licit cost. c. a sunk cost. %. a transaction cost.
#+a(ter 109E&ternalities ANS: D DIF: 1 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 12.
211
T+e (ro(osition t+at if (ri)ate (arties can ,ar0ain -it+out cost o)er t+e allocation of resources$ t+ey can sol)e t+e (ro,lem of e&ternalities on t+eir o-n$ is calle% a. t+e 'i0ou)ian t+eorem. ,. a correcti)e ta&. c. t+e e&ternality t+eorem. %. t+e #oase t+eorem.
ANS: D DIF: 1 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional 1.. *+ic+ of t+e follo-in0 su00ests t+at (ri)ate markets can ,e effecti)e in %ealin0 -it+ e&ternalitiesB a. t+e Din)isi,le +an%D ,. t+e la- of %iminis+in0 social returns c. t+e #oase t+eorem %. tec+nolo0y (olicy
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 11. T+e #oase t+eorem su00ests t+at (ri)ate markets may not ,e a,le to sol)e t+e (ro,lem of e&ternalities a. if t+e 0o)ernment %oes not ,ecome in)ol)e% in t+e (rocess. ,. -+en t+e num,er of intereste% (arties is lar0e an% ,ar0ainin0 costs are +i0+. c. if t+e firm in t+e market is a mono(oly. %. if some (eo(le ,enefit from t+e e&ternality.
ANS: / DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 14. Transaction costs a. can kee( (ri)ate (arties from sol)in0 e&ternality (ro,lems. ,. are incurre% in t+e (ro%uction (rocess %ue to e&ternalities. c. increase -+en ta&es are im(ose% to correct ne0ati)e e&ternalities. %. are eliminate% -+en t+e 0o)ernment inter)enes in a market -it+ e&ternalities.
ANS: A DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 15. "ne reason t+at (ri)ate solutions to e&ternalities %o not al-ays -ork is t+at a. 0o)ernment inter)ention ne0ates t+e ,enefits of (ositi)e e&ternalities. ,. some (eo(le ,enefit from e&ternalities. c. intereste% (arties incur costs in t+e ,ar0ainin0 (rocess. %. c+arities are not -ell or0ani2e%.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Inter(reti)e 16. Assumin0 transaction costs are small$ t+e #oase t+eorem -oul% (re%ict t+at (ri)ate (arties coul% arri)e at an efficient solution for -+ic+ of t+e follo-in0 (ro,lemsB a. "ne nei0+,or lets +is %o0 run t+rou0+ anot+er nei0+,orJs 0ar%en$ %ama0in0 +er flo-ers. ,. "ne nei0+,or %oesnEt mo- +er yar%. c. "ne nei0+,or (lays +is music lou%ly. %. All of t+e a,o)e are correct.
ANS: D DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e
212
17.
#+a(ter 109E&ternalities If only a fe- (eo(le are affecte% ,y an e&ternality$ t+en it is likely t+at a. correcti)e ta&es -ill (ro)i%e t+e most efficient solution to t+e e&ternality. ,. comman% an% control re0ulation -ill (ro)i%e t+e most efficient solution to t+e e&ternality. c. a (ri)ate solution to t+e inefficiency -ill occur. %. a (ri)ate solution -ill ,e )ery %ifficult to ne0otiate.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Inter(reti)e 18. Reac+in0 an efficient ,ar0ain is %ifficult -+en t+e a. e&ternality is lar0e. ,. num,er of intereste% (arties is lar0e. c. e&ternality is ne0ati)e. %. 0o)ernment ,ecomes in)ol)e%.
ANS: / DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 20. *+ic+ of t+e follo-in0 is a (ro,lem t+at kee(s (eo(le from (ri)ately sol)in0 e&ternality (ro,lemsB a. Eac+ (arty in)ol)e% +ol%s out for a ,etter %eal. ,. T+e e&ternality is lar0e. c. "nly (ro,lems -it+ a sufficiently lar0e num,er of (arties can ,e sol)e%. %. T+ere is a lack of 0o)ernment inter)ention.
ANS: A DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 21. In class action la-suits intereste% (arties to t+e la-suit are not re3uire% to (ay attorney fees %irectly. T+is is an e&am(le of an attem(t to a. ma&imi2e attorney fees. ,. re%uce t+e incenti)e of attorneys to file class action la-suits. c. re%uce t+e transaction costs of fin%in0 a (ri)ate solution to an e&ternality. %. re0ulate attorney fees.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 22. Nancy lo)es to lan%sca(e +er yar%$ ,ut +er nei0+,or !ee (laces a lo- )alue on +is lan%sca(in0. *+en !eeEs 0rass is ne0lecte% an% 0ets lon0$ Nancy -ill mo- it for !ee. T+is is an e&am(le of a. a situation in -+ic+ t+e #oase t+eorem fails to e&(lain t+e la-n mo-in0 arran0ement. ,. an im(ro(er allocation of resources. c. a (ri)ate solution to a ne0ati)e e&ternality (ro,lem. %. an e&(loitation of a common resource.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 2.. T+e #oase t+eorem su00ests t+at (ri)ate solutions to an e&ternality (ro,lem a. are effecti)e un%er all con%itions. ,. -ill usually allocate resources efficiently if (ri)ate (arties can ,ar0ain -it+out cost. c. are only efficient -+en t+ere are ne0ati)e e&ternalities. %. may not ,e (ossi,le ,ecause of t+e %istri,ution of (ro(erty ri0+ts.
ANS: / DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e
#+a(ter 109E&ternalities 21. In -+ic+ of t+e follo-in0 cases is t+e #oase t+eorem most likely to sol)e t+e e&ternalityB a. E% is aller0ic to +is roommateJs cat. ,. #+emicals from manufacturin0 (lants in t+e Mi%-est are causin0 aci% rain in #ana%a. c. 'ollute% -ater runoff from farms is makin0 resi%ents of a near,y to-n sick. %. In%ustriali2ation aroun% t+e -orl% is causin0 0lo,al -armin0.
21.
ANS: A DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 24. Accor%in0 to t+e #oase t+eorem$ (ri)ate (arties can sol)e t+e (ro,lem of e&ternalities if a. t+e cost of ,ar0ainin0 is small. ,. t+e initial %istri,ution of le0al ri0+ts fa)ors t+e (erson ,ein0 a%)ersely affecte% ,y t+e e&ternality. c. t+e num,er of (arties in)ol)e% is sufficiently lar0e. %. All of t+e a,o)e are correct.
ANS: A DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 25. Accor%in0 to t+e #oase t+eorem$ (ri)ate markets -ill sol)e e&ternality (ro,lems an% allocate resources efficiently as lon0 as a. t+e e&ternalities t+at are (resent are (ositi)e$ not ne0ati)e. ,. 0o)ernment assi0ns (ro(erty ri0+ts to t+e +arme% (arty. c. (ri)ate (arties can ,ar0ain -it+ sufficiently lo- transaction costs. %. ,usinesses %etermine an a((ro(riate le)el of (ro%uction.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e 26. T+e #oase t+eorem states t+at a. un%er certain circumstances 0o)ernment inter)ention is not nee%e% to reac+ efficient outcomes -+en an e&ternality is (resent. ,. 0o)ernment inter)ention is al-ays re3uire% to reac+ an efficient outcome -+en an e&ternality is (resent. c. 0o)ernment inter)ention cannot lea% to an efficient outcome -+en an e&ternality is (resent. %. only ne0ati)e e&ternalities can ,e resol)e% usin0 0o)ernment inter)ention.
ANS: A DIF: 1 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional 27. *+ic+ of t+e follo-in0 is not a necessary con%ition for t+e #oase t+eoremB a. 'ro(erty ri0+ts are clearly %efine%. ,. T+ere are no ,ar0ainin0 costs. c. T+e 0o)ernment inter)enes to internali2e t+e e&ternality. %. T+ere are only a fe- (arties in)ol)e%.
ANS: # DIF: 1 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Definitional 28. In many cases t+e #oase t+eorem %oes not -ork -ell ,ecause a. t+ere are too fe- (arties at t+e ne0otiation ta,le. ,. t+e 0o)ernment %oes not kno- a,out t+e #oase t+eorem. c. transaction costs are too +i0+. %. transaction costs are too lo-.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Inter(reti)e
211
.0.
#+a(ter 109E&ternalities *+y canEt (ri)ate in%i)i%uals al-ays internali2e an e&ternality -it+out t+e +el( of 0o)ernmentB a. !e0al restrictions (re)ent si%e (ayments ,et-een in%i)i%uals. ,. Transactions costs may ,e too +i0+. c. Si%e (ayments ,et-een in%i)i%uals are inefficient. %. Si%e (ayments ,et-een in%i)i%uals are insufficient.
ANS: / DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e .1. *+at economic ar0ument su00ests t+at if transactions costs are sufficiently lo-$ t+e e3uili,rium is economically efficient re0ar%less of +o- (ro(erty ri0+ts are %istri,ute%B a. t+e #oase t+eorem ,. t+e la-s of su((ly an% %eman% c. t+e la- of com(arati)e a%)anta0e %. t+e la- of e&ternalities
ANS: A DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Inter(reti)e .2. T+e #oase t+eorem states t+at a. ta&es are an efficient -ay for 0o)ernments to reme%y ne0ati)e e&ternalities. ,. su,si%ies are an efficient -ay for 0o)ernments to reme%y (ositi)e e&ternalities. c. in%ustrial (olicies encoura0e tec+nolo0y s(illo)ers. %. in t+e a,sence of transaction costs$ (ri)ate (arties can sol)e t+e (ro,lem of e&ternalities on t+eir o-n.
ANS: D DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: A((licati)e ... Mary an% #at+y are roommates. Mary assi0ns a I.0 )alue to smokin0 ci0arettes. #at+y )alues smoke free air at I14. *+ic+ of t+e follo-in0 scenarios is a successful e&am(le of t+e #oase t+eoremB a. #at+y offers Mary I20 not to smoke. Mary acce(ts an% %oes not smoke. ,. Mary (ays #at+y I15 so t+at Mary can smoke. c. Mary (ays #at+y I11 so t+at Mary can smoke. %. #at+y offers Mary I14 not to smoke. Mary acce(ts an% %oes not smoke.
ANS: / DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .1. A %entist s+ares an office ,uil%in0 -it+ a ra%io station. T+e electrical current from t+e %entistEs %rill causes static in t+e ra%io ,roa%cast$ causin0 t+e ra%io station to lose I10$000 in (rofits. T+e ra%io station coul% (ut u( a s+iel% at a cost of I.0$000N t+e %entist coul% ,uy a ne- %rill t+at causes less interference for I5$000. Eit+er -oul% restore t+e ra%io stationEs lost (rofits. *+at is t+e economically efficient outcomeB a. T+e ra%io station (uts u( a s+iel%$ -+ic+ it (ays for. ,. T+e ra%io station (uts u( a s+iel%$ -+ic+ t+e %entist (ays for. c. Neit+er t+e ra%io station nor t+e %entist (urc+ase a%%itional e3ui(ment. %. T+e %entist 0ets a ne- %rillN it %oes not matter -+o (ays for it.
ANS: D DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .4. Dick o-ns a %o0 -+ose ,arkin0 annoys DickEs nei0+,or Mane. Su((ose t+at t+e ,enefit of o-nin0 t+e %o0 is -ort+ I200 to Dick an% t+at Mane ,ears a cost of I100 from t+e ,arkin0. Assumin0 Dick +as t+e le0al ri0+t to kee( t+e %o0$ a (ossi,le (ri)ate solution to t+is (ro,lem is t+at a. Mane (ays Dick I140 to 0i)e t+e %o0 to +is (arents -+o li)e on an isolate% farm. ,. Dick (ays Mane I.40 for +er incon)enience. c. Mane (ays Dick I.00 to 0i)e t+e %o0 to +is (arents -+o li)e on an isolate% farm. %. T+ere is no (ri)ate transaction t+at -oul% im(ro)e t+is situation.
#+a(ter 109E&ternalities ANS: # DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .5.
214
Dick o-ns a %o0 -+ose ,arkin0 annoys DickEs nei0+,or Mane. Su((ose t+at t+e ,enefit of o-nin0 t+e %o0 is -ort+ I600 to Dick an% t+at Mane ,ears a cost of I400 from t+e ,arkin0. Assumin0 Dick +as t+e le0al ri0+t to kee( t+e %o0$ a (ossi,le (ri)ate solution to t+is (ro,lem is t+at a. Dick (ays Mane I500 for +er incon)enience. ,. Mane (ays Dick I540 to 0i)e t+e %o0 to +is (arents -+o li)e on an isolate% farm. c. Mane (ays Dick I700 to 0i)e t+e %o0 to +is (arents -+o li)e on an isolate% farm. %. T+e current situation is efficient.
ANS: D DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .6. Dick o-ns a %o0 -+ose ,arkin0 annoys DickEs nei0+,or Mane. Dick recei)es (ersonal ,enefit from o-nin0 t+e %o0$ an% Mane ,ears a cost of DickEs o-ners+i( of t+e %o0. Assumin0 Mane +as t+e le0al ri0+t to (eace an% 3uiet$ -+ic+ of t+e follo-in0 statements is correctB a. If DickEs ,enefit e&cee%s ManeEs cost$ 0o)ernment inter)ention is necessary. ,. Dick -ill (ay to kee( +is %o0 if +is ,enefit e&cee%s ManeEs cost. c. If ManeEs cost e&cee%s DickEs ,enefit$ Dick -ill (ay Mane to kee( +is %o0. %. If Mane +as t+e le0al ri0+t to (eace an% 3uiet$ no furt+er transactions -ill ,e mutually ,eneficial.
ANS: / DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .7. /ettyJs cat causes Su2y to snee2e. /etty )alues +er catJs com(anions+i( at I.00 (er year. T+e cost to Su2y of tissues an% +er aller0y me%ication is I.40 (er year. /ase% on t+e #oase t+eorem$ a. /etty s+oul% (ay Su2y I100 so t+at s+e may kee( +er cat. ,. /etty s+oul% (ay Su2y I.40 to (urc+ase +er tissues an% aller0y me%ication. c. Su2y s+oul% (ay /etty I.24 to 0i)e a-ay +er cat. %. Su2y s+oul% mo)e.
ANS: # DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical .8. Accor%in0 to t+e #oase t+eorem$ in t+e (resence of e&ternalities a. (ri)ate (arties can ,ar0ain to reac+ an efficient outcome. ,. 0o)ernment assistance is necessary to reac+ an efficient outcome. c. t+e assi0nment of le0al ri0+ts can (re)ent e&ternalities. %. t+e initial %istri,ution of (ro(erty ri0+ts -ill %etermine t+e efficient outcome.
ANS: A DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical 10. Assume t+at your roommate is )ery messy. Su((ose s+e 0ets a I40 ,enefit from ,ein0 messy ,ut im(oses a I100 cost on you. T+e #oase t+eorem -oul% su00est t+at an efficient solution -oul% ,e for you to a. (ay your roommate at least I40 ,ut no more t+an I100 to clean u( after +erself. ,. (ay your roommate at least I101 to clean u( after +erself. c. c+ar0e your roommate at least I40 to +a)e you clean u( after +er. %. c+ar0e your roommate at least I100 ,ut no more t+an I200 to kee( you from com(lainin0 a,out t+e mess.
ANS: A DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical
215
11.
#+a(ter 109E&ternalities Assume t+at your roommate is )ery messy. Accor%in0 to cam(us (olicy$ you +a)e a ri0+t to li)e in an uncluttere% a(artment. Su((ose s+e 0ets a I200 ,enefit from ,ein0 messy ,ut im(oses a I100 cost on you. T+e #oase t+eorem -oul% su00est t+at an efficient solution -oul% ,e for your roommate to a. sto( +er messy +a,its or else mo)e out. ,. (ay you at least I100 ,ut less t+an I200 to li)e -it+ t+e clutter. c. continue to ,e messy an% force you to mo)e out. %. %eman% (ayment of at least I100 ,ut no more t+an I200 to clean u( after +erself.
ANS: / DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical 12. Su((ose t+at #om(any AEs railroa% cars (ass t+rou0+ Farmer /Es corn fiel%s. T+e railroa% causes an e&ternality to t+e farmer ,ecause t+e railroa% cars emit s(arks t+at cause I1$400 in %ama0e to t+e farmerEs cro(s. T+ere is a s(ecial soy ,ase% 0rease t+at t+e railroa% coul% (urc+ase t+at -oul% eliminate t+e %ama0in0 s(arks. T+e 0rease costs I1$200. Su((ose t+at t+e farmer +as t+e ri0+t to com(ensation for any %ama0e t+at +is cro(s suffer. Assume t+at t+ere are no transaction costs. *+ic+ of t+e follo-in0 c+aracteri2es t+e efficient outcomeB a. T+e railroa% -ill continue to o(erate ,ut -ill (ay t+e farmer I1$400 in %ama0es. ,. T+e railroa% -ill (urc+ase t+e 0rease for I1$200 an% (ay t+e farmer not+in0 ,ecause no cro( %ama0e -ill occur. c. T+e farmer -ill incur I1$400 in %ama0es to +is cro(s. %. T+e farmer -ill (ay t+e railroa% I1$200 to (urc+ase t+e 0rease so t+at no cro( %ama0e -ill occur.
ANS: / DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical 1.. Su((ose t+at #om(any AEs railroa% cars (ass t+rou0+ Farmer /Es corn fiel%s. T+e railroa% causes an e&ternality to t+e farmer ,ecause t+e railroa% cars emit s(arks t+at cause I1$400 in %ama0e to t+e farmerEs cro(s. T+ere is a s(ecial soy ,ase% 0rease t+at t+e railroa% coul% (urc+ase t+at -oul% eliminate t+e %ama0in0 s(arks. T+e 0rease costs I1$200. Su((ose t+at t+e railroa% is not lia,le for any %ama0e cause% to t+e cro(s. Assume t+at t+ere are no transaction costs. *+ic+ of t+e follo-in0 c+aracteri2es t+e efficient outcomeB a. T+e railroa% -ill continue to o(erate ,ut -ill (ay t+e farmer I1$400 in %ama0es. ,. T+e railroa% -ill (urc+ase t+e 0rease for I1$200 an% (ay t+e farmer not+in0 ,ecause no cro( %ama0e -ill occur. c. T+e farmer -ill incur I1$400 in %ama0es to +is cro(s. %. T+e farmer -ill (ay t+e railroa% I1$200 to (urc+ase t+e 0rease so t+at no cro( %ama0e -ill occur.
ANS: D DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical 11. Su((ose t+at /ill -ants to %ine at a fancy restaurant$ ,ut t+e only a)aila,le ta,le is in t+e smokin0 section. /ill %islikes t+e smell of ci0arette smoke. Ae notices t+at only one (erson$ 'eter$ is smokin0 in t+e smokin0 section. /ill )alues t+e a,sence of smoke at I14. 'eter )alues t+e a,ility to smoke in t+e restaurant at I4. *+ic+ of t+e follo-in0 re(resents an efficient solution in t+e a,sence of transaction costsB a. 'eter continues to smoke ,ecause +e +as a ri0+t to smoke in t+e smokin0 section. ,. /ill offers 'eter ,et-een I4 an% I14 not to smoke. 'eter acce(ts$ an% ,ot+ (arties are ,etter off. c. /ill offers 'eter ,et-een I4 an% I14 not to smoke. 'eter %eclines ,ecause +e +as a ri0+t to smoke in t+e smokin0 section. %. "nly a 0o)ernment (olicy ,annin0 smokin0 in restaurants -ill sol)e t+is (ro,lem.
ANS: / DIF: . REF: 10 2 NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical
216
Su((ose t+at /ill -ants to %ine at a fancy restaurant$ ,ut t+e only a)aila,le ta,le is in t+e smokin0 section. /ill %islikes t+e smell of ci0arette smoke. Ae notices t+at only one (erson$ 'eter$ is smokin0 in t+e smokin0 section. /ill )alues t+e a,sence of smoke at I14. 'eter )alues t+e a,ility to smoke in t+e restaurant at I10. In or%er for /ill to (ay 'eter not to smoke$ +e -ill nee% to ti( t+e -aiter I10 to facilitate t+e transaction. *+ic+ of t+e follo-in0 re(resents an efficient solutionB a. 'eter continues to smoke ,ecause t+e cost to /ill to (ay +im not to smoke is ,et-een I20 an% I24$ -+ic+ e&cee%s t+e ,enefit to +im of no smokin0 ?I14@. ,. /ill offers 'eter ,et-een I10 an% I14 not to smoke$ an% +e (ays t+e -aiter I10. 'eter acce(ts$ an% ,ot+ (arties are ,etter off. c. /ill offers 'eter ,et-een I10 an% I14 not to smoke$ an% +e (ays t+e -aiter I10. 'eter %eclines ,ecause +e +as a ri0+t to smoke in t+e smokin0 section. %. /ill offers 'eter I4 not to smoke$ an% +e (ays t+e -aiter I10. 'eter acce(ts$ an% ,ot+ (arties are ,etter off.
ANS: A DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical 15. Mo+n li)es in an a(artment ,uil%in0 an% 0ets a I600 ,enefit from (layin0 +is stereo. Mary$ -+o li)es ne&t %oor to Mo+n an% often loses slee( %ue to t+e music comin0 from Mo+nJs stereo$ ,ears a I1$000 cost from t+e noise. At -+ic+ of t+e follo-in0 offers from Mary coul% ,ot+ Mary an% Mo+n ,enefit from t+e silencin0 of Mo+nJs stereoB a. I200 ,. I500 c. I800 %. I1$100
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase T+eorem MS#: Analytical 16. Mo+n li)es in an a(artment ,uil%in0 an% 0ets a I400 ,enefit from (layin0 +is stereo. Mary$ -+o li)es ne&t %oor to Mo+n an% often loses slee( %ue to t+e lou% music comin0 from Mo+nJs stereo$ ,ears a I600 cost from t+e noise. Mary -oul% like to offer Mo+n some money to turn %o-n t+e )olume on +is stereo. If Mary +a% to +ire a la-yer to %ra- u( t+e contract$ -+at is t+e ma&imum amount s+e coul% (ay to t+e la-yer to ensure t+at ,ot+ Mo+n an% Mary -oul% ,enefit from t+e a0reementB a. An amount less t+an I200. ,. An amount ,et-een I200 an% I400. c. An amount ,et-een I400 an% I600. %. Any amount coul% result in ,ot+ (arties ,enefittin0 from t+e a0reement.
ANS: A DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': Transaction costs MS#: A((licati)e 17. Mo+n li)es in an a(artment ,uil%in0 an% 0ets a ,enefit from (layin0 +is stereo. Mary$ -+o li)es ne&t %oor to Mo+n an% often loses slee( %ue to t+e lou% music comin0 from Mo+nJs stereo$ ,ears a cost from t+e noise. Mary is t+reatenin0 to call t+e (olice to force Mo+n to turn %o-n +is stereo. <n%er -+ic+ of t+e follo-in0 con%itions -oul% Mo+n ,e a,le to offer Mary some amount of money to kee( +er from callin0 t+e (olice an% to allo- +im to continue to (lay +is stereo lou%lyB a. T+e cost of t+e noise to Mary must e&cee% t+e ,enefit of t+e music to Mo+n. ,. T+e ,enefit of t+e music to Mo+n must e&cee% t+e cost of t+e noise to Mary. c. T+e #oase T+eorem 0uarantees t+at Mary an% Mo+n -ill al-ays ,e a,le to come to an a0reement t+at kee(s Mary from callin0 t+e (olice re0ar%less of t+e in%i)i%ual ,enefits an% costs. %. T+e cost of t+e noise to Mary must e&cee% t+e ,enefit of t+e music to Mo+n ,y an amount 0reater t+an t+e transaction costs associate% -it+ t+e a0reement.
ANS: / DIF: . REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase T+eorem MS#: Analytical
217
18.
#+a(ter 109E&ternalities E% is a -riter -+o -orks from +is +ome. E% li)es ne&t%oor to Ricky$ t+e %rummer for a local ,an%. Ricky nee%s lots of (ractice to earn +is s+are of t+e ,an%s (rofits$ I240. E% 0ets %istracte% ,y RickyJs %rummin0 ,ut nee%s to 0et +is -ritin0 %one to earn I400 for +is current article. *+ic+ of t+e follo-in0 is an efficient solutionB a. Ricky offers E% I188 to allo- Ricky to continue %rummin0. E% acce(ts an% ,ot+ are ,etter off. ,. Ricky offers E% I218 to allo- Ricky to continue %rummin0. E% acce(ts an% ,ot+ are ,etter off. c. E% offers Ricky I241 to sto( (racticin0 +is %rummin0. Ricky a0rees an% ,ot+ are ,etter off. %. E% offers Ricky I401 to sto( (racticin0 +is %rummin0. Ricky a0rees an% ,ot+ are ,etter off.
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase T+eorem MS#: Analytical 40. E% is a -riter -+o -orks from +is +ome. E% li)es ne&t%oor to Ricky$ t+e %rummer for a local ,an%. Ricky nee%s lots of (ractice to earn +is s+are of t+e ,an%s (rofits$ I240. E% 0ets %istracte% ,y RickyJs %rummin0 ,ut nee%s to 0et +is -ritin0 %one to earn I400 for +is current article. If E% nee%s to +ire a la-yer to +el( +im reac+ an a0reement -it+ Ricky$ -+at (rice is E% -illin0 to (ay t+e la-yerB a. less t+an I240 c. less t+an I400 ,. less t+an I140 %. less t+an I640
ANS: # DIF: 2 REF: 10 . NAT: Analytical !"#: Markets$ market failure$ an% e&ternalities T"': #oase t+eorem MS#: Analytical

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Chapter 10 Externalities

ANS: # NAT: Analytic T"': E&ternalities 2.

ANS: / NAT: Analytic T"': E&ternalities ..

ANS: A NAT: Analytic T"': E&ternalities 1.

ANS: / NAT: Analytic T"': E&ternalities 4.

ANS: # NAT: Analytic T"': E&ternalities 5.

ANS: # NAT: Analytic T"': E&ternalities 6.

ANS: D NAT: Analytic T"': E&ternalities

ANS: A NAT: Analytic T"': E&ternalities 8.

ANS: / NAT: Analytic T"': E&ternalities 10.

ANS: D NAT: Analytic T"': E&ternalities 11.

ANS: # NAT: Analytic T"': E&ternalities 12.

ANS: D NAT: Analytic T"': E&ternalities 1..

ANS: # NAT: Analytic T"': E&ternalities

ANS: A NAT: Analytic T"': E&ternalities 14.

ANS: # NAT: Analytic T"': E&ternalities 15.

ANS: D NAT: Analytic T"': E&ternalities 16.

ANS: A NAT: Analytic T"': E&ternalities 17.

ANS: # NAT: Analytic T"': E&ternalities 18.

ANS: # NAT: Analytic T"': E&ternalities

ANS: / NAT: Analytic T"': E&ternalities 21.

ANS: D NAT: Analytic T"': E&ternalities 22.

ANS: D NAT: Analytic T"': E&ternalities 2..

ANS: D NAT: Analytic T"': E&ternalities 21.

ANS: D NAT: Analytic T"': E&ternalities

Sec01!Externalities an" Mar#et Ine$$icienc%

ANS: D NAT: Analytical T"': E&ternalities 2.

ANS: A NAT: Analytical T"': E&ternalities ..

ANS: # NAT: Analytical T"': E&ternalities 1.

ANS: # NAT: Analytical T"': E&ternalities

ANS: D NAT: Analytical T"': E&ternalities 5.

ANS: / NAT: Analytical T"': E&ternalities 6.

ANS: / NAT: Analytical T"': E&ternalities 7.

ANS: A NAT: Analytical T"': E&ternalities 8.

ANS: # NAT: Analytical T"': E&ternalities 10.

ANS: A NAT: Analytical T"': E&ternalities 11.

ANS: / NAT: Analytical T"': E&ternalities 12.

ANS: # NAT: Analytical T"': E&ternalities 1..

ANS: / NAT: Analytical T"': E&ternalities Figure 10-1

ANS: / NAT: Analytical T"': E&ternalities

#+a(ter 109E&ternalities 14.

ANS: # NAT: Analytical T"': E&ternalities 15.

ANS: / NAT: Analytical T"': E&ternalities Figure 10-2

' ri)ate #ost

ANS: / NAT: Analytical T"': E&ternalities 10.

#+a(ter 109E&ternalities Figure 10-!

Deman% Social Lalue

#+a(ter 109E&ternalities 80.

Social )alue Deman% C2 C.

Sec0)! (/lic &licies T&6ar" Externalities

#+a(ter 109E&ternalities Figure 10-5

ANS: / NAT: Analytical T"': E&ternalities 4.

ANS: A NAT: Analytical T"': E&ternalities 5.

ANS: # NAT: Analytical T"': E&ternalities 6.

ANS: D NAT: Analytical T"': E&ternalities 7.

ANS: A NAT: Analytical T"': E&ternalities 8.

ANS: / NAT: Analytical T"': E&ternalities 10.

#+a(ter 109E&ternalities .5.

#+a(ter 109E&ternalities 15.

ANS: NAT: T"': MS#: 51.

#+a(ter 109E&ternalities 66.

#+a(ter 109E&ternalities Table 10-3

Sec0+! ri8ate S&l(ti&ns t& Externalities

ANS: D NAT: Analytical T"': E&ternalities 2.