True/False Indicate whether the
sentence or statement is true or false.
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1.
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A positive externality is an external benefit that
accrues to the buyers in a market while a negative externality is an external cost that accrues to
the sellers in a market.
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2.
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If a market generates a negative externality, the
social cost curve is above the supply curve (private cost curve).
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3.
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If a market generates a positive externality, the
social value curve is above the demand curve (private value curve).
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4.
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A market that generates a negative externality that
has not been internalized generates an equilibrium quantity that is less than the optimal
quantity.
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5.
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If a market generates a negative externality, a
Pigovian tax will move the market toward a more efficient outcome.
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6.
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According to the Coase theorem, an externality
always requires government intervention in order to internalize the externality.
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7.
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To reduce pollution by some targeted amount, it is
most efficient if each firm that pollutes reduces its pollution by an equal amount.
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8.
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When a group of neighbours ask a householder to
tidy his front garden because they keep their own gardens tidy and attractive, they are attempting to
use moral codes and social sanctions to internalize the externality associated with an untidy garden
in a residential area.
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9.
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A tax always makes a market less
efficient.
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10.
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If Roberto values smoking in a restaurant at
€10 and Natalie values clean air while she eats at €15, according to the Coase theorem,
Roberto will not smoke in the restaurant only if Natalie owns the right to clean air.
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11.
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If transactions costs exceed the potential gains
from an agreement between affected parties to an externality, there will be no private solution to
the externality.
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12.
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A Pigovian tax sets the price of pollution while
tradable pollution permits sets the quantity of pollution.
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13.
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An advantage of using tradable pollution permits to
reduce pollution is that the regulator need not know anything about the demand for pollution
rights.
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14.
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The majority of economists do not like the idea of
putting a price on polluting the environment.
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15.
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For any given demand curve for pollution, a
regulator can achieve the same level of pollution with either a Pigovian tax or by allocating
tradable pollution permits.
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Multiple Choice Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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An externality is
a. | the benefit that accrues to the buyer in a
market. | b. | the cost that accrues to the seller in a
market. | c. | none of these answers. | d. | the compensation paid to a firm's external
consultants. | e. | the uncompensated
impact of one person's actions on the well-being of a
bystander. |
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17.
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A negative externality generates
a. | a social cost curve that is above the supply curve
(private cost curve) for a good. | b. | none of these
answers. | c. | a social cost curve that is below the supply curve
(private cost curve) for a good. | d. | a social value
curve that is above the demand curve (private value curve) for a
good. |
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18.
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A positive externality generates
a. | a social cost curve that is above the supply curve
(private cost curve) for a good. | b. | none of these
answers. | c. | a social value curve that is above the demand curve
(private value curve) for a good. | d. | a social value
curve that is below the demand curve (private value curve) for a
good. |
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19.
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A negative externality (that has not been
internalized) causes the
a. | optimal quantity to exceed the equilibrium
quantity. | b. | equilibrium quantity to be either above or below the
optimal quantity. | c. | equilibrium
quantity to equal the optimal quantity. | d. | equilibrium
quantity to exceed the optimal quantity. |
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20.
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A positive externality (that has not been
internalized) causes the
a. | equilibrium quantity to exceed the optimal
quantity. | b. | equilibrium quantity to equal the optimal
quantity. | c. | optimal quantity to exceed the equilibrium
quantity. | d. | equilibrium quantity to be either above or below the
optimal quantity. |
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21.
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To internalize a negative externality, an
appropriate public policy response would be to
a. | have the government take over the production of the good
causing the externality. | b. | ban the production
of all goods creating negative externalities. | c. | tax the
good. | d. | subsidize the
good. |
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22.
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The government engages in a technology
policy
a. | by allocating tradable technology permits to high
technology industry. | b. | to internalize the
positive externality associated with technology-enhancing industries. | c. | to help stimulate private solutions to the technology
externality. | d. | to internalize the
negative externality associated with industrial pollution. |
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23.
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When an individual buys a car in a congested urban
area, it generates
a. | a positive externality. | b. | a technology spillover. | c. | an efficient
market outcome. | d. | a negative
externality. |
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24.
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The most efficient pollution control system would
ensure that
a. | the regulators decide how much each polluter should
reduce its pollution. | b. | no pollution of
the environment is tolerated. | c. | each polluter
reduce its pollution an equal amount. | d. | the polluters with
the lowest cost of reducing pollution reduce their pollution the greatest
amount. |
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25.
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According to the Coase theorem, private parties can
solve the problem of externalities if
a. | there are no transaction
costs. | b. | each affected party has equal power in the
negotiations. | c. | the party affected
by the externality has the initial property right to be left alone. | d. | there are a large number of affected parties. | e. | the government requires them to negotiate with each
other. |
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26.
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To internalize a positive externality, an
appropriate public policy response would be to
a. | ban the good creating the
externality. | b. | tax the
good. | c. | subsidize the good. | d. | have the government produce the good until the value of an additional unit is
zero. |
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27.
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Which of the following is not considered a
transaction cost incurred by parties in the process of contracting to eliminate a pollution
externality?
a. | costs incurred due to lawyers
fees | b. | costs incurred to reduce the
pollution | c. | costs incurred to enforce the
agreement | d. | costs incurred due to a large number of parties affected
by the externality | e. | All of these
answers are considered transaction costs. |
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28.
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Roberto and Thomas live in a university hall of
residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet
at a value of €150. Which of the following statements is true?
a. | It is efficient for Roberto to stop playing loud music
regardless of who has the property right to the level of sound. | b. | It is efficient for Roberto to continue to play loud
music. | c. | It is efficient for Roberto to stop playing loud music
only if Thomas has the property right to peace and quiet. | d. | It is efficient for Roberto to stop playing loud music only if Roberto has the
property right to play loud music. |
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29.
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Roberto and Thomas live in a university hall of
residence. Roberto values playing loud music at a value of €100. Thomas values peace and quiet
at a value of €150. Which of the following statements is true about an efficient solution to
this externality problem if Roberto has the right to play loud music and if there are no transaction
costs?
a. | Thomas will pay Roberto between €100 and
€150 and Roberto will continue to play loud music. | b. | Roberto will pay Thomas €150 and Roberto will continue to play loud
music. | c. | Thomas will pay Roberto between €100 and
€150 and Roberto will stop playing loud music. | d. | Roberto will pay Thomas €100 and Roberto will stop playing loud
music. |
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30.
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Which of the following is true regarding tradable
pollution permits and Pigovian taxes?
a. | All of these answers are
true. | b. | Pigovian taxes and tradable pollution permits create an
efficient market for pollution. | c. | Tradable pollution
permits efficiently reduce pollution only if they are initially distributed to the firms that can
reduce pollution at the lowest cost. | d. | To set the
quantity of pollution with tradable pollution permits, the regulator must know everything about the
demand for pollution rights. | e. | Pigovian taxes are
more likely to reduce pollution to a targeted amount than tradable pollution
permits. |
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31.
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The gas-guzzler tax that is placed on new vehicles
that are very fuel inefficient is an example of
a. | a tradable pollution permit. | b. | an attempt to internalize a positive externality. | c. | an application of the Coase theorem. | d. | an attempt to internalize a negative
externality. |
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32.
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A Pigovian tax on pollution
a. | sets the quantity of
pollution. | b. | reduces the
incentive for technological innovations to further reduce pollution. | c. | sets the price of pollution. | d. | determines the demand for pollution
rights. |
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33.
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Tradable pollution permits
a. | reduce the incentive for technological innovations to
further reduce pollution. | b. | set the price of
pollution. | c. | determine the
demand for pollution rights. | d. | set the quantity
of pollution. |
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34.
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When wealthy alumni provide charitable
contributions to their universities to reduce the tuition payments of current students, it is an
example of
a. | an attempt to internalize a positive
externality. | b. | an attempt to
internalize a negative externality. | c. | a Pigovian
tax. | d. | a command-and-control
policy. |
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35.
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Suppose an industry emits a negative externality
such as pollution and the possible methods to internalize the externality are command-and-control
policies, Pigovian taxes, and tradable pollution permits. If economists were to rank these methods
for internalizing a negative externality based on efficiency, ease of implementation, and the
incentive for the industry to further reduce pollution in the future, they would probably rank them
in the following order (from most favoured to least favoured):
a. | Pigovian taxes, command-and-control policies, tradable
pollution permits. | b. | tradable pollution
permits, Pigovian taxes, command-and-control policies. | c. | tradable pollution permits, command-and-control policies, Pigovian
taxes. | d. | command-and-control policies, tradable pollution
permits, Pigovian taxes. | e. | They would all
rank equally high because the same result can be obtained from any one of the
policies. |
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