Chapter 10

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Chapter 10

True/False
Indicate whether the statement is true or false.

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.

If a market generates a negative externality, the social cost curve is above the supply curve (private cost curve).

If a market generates a positive externality, the social value curve is above the demand curve (private value curve).

A market that generates a negative externality that has not been internalized generates an equilibrium quantity that is less than the optimal quantity.

If a market generates a negative externality, a Pigovian tax will move the market toward a more efficient outcome.

According to the Coase theorem, an externality always requires government intervention in order to internalize the externality.

To reduce pollution by some targeted amount, it is most efficient if each firm that pollutes reduces its pollution by an equal amount.

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.

A tax always makes a market less efficient.

10.

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.

11.

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.

12.

A Pigovian tax sets the price of pollution while tradable pollution permits sets the quantity of pollution.

13.

An advantage of using tradable pollution permits to reduce pollution is that the regulator need not know anything about the demand for pollution rights.

14.

The majority of economists do not like the idea of putting a price on polluting the environment.

15.

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.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

16.

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.	the unanticipated effect on a business of a decision that it makes
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.

17.

A negative externality generates

a.	a social cost curve that is above the supply curve (private cost curve) for a good.
b.	a value to a consumer that is less than the total consumer surplus
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.

18.

A positive externality generates

a.	a social cost curve that is above the supply curve (private cost curve) for a good.
b.	a benefit to suppliers that is greater than the value of producer surplus
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.

19.

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.

20.

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.

21.

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.

22.

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.

23.

When an individual buys a car in a congested urban area, it generates

a.	a positive externality.	c.	an efficient market outcome.
b.	a positive technology spillover.	d.	a negative externality.

24.

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.

25.

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.

26.

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.

27.

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.

28.

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.

29.

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.

30.

Which of the following is true regarding tradable pollution permits and Pigovian taxes?

a.	Pigovian taxes shift the demand curve for the pollution to the left and so lead to a more efficient market solution.
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.

31.

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.

32.

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.

33.

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.

34.

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.

35.

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.