Question 1

Assume that your housemate is very messy. Suppose he gets a $200 benefit from being messy but imposes a $300 cost on you. The Coase theorem would suggest that an efficient solution would be:

Accepted Answer

A)   for you to tell him to stop his messy habits or force him to move out
B)   for you to pay your housemate at least $200 but less than $300 to clean up
C)   for him to continue to be messy and force you to make other living arrangements elsewhere
D)   for you to demand payment of at least $200 but no more than $300 to clean up after himE) C) and D)
F) B) and D)

Question 2

According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Accepted Answer

A) True 
 B)False

Question 3

The coalition government has removed the ban on the manufacture and sale of CFCs in Australia. This is an example of:

Accepted Answer

A)   a market-based policy
B)   a command-and-control policy
C)   tradeable permits
D)   allowing the market to reach equilibrium taking only private costs into accountE) A) and B)
F) A) and C)

Question 4

Which of the following policies is government most inclined to use when faced with a positive externality?

Accepted Answer

A)   taxation
B)   permits
C)   subsidies
D)   usage feesE) A) and D)
F) B) and C)

Question 5

If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Accepted Answer

A) True 
 B)False

Question 6

Graph 10-3
 B be equivalent to the Pigovian tax B)  QA be equivalent to the amount of pollution allowed by the pollution permit holders C)  the equilibrium price and quantity of pollution be the same in both panel A and panel B D)  all of the above conditions hold" class="answers-bank-image d-inline" rel="preload" >
-Refer to Graph 10-3. The equivalence of a Pigovian tax and a pollution permit would require that:

Accepted Answer

A)   PB be equivalent to the Pigovian tax
B)   QA be equivalent to the amount of pollution allowed by the pollution permit holders
C)   the equilibrium price and quantity of pollution be the same in both panel A and panel B
D)   all of the above conditions holdE) A) and B)
F) A) and C)

Question 7

Graph 10-3
 
-Referring to Graph 10-3, which curve best represents a Pigovian tax?

Accepted Answer

A)   A
B)   B
C)   C
D)   DE) B) and D)
F) A) and B)

Question 8

Emission controls on automobiles provide an example of a:

Accepted Answer

A)   Pigovian tax on automobiles, based on how much they pollute
B)   command-and-control policy to increase social efficiency
C)   policy that reduces pollution by allocating resources through market mechanisms
D)   policy to reduce congestion on urban freewaysE) B) and D)
F) All of the above

Question 9

Graph 10-1
 3 - P1 B)  P3 - P2 C)  P3 - P1. D)  The value of the optimal tax cannot be measured" class="answers-bank-image d-inline" rel="preload" >
-Refer to Graph 10-1. In the figure shown, an optimal government policy would be a tax on production to the value of:

Accepted Answer

A)   P3 - P1
B)   P3 - P2
C)   P3 - P1.
D)   The value of the optimal tax cannot be measuredE) All of the above
F) C) and D)

Question 10

Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:

Accepted Answer

A)   farmers would choose not to use any fertiliser
B)   farmers fully internalise the pollution costs of the fertiliser
C)   farm output would be maximised
D)   the value to consumers of pastoral products would exceeds the cost of production (including tax)  at the market equilibriumE) A) and D)
F) None of the above

Question 11

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

Accepted Answer

A)   the optimum level of output is less than the free market level of output and the optimum price is greater than the free market price
B)   the optimum level of output is greater than the free market level of output and the optimum price is less than the free market price
C)   the optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price
D)   the optimum level of output is less than the free market level of output and the optimum price is less than the free market priceE) A) and B)
F) C) and D)

Question 12

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Accepted Answer

A) True 
 B)False

Question 13

When regulating a market in which an externality arises, the government can only command how much of the good companies are allowed to produce.

Accepted Answer

A) True 
 B)False

Question 14

If sparks from trains sets adjacent farmland on fire, one way to internalise the externality is:

Accepted Answer

A)   for the rail company to increase the volume of rail traffic
B)   for the rail company to purchase the adjacent farmland
C)   for the government to buy the farmland
D)   for the rail company to lower their freight chargesE) B) and D)
F) All of the above

Question 15

When one firm sells its pollution permit to another firm:

Accepted Answer

A)   both firms benefit
B)   the total amount of pollution remains the same
C)   social welfare is enhanced
D)   all of the above occurE) C) and D)
F) All of the above

Question 16

The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

Accepted Answer

A) True 
 B)False

Question 17

Government can solve externality problems that are too costly for private parties to solve.

Accepted Answer

A) True 
 B)False

Question 18

Graph 10-2
  This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees.
-Refer to Graph 10-2. The producer surplus derived from the most efficient kiwifruit production levels is represented by the area:

Accepted Answer

A)   g
B)   e + g
C)   a + b
D)   a + b + cE) None of the above
F) C) and D)

Question 19

A positive externality exists when:

Accepted Answer

A)   a person engages in an activity that has a spillover that makes a bystander better off
B)   the market has only one seller
C)   a firm sells its product in an external foreign market
D)   a person engages in an activity that has a spillover that makes a bystander worse offE) C) and D)
F) All of the above

Question 20

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods. Policies to reduce this noise problem include:

Accepted Answer

A)   charging passengers an airport departure tax
B)   charging excise taxes on airline fuel
C)   encouraging people to drive rather than fly
D)   requiring aircraft to use 'whisper' technology to quieten their enginesE) A) and D)
F) A) and C)

Exam 10: Externalities

Graph 10-3 -Referring to Graph 10-3, which curve best represents a Pigovian tax?

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The owner of a luxury 4WD enjoys a positive externality because the luxury 4WD offers added safety when compared to a small car.

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

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A positive externality exists when:

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The coalition government has removed the ban on the manufacture and sale of CFCs in Australia. This is an example of:

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If sparks from trains sets adjacent farmland on fire, one way to internalise the externality is:

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When one firm sells its pollution permit to another firm:

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When regulating a market in which an externality arises, the government can only command how much of the good companies are allowed to produce.

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Graph 10-1 -Refer to Graph 10-1. In the figure shown, an optimal government policy would be a tax on production to the value of:

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Government can solve externality problems that are too costly for private parties to solve.

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According to the Coase theorem, parties will bargain among themselves to reach an efficient solution without intervention.

Correct AnswerverifiedShow Answer

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods. Policies to reduce this noise problem include:

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Suppose fertiliser use on pastoral land causes water quality in surrounding areas to fall. If a tax on fertiliser was set at the optimal level:

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Emission controls on automobiles provide an example of a:

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If the social cost of producing robots is less than the private cost of producing robots, the private market produces too few robots.

Correct AnswerverifiedShow Answer

Which of the following policies is government most inclined to use when faced with a positive externality?

Correct AnswerverifiedShow Answer

Assume that your housemate is very messy. Suppose he gets a $200 benefit from being messy but imposes a $300 cost on you. The Coase theorem would suggest that an efficient solution would be:

Correct AnswerverifiedShow Answer

Graph 10-3 -Refer to Graph 10-3. The equivalence of a Pigovian tax and a pollution permit would require that:

Correct AnswerverifiedShow Answer

Graph 10-2 This graph reflects the market for kiwifruit, where pesticide used by kiwifruit orchardists also unintentionally kills honey bees. -Refer to Graph 10-2. The producer surplus derived from the most efficient kiwifruit production levels is represented by the area:

Correct AnswerverifiedShow Answer

Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems caused by externalities.

Correct AnswerverifiedShow Answer

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