Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

-Refer to the figure above. This diagram represents the tobacco industry. The market creates an equilibrium price and quantity exchanged of

Accepted Answer

A)   R19.00 and 38 units.
B)   R18.00 and 35 units.
C)   R16.00 and 42 units.
D)   R13.50 and 58 units.E) C) and D)
F) All of the above

Question 3

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 internalise the externality associated with an untidy garden in a residential area.

Accepted Answer

A) True 
 B)False

Question 4

The most efficient pollution control system would ensure that

Accepted Answer

A)   the regulators decide how much each polluter should reduce its pollution.
B)   no pollution of the environment is tolerated.
C)   each polluter reduces its pollution an equal amount.
D)   the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount.E) None of the above
F) C) and D)

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

-Refer to the figure above. This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost)  curve?

Accepted Answer

A)   The cost of labour.
B)   The cost to the government of the hospital expenses of smokers with cancer.
C)   The increased risk of cancer to the non-smoking passengers in the smoker's car pool.
D)   All of the above.E) B) and C)
F) A) and D)

Question 7

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?

Accepted Answer

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.F) B) and C)
G) All of the above

Question 8

If a perfectly competitive industry is not forced to take account of a negative externality it creates, it will produce where

Accepted Answer

A)   the marginal cost of production equals the marginal private benefit.
B)   the marginal cost of production equals the marginal social benefit.
C)   the marginal social cost of production equals the marginal social benefit.
D)   price equals marginal social benefit.E) A) and D)
F) B) and C)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

Accepted Answer

Private parties may fail to bargain to a...

Question 11

The government engages in a technology policy

Accepted Answer

A)   by allocating tradable technology permits to high technology industry.
B)   to internalise the positive externality associated with technology-enhancing industries.
C)   to help stimulate private solutions to the technology externality.
D)   to internalise the negative externality associated with industrial pollution.E) C) and D)
F) B) and D)

Question 12

The social cost of a good is

Accepted Answer

A)   its benefit to the people who buy and consume it.
B)   its total benefit to everyone in society.
C)   its cost to everyone in the society that occurs in addition to the private costs.
D)   the cost paid by the firm that produces and sells it.E) None of the above
F) C) and D)

Question 13

A positive externality generates

Accepted Answer

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.E) C) and D)
F) All of the above

Question 14

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

Accepted Answer

A)   a positive externality.
B)   a positive technology spill-over.
C)   an efficient market outcome.
D)   a negative externality.E) B) and C)
F) None of the above

Question 15

A negative externality (that has not been internalised)  causes the

Accepted Answer

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.E) None of the above
F) C) and D)

Question 16

A negative externality generates

Accepted Answer

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.E) A) and B)
F) All of the above

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

A Pigovian tax on pollution

Accepted Answer

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.E) None of the above
F) A) and B)

Question 20

Which best describes making political decisions to return favours:

Accepted Answer

A)   Short-termism.
B)   Cronyism.
C)   Special interest effect.
D)   Rent seeking.E) All of the above
F) A) and D)

Exam 11: Market Failure and Externalities

-Refer to the figure above. This diagram represents the tobacco industry. The market creates an equilibrium price and quantity exchanged of

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A Pigovian tax on pollution

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-Refer to the figure above. This diagram represents the tobacco industry. Which of the following would be included in the supply (private cost) curve?

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If a perfectly competitive industry is not forced to take account of a negative externality it creates, it will produce where

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The social cost of a good is

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The most efficient pollution control system would ensure that

Correct AnswerverifiedShow Answer

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 internalise the externality associated with an untidy garden in a residential area.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A positive externality generates

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The Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution?

Correct AnswerverifiedPrivate parties may fail to bargain to a...View AnswerShow Answer

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality?

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A negative externality (that has not been internalised) causes the

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The government engages in a technology policy

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Which best describes making political decisions to return favours:

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A negative externality generates

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

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Private parties may fail to bargain to a...
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