1. Which one of the following is not an example of an externality?
1) Carbon dioxide emissions from a motor vehicles
2) A driver enjoys beautiful scenery while driving through a National Forest
3) Acid rain damages wildlife habitat in a region downwind from a factory
4) Increased costs of mining iron ore drive up the price of steel
5) Over-fishing results in the depletion of the food supply of an endangered marine mammal
2. If producing a good generates pollution (a negative externality), from a social perspective ...
1) The price will be too low and the quantity produced will be too low
2) The price will be too low and the quantity produced will be too high
3) The price will be too high and the quantity produced will be too low
4) The price will be too high and the quantity produced will be too high
5) The price will be too low but the quantity produced will be correct
3. If a business generating pollution is charged a tax per unit of pollution, ....
1) The business will be forced to declare bankruptcy
2) The business will raise its prices and produce less of the polluting good
3) The business will be less likely to invest in pollution-reducing technologies
4) The business will raise its prices but produce the same quantity of the polluting good
5) The business will lower its prices and produce less
4. In a market supply and demand graph, the socially efficient outcome occurs ...
1) Where the private marginal benefits intersect with the social marginal costs
2) Where the private marginal benefits intersect with the private marginal costs
3) Where the social marginal benefits intersect with the social marginal costs
4) Where the social marginal benefits intersect with the private marginal costs
5) Where externalities are maximized
5. From an economic perspective, there is "too little" pollution in a market if ...
1) The profits of businesses are not maximized
2) The marginal benefits of a polluting activity exceed the marginal costs
3) The marginal costs of a polluting activity exceed the marginal benefits
4) The net social benefits of pollution are zero
5) The net private benefits of pollution are zero
6. Which one of the following is not a possible way to internalize externalities?
1) Eliminate government intervention
2) Raise taxes
3) Create subsidies
4) Create a system of tradable permits
5) Create new regulations
7. Assuming no transactions costs, internalizing an externality will ...
1) Increase consumer surplus but reduce producer surplus
2) Reduce consumer surplus but increase producer surplus
3) Increase total social costs
4) Result in a net social loss
5) Result in a net social gain
8. Suppose that making shoes creates pollution, a negative externality. To incorporate the
externality in a market graph we would ...
1) Add the externality cost to the market demand curve
2) Subtract the externality cost from the market demand curve
3) Add the externality cost to both the market supply curve and the market demand curve
4) Add the externality cost to the market supply curve
5) Add the externality cost to the market supply curve
9. Will reducing pollution to zero in a particular industry be economically efficient?
1) Never
2) Always
3) Yes, as long the marginal costs of pollution reduction exceed the marginal benefits
4) Yes, as long as the marginal benefits of pollution reduction exceed the marginal costs
5) Yes, as long as the total benefits of pollution reduction exceed the total costs
10. Which one of the following statements is true?
1) There is a fixed level of pollution that is "optimal" in economic terms
2) The "optimal" pollution level can vary over time
3) "Optimal" pollution maximizes industry profits
4) "Optimal" pollution increases consumer surplus
5) "Optimal" pollution increases net social loss
11. Which one of the following statements is false?
1) A Pigouvian tax is used to internalize pollution costs
2) Transactions costs could reduce the potential for parties in a dispute to reach an efficient agreement
3) The assignment of initial property rights affects the equity of a situation
4) The "optimal" level of pollution is unlikely to be zero
5) The "optimal" level of pollution maximizes industry profits
12. The Coase theorem states that ...
1) Property rights should initially be assigned to those affected by a negative externality
2) Property rights should initially be assigned to those creating a negative externality
3) As long as property rights are well defined and no transactions costs exist, an efficient allocation will result
4) As long as property rights are well defined and transactions costs are high, an efficient allocation will result
5) An efficient allocation will also be equitable to all parties concerned
13. Assuming the Coase theorem applies, an efficient allocation of a resource will result ...
1) Only if the party affected by an externality has the property rights
2) Only if there are no externalities
3) Through negotiations between the parties involved
4) Only if the party responsible for the externality has the property rights
5) Only if the government acts to internalize externalities
14. What does the Coase theorem say about equity?
1) An equitable outcome will occur whenever property rights are well defined
2) An equitable outcome will occur whenever transactions costs are zero
3) An equitable outcome will occur whenever those affected by an externality have the property rights
4) An equitable outcome will occur as long as an efficient outcome is achieved
5) Nothing
15. The costs of conducting a negotiation are called ...
1) Pigouvian costs
2) Property rights costs
3) Marginal costs
4) Transactions costs
5) Social costs
16. Which one of the following is not a barrier to an efficient allocation of resources?
1) Equity considerations
2) Free rider effects
3) Transactions costs
4) Holdout effects
5) Poorly defined property rights