Question 1

Which of the following statements about a Pigovian tax is true? If the amount of the tax is equal to the external cost, deadweight loss will be zero. The tax must be placed on producers. The tax moves the market quantity closer to the efficient quantity.

Accepted Answer

A)  I only
B)  II and III only
C)  I and III only
D)  I, II, and IIIE) B) and C)
F) All of the above

Question 2

When a positive externality exists in a market, the distribution of surplus received from a subsidy depends on:

Accepted Answer

A)  how the subsidy is distributed among those affected by the externality.
B)  whether those who are affected by the externality receive its true value.
C)  where the government obtains the money it uses to pay for the subsidy.
D)  None of these are true.E) A) and D)
F) A) and C)

Question 3

If a production process causes a negative externality, then the social cost of production will be _______ the private cost of production.

Accepted Answer

A)  larger than
B)  the same as
C)  smaller than
D)  zero, unlikeE) A) and D)
F) A) and B)

Question 4

Markets fail to maximize total surplus when:

Accepted Answer

A)  individual choices impose costs or benefits on others.
B)  society's choices impose costs or benefits on other societies.
C)  all costs and benefits are received by participants in transactions.
D)  producer surplus is not exactly equal to consumer surplus.E) A) and B)
F) B) and C)

Question 5

A tax on cigarettes:

Accepted Answer

A)  increases total surplus.
B)  increases efficiency in the market.
C)  increases both total surplus and efficiency in the market.
D)  always reduces surplus and efficiency in the market.E) All of the above
F) A) and B)

Question 6

When a positive externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Accepted Answer

A)  more than
B)  the same amount as
C)  zero, unlike
D)  less thanE) B) and C)
F) C) and D)

Question 7

A Pigovian tax is intended to:

Accepted Answer

A)  counter the effect of a negative externality.
B)  decrease efficiency in a market.
C)  decrease total surplus in a market.
D)  All of these are true.E) A) and C)
F) B) and C)

Question 8

The graph shown displays a market with an externality.  Which areas represent deadweight loss?

Accepted Answer

A)  A + C
B)  B + D
C)  C + F
D)  D + EE) A) and D)
F) None of the above

Question 9

When a market is fully corrected for externalities, it:

Accepted Answer

A)  is equitable.
B)  maximizes surplus.
C)  makes everyone in society better off.
D)  All of these are true.E) A) and D)
F) None of the above

Question 10

When a negative consumption externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

Accepted Answer

A)  higher; private
B)  lower; private
C)  lower; social
D)  unchanged; socialE) A) and B)
F) C) and D)

Question 11

If a Pigovian tax is levied on consumers, the demand curve will shift straight _______ and the equilibrium quantity will _______.

Accepted Answer

A)  up; decrease
B)  down; decrease
C)  down; increase
D)  up; increaseE) All of the above
F) B) and D)

Question 12

Who is affected when a Pigovian tax is imposed on a market with a negative production externality?

Accepted Answer

A)  Producers
B)  Consumers
C)  Those affected by the externality
D)  All of these groups are affected when a Pigovian tax is imposed.E) C) and D)
F) None of the above

Question 13

When a Pigovian tax is levied on a market, price _______ and quantity _______ to the efficient level.

Accepted Answer

A)  increases; decreases
B)  decreases; increases
C)  increases; increases
D)  decreases; decreasesE) All of the above
F) B) and C)

Question 14

When a negative externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Accepted Answer

A)  zero, unlike
B)  more than
C)  the same amount as
D)  less thanE) None of the above
F) A) and C)

Question 15

The idea that individuals can reach an efficient equilibrium through private trades, even in the presence of an externality, is called:

Accepted Answer

A)  market failure.
B)  trade quotas.
C)  the Coase theorem.
D)  the invisible hand.E) B) and C)
F) A) and C)

Question 16

If it is possible to eliminate the problems created by externalities, why do they persist?

Accepted Answer

A)  Correcting externalities always reduces total surplus.
B)  It is difficult to measure external benefits and costs.
C)  The costs of imposing taxes and subsidies generally exceed the benefits.
D)  None of these are true.E) A) and B)
F) A) and C)

Question 17

Latoya and Maggie are roommates. Maggie likes to play music in their dorm room every evening. Tonight, Latoya needs to study for her economics exam and would prefer that Maggie not play music. Latoya values silence at $50. Maggie values her music at $20. Assume the roommates can bargain with zero transactions costs. If the dorm rules are such that Maggie is allowed to play music whenever she likes, which of the following is true?

Accepted Answer

A)  Maggie could offer to pay Latoya $20 in exchange for playing her music, an offer that Latoya would accept.
B)  Maggie will not be able to offer any amount high enough to convince Latoya to allow music.
C)  Maggie and Latoya will not be able to reach an agreement that results in Maggie turning off her music for the evening.
D)  Latoya could offer to pay Maggie $25 in exchange for Maggie turning off her music, an offer that Maggie would accept.E) All of the above
F) A) and C)

Question 18

If a Pigovian tax is too large, what result can be expected?

Accepted Answer

A)  The equilibrium quantity will be too high.
B)  The outcome will not maximize surplus.
C)  The outcome will still be efficient.
D)  All of these are true.E) All of the above
F) A) and B)

Question 19

Latoya and Maggie are roommates. Maggie likes to play music in their dorm room every evening. Tonight, Latoya needs to study for her economics exam and would prefer that Maggie not play music. Latoya values silence at $50. Maggie values her music at $20. Assume the roommates can bargain with zero transactions costs. Which of the following is true?

Accepted Answer

A)  It is efficient for Maggie to play her music.
B)  Maggie and Latoya will not be able to reach efficiency in this situation.
C)  The university should offer a subsidy for noise-cancelling headphones.
D)  It is efficient for Maggie to refrain from playing music tonight.E) All of the above
F) C) and D)

Question 20

The biggest difference between using a Pigovian tax or a tradable allowance to correct for a negative externality is:

Accepted Answer

A)  the government collects revenues from a Pigovian tax, whereas a tradable allowance allows private parties to trade quota rights on their own.
B)  a Pigovian tax creates an efficient outcome, while a tradable allowance does not.
C)  a Pigovian tax maximizes total surplus, whereas a tradable allowance does not.
D)  All of these are differences between Pigovian taxes and tradeable allowances.E) None of the above
F) All of the above

Exam 18: Externalities

A tax on cigarettes:

Correct Answer
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The idea that individuals can reach an efficient equilibrium through private trades, even in the presence of an externality, is called:

Correct Answer
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The graph shown displays a market with an externality. Which areas represent deadweight loss?

Correct Answer
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When a positive externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Correct Answer
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Correct Answer
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When a positive externality exists in a market, the distribution of surplus received from a subsidy depends on:

Correct Answer
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When a market is fully corrected for externalities, it:

Correct Answer
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The biggest difference between using a Pigovian tax or a tradable allowance to correct for a negative externality is:

Correct Answer
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If a Pigovian tax is levied on consumers, the demand curve will shift straight _ and the equilibrium quantity will _.

Correct Answer
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When a Pigovian tax is levied on a market, price _ and quantity _ to the efficient level.

Correct Answer
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A Pigovian tax is intended to:

Correct Answer
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If a Pigovian tax is too large, what result can be expected?

Correct Answer
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Markets fail to maximize total surplus when:

Correct Answer
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When a negative externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Correct Answer
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Which of the following statements about a Pigovian tax is true? If the amount of the tax is equal to the external cost, deadweight loss will be zero. The tax must be placed on producers. The tax moves the market quantity closer to the efficient quantity.

Correct Answer
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If a production process causes a negative externality, then the social cost of production will be _______ the private cost of production.

Correct Answer
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Correct Answer
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When a negative consumption externality is present in a market, total surplus will be _ if buyers only consider _ costs.

Correct Answer
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If it is possible to eliminate the problems created by externalities, why do they persist?

Correct Answer
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Who is affected when a Pigovian tax is imposed on a market with a negative production externality?

Correct Answer
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Exam 18: Externalities

A tax on cigarettes:

Correct AnswerverifiedShow Answer

The idea that individuals can reach an efficient equilibrium through private trades, even in the presence of an externality, is called:

Correct AnswerverifiedShow Answer

The graph shown displays a market with an externality. Which areas represent deadweight loss?

Correct AnswerverifiedShow Answer

When a positive externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When a positive externality exists in a market, the distribution of surplus received from a subsidy depends on:

Correct AnswerverifiedShow Answer

When a market is fully corrected for externalities, it:

Correct AnswerverifiedShow Answer

The biggest difference between using a Pigovian tax or a tradable allowance to correct for a negative externality is:

Correct AnswerverifiedShow Answer

If a Pigovian tax is levied on consumers, the demand curve will shift straight _______ and the equilibrium quantity will _______.

Correct AnswerverifiedShow Answer

When a Pigovian tax is levied on a market, price _______ and quantity _______ to the efficient level.

Correct AnswerverifiedShow Answer

A Pigovian tax is intended to:

Correct AnswerverifiedShow Answer

If a Pigovian tax is too large, what result can be expected?

Correct AnswerverifiedShow Answer

Markets fail to maximize total surplus when:

Correct AnswerverifiedShow Answer

When a negative externality is present in a market, consumers will purchase _______ the socially optimal quantity.

Correct AnswerverifiedShow Answer

Which of the following statements about a Pigovian tax is true? If the amount of the tax is equal to the external cost, deadweight loss will be zero. The tax must be placed on producers. The tax moves the market quantity closer to the efficient quantity.

Correct AnswerverifiedShow Answer

If a production process causes a negative externality, then the social cost of production will be _______ the private cost of production.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When a negative consumption externality is present in a market, total surplus will be _______ if buyers only consider _______ costs.

Correct AnswerverifiedShow Answer

If it is possible to eliminate the problems created by externalities, why do they persist?

Correct AnswerverifiedShow Answer

Who is affected when a Pigovian tax is imposed on a market with a negative production externality?

Correct AnswerverifiedShow Answer

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If a Pigovian tax is levied on consumers, the demand curve will shift straight _ and the equilibrium quantity will _.

Correct Answer
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When a Pigovian tax is levied on a market, price _ and quantity _ to the efficient level.

Correct Answer
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When a negative consumption externality is present in a market, total surplus will be _ if buyers only consider _ costs.

Correct Answer
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Correct Answer
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