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Some government policies provide incentives for private decision makers to choose to solve the problem of externalities on their own. What term do we use to describe such policies?

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We use the term mark...

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The concept of external benefit is associated with a negative externality, but not with a positive externality.

A) True
B) False

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Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,


A) the supply curve would adequately reflect the marginal social cost of production.
B) consumers will be required to pay a higher price for steel than they would have if the externality were internalized.
C) the market equilibrium quantity will not be the socially optimal quantity.
D) producers will produce less steel than they otherwise would if the externality were internalized.

E) A) and C)
F) None of the above

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Altering incentives so that people take account of the external effects of their actions


A) is called internalizing the externality.
B) can be done by imposing a corrective tax.
C) is the role of government in markets with externalities.
D) All of the above are correct.

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

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Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. -Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal? A) $67 B) $68 C) $81 D) $83 -Refer to Table 10-5. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?


A) $67
B) $68
C) $81
D) $83

E) All of the above
F) B) and C)

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Suppose the market-equilibrium quantity of good x is larger than the socially-optimal quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

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The production of go...

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Figure 10-10 Figure 10-10 -Refer to Figure 10-10. Which of the following statements is correct? A) The private cost of producing the 160<sup>th</sup> unit of output is $16. B) The social cost of producing the 160<sup>th</sup> unit of output is $22. C) The external cost of producing the 160<sup>th</sup> unit of output is $6. D) All of the above are correct. -Refer to Figure 10-10. Which of the following statements is correct?


A) The private cost of producing the 160th unit of output is $16.
B) The social cost of producing the 160th unit of output is $22.
C) The external cost of producing the 160th unit of output is $6.
D) All of the above are correct.

E) None of the above
F) B) and D)

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Technology spillover is one type of


A) negative externality.
B) positive externality.
C) subsidy.
D) producer surplus.

E) A) and C)
F) A) and D)

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Figure 10-8 Figure 10-8 -Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the socially-optimal level of output, it would A) introduce a subsidy of $2 per unit. B) impose a tax of $2 per unit. C) introduce a subsidy of $4 per unit. D) impose a tax of $4 per unit. -Refer to Figure 10-8. If the government wanted to tax or subsidize this good to achieve the socially-optimal level of output, it would


A) introduce a subsidy of $2 per unit.
B) impose a tax of $2 per unit.
C) introduce a subsidy of $4 per unit.
D) impose a tax of $4 per unit.

E) B) and D)
F) A) and B)

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Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. Table 10-1 The following table shows the private value, private cost, and external cost for various quantities of output in a market. -Refer to Table 10-1. What is the equilibrium quantity of output in the market? A) 2 units B) 3 units C) 4 units D) 5 units -Refer to Table 10-1. What is the equilibrium quantity of output in the market?


A) 2 units
B) 3 units
C) 4 units
D) 5 units

E) B) and C)
F) C) and D)

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Which of the following statements is correct about a market in which pollution is emitted?


A) Both corrective taxes and pollution permits move the market toward the social optimum.
B) Corrective taxes move the market toward the social optimum, but pollution permits do not move the market toward the social optimum.
C) Pollution permits move the market toward the social optimum, but corrective taxes do not move the market toward the social optimum.
D) Neither corrective taxes nor pollution permits move the market toward the social optimum.

E) B) and D)
F) B) and C)

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Suppose the socially-optimal quantity of good x is larger than the market-equilibrium quantity of good x. Does the production of good x convey a positive externality or does it convey a negative externality?

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The production of go...

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A negative externality


A) is an adverse impact on a bystander.
B) causes the product in a market to be under-produced.
C) is an adverse impact on market participants.
D) is present in markets where the good or service does not have any impact on bystanders.

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

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In some cases, selling pollution permits is a better method for reducing pollution than imposing a corrective tax because


A) it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
B) selling pollution permits create a net increase in pollution.
C) Corrective taxes distort incentives.
D) Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.

E) C) and D)
F) B) and D)

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​Figure 10-20. ​ ​Figure 10-20. ​ -Refer to Figure 10-20. The graph depicts the market for fertilizer. Without any government regulation, what is the equilibrium price of fertilizer? A) $​100 B) $200 C) $250 D) ​$300 -Refer to Figure 10-20. The graph depicts the market for fertilizer. Without any government regulation, what is the equilibrium price of fertilizer?


A) $​100
B) $200
C) $250
D) ​$300

E) A) and B)
F) A) and C)

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Scenario 10-3 Suppose the equation for the demand curve in a market is Scenario 10-3 Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? , where Scenario 10-3 Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? is the quantity demanded and Scenario 10-3 Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? is the price. Also, suppose the equation for the supply curve in the same market is Scenario 10-3 Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? , where Scenario 10-3 Suppose the equation for the demand curve in a market is , where is the quantity demanded and is the price. Also, suppose the equation for the supply curve in the same market is , where is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve? is the quantity supplied. -Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the equation of the social-cost curve?

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The equati...

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The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

A) True
B) False

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Which of the following statements is not correct?


A) Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level.
B) Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution.
C) Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution.
D) Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.

E) None of the above
F) All of the above

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A negative externality arises when a person engages in an activity that has


A) an adverse effect on a bystander who is not compensated by the person who causes the effect.
B) an adverse effect on a bystander who is compensated by the person who causes the effect.
C) a beneficial effect on a bystander who pays the person who causes the effect.
D) a beneficial effect on a bystander who does not pay the person who causes the effect.

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

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Figure 10-7 Figure 10-7 -Refer to Figure 10-7. To internalize the externality in this market, the government should A) impose a tax on this product. B) provide a subsidy for this product. C) forbid production. D) produce the product itself. -Refer to Figure 10-7. To internalize the externality in this market, the government should


A) impose a tax on this product.
B) provide a subsidy for this product.
C) forbid production.
D) produce the product itself.

E) B) and C)
F) A) and D)

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