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Exam 10: Externalities

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Question 91

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Which of the following statements is not true of both pollution permits and corrective taxes?

A) Both policies internalize the externality of pollution.
B) Both policies require firms to pay for their pollution.
C) Both policies lead to the establishment of an equilibrium price of pollution.
D) Both policies increase the amount of pollution compared to the market equilibrium.

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

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Question 92

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

A) True
B) False

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Question 93

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Private parties may choose not to solve an externality problem if the transaction costs are large enough.

Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500^th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. -Refer to Scenario 10-4. What is the social value of the 500^th fire extinguisher?

Figure 10-5 -Refer to Figure 10-5. The socially optimal quantity of output is

Figure 10-8 ​ -Refer to Figure 10-8. This market is characterized by a negative externality.

Which of the following is not an advantage of corrective taxes?

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?

Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution

Which of the following is not a characteristic of pollution permits?

Figure 10-6 ​ -Refer to Figure 10-6. If 250 units of plastics are produced and consumed, then the

Figure 10-7 -Refer to Figure 10-7. This graph shows the market for pollution when permits are issued to firms and traded in the marketplace. In the absence of a pollution permit system, the quantity of pollution would be

Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500^th fire extinguisher entails the following: • a private cost of $10; • an external cost of $0; • a private value of $9; • an external benefit of $3. -Refer to Scenario 10-4. Is the socially-optimal quantity of fire extinguishers less than, equal to, or greater than 500? Explain.

The patent system gives firms greater incentive to engage in research and other activities that advance technology.

Which of the following illustrates the concept of a negative externality?

When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

Table 10-2 ​ ​ $\begin{array} { | c | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Private Value } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Private Cost } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Social Value } \\\text { (Dollars) }\end{array} \\\hline 1 & 51 & 45 & 57 \\\hline 2 & 48 & 48 & 54 \\\hline 3 & 45 & 51 & 51 \\\hline 4 & 42 & 54 & 48 \\\hline 5 & 39 & 57 & 45 \\\hline 6 & 36 & 60 & 42 \\\hline\end{array}$ ​ -Refer to Table 10-2. What is the socially optimal level of output in this market?

When positive externalities are present in a market

Suppose a Pigovian tax is imposed on a market that is characterized by one or more externalities. Is this a command-and-control policy or is it a market-based policy?

Research into new technologies conveys neither negative externalities nor positive externalities.