ECONOMICS 201>Chapter 10 Externalities EXAM. Complete Solution. 100 Points.

1. Markets sometimes fail to allocate resources efficiently. ANS: T DIF: 2 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Interpretive 2. When a transaction between a ...

1. Markets sometimes fail to allocate resources efficiently. ANS: T DIF: 2 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market failure MSC: Interpretive 2. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. ANS: T DIF: 1 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Definitional 3. Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply. ANS: T DIF: 2 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive 4. In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole. ANS: T DIF: 1 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Definitional 5. In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole. ANS: F DIF: 1 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive 6. Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange. ANS: F DIF: 1 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative 7. The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution. ANS: T DIF: 1 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Definitional 8. Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture. ANS: F DIF: 1 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Applicative 9. When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality. ANS: T DIF: 1 REF: 10-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Interpretive 10. When firms internalize a negative externality, the market supply curve shifts to the left. ANS: T DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities MSC: Analytical 664  Chapter 10/Externalities 11. Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education. ANS: F DIF: 1 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Positive externalities MSC: Applicative 12. A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality. ANS: T DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Interpretive 13. Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable. ANS: F DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities | Positive externalities MSC: Interpretive 14. The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities. ANS: T DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Negative externalities | Positive externalities MSC: Applicative 15. If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots. ANS: T DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Positive externalities | Technology spillovers MSC: Analytical 16. The patent system gives firms greater incentive to engage in research and other activities that advance technology. ANS: T DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Technology spillovers MSC: Applicative 17. Government intervention in the economy with the goal of promoting technology-producing industries is known as patent policy. ANS: F DIF: 1 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Industrial policy MSC: Definitional 18. A technology spillover is a type of negative externality. ANS: F DIF: 2 REF: 10-1 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Technology spillovers MSC: Interpretive 19. Even if possible, it would be inefficient to prohibit all polluting activity. ANS: T DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Externalities MSC: Applicative 20. When correcting for an externality, command-and-control policies are always preferable to market-based policies. ANS: F DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Command-and-control policies | Corrective taxes MSC: Interpretive Chapter 10/Externalities  665 21. Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the government. ANS: F DIF: 1 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Interpretive 22. Corrective taxes cause deadweight losses, reducing economic efficiency. ANS: F DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Interpretive 23. Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does. ANS: F DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Applicative 24. A corrective tax places a price on the right to pollute. ANS: T DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Interpretive 25. According to recent research, the gas tax in the United States is lower than the optimal level. ANS: T DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities KEY: Corrective taxes MSC: Applicative 26. The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage. ANS: F DIF: 2 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes MSC: Interpretive 27. Corrective taxes are more efficient than regulations for keeping the environment clean. ANS: T DIF: 1 REF: 10-2 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Corrective taxes | Tradable pollution permits MSC: Applicative