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
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