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What is meant by the term "internalizing an externality"? How does a Pigovian tax or subsidy internalize an externality?

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Internalizing an externality refers to t...

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The first economist to systematically analyze market failure was


A) Adam Smith.
B) Ronald Coase.
C) A.C.Pigou.
D) J.E.Meade.

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

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An external cost is created when you


A) graduate from college.
B) buy flowers for your mother on Mother's Day.
C) litter on the side of the road.
D) buy a sandwich for lunch.

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

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Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter.If the victims of the pollution could not legally enforce the right of their property not to be damaged,the amount of pollution reduction


A) would be significantly less than if the owners of the smelter were legally liable for damages.
B) would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost.
C) would be the same as if it would be if the owners of the smelter were legally liable.
D) would be too small; the government would have to intervene to bring about an efficient outcome.

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

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All of the following are examples of public goods except


A) broadcast television with commercials.
B) clean water systems.
C) stock of knowledge in the public domain.
D) crime prevention.

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

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Which of the following statements describes the Coase Theorem?


A) It is not possible to completely eliminate an externality.
B) Under some circumstances private solutions to the problems that result from externalities can be found.
C) Completely eliminating an externality is not economically efficient.
D) A negative externality occurs when the marginal social cost of production exceeds the social benefit.

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

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It is difficult for a private market to provide the economically efficient quantity of a public good because


A) by law governments cannot use cost-benefit analysis to determine this quantity.
B) public goods produce positive and negative externalities.
C) individual preferences are not revealed in the market for the good.
D) it is too expensive to produce the necessary amount of the good.

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

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Which of the following describes how a negative externality affects a competitive market?


A) The externality causes a difference between the private cost of production and the social cost.
B) The externality causes a difference between the private cost of production and the private benefit from consumption.
C) The externality causes consumer surplus to exceed producer surplus.
D) The externality causes a difference between the private cost of production and the equilibrium price.

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

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Figure 5-4 Figure 5-4 Consider a chemical plant that discharges toxic fumes over a nearby community.To reduce the emissions of toxic fumes the firm can install pollution abatement devices.Figure 5-4 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions. -Refer to Figure 5-4.Suppose the emissions reduction target is currently established at 8 million tons.What is the area that represents the cost of eliminating an additional 1 million tons? A) A B) B + C C) A + B D) A + B + C Consider a chemical plant that discharges toxic fumes over a nearby community.To reduce the emissions of toxic fumes the firm can install pollution abatement devices.Figure 5-4 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions. -Refer to Figure 5-4.Suppose the emissions reduction target is currently established at 8 million tons.What is the area that represents the cost of eliminating an additional 1 million tons?


A) A
B) B + C
C) A + B
D) A + B + C

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

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A private good is


A) a good that is rivalrous and nonexcludable.
B) a good that is nonrivalrous and nonexcludable.
C) a good that is rivalrous and excludable.
D) a good that is nonrivalrous and excludable.

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

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Figure 5-8 Figure 5-8 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 5-8 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights. -Refer to Figure 5-8.How much is Bree willing to pay to have 4 street lights installed? A) $1,500 B) $1,800 C) $2,700 D) $7,200 Amit and Bree are the only two homeowners on an isolated private road.Both agree that installing street lights along the road would be beneficial and want to do so.Figure 5-8 shows their willingness to pay for different quantities of street lights,the market demand for street lights and the marginal cost of installing the street lights. -Refer to Figure 5-8.How much is Bree willing to pay to have 4 street lights installed?


A) $1,500
B) $1,800
C) $2,700
D) $7,200

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

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When there is a positive externality


A) the private benefit received by consumers is greater than the external benefit.
B) the social benefit received by consumers is greater than the private benefit.
C) the private benefit received by consumers is greater than the private cost.
D) the private benefit received by consumers is greater than the social benefit.

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

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Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behavior known as


A) excludability.
B) public rivalry.
C) free riding.
D) internalizing an external cost.

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

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If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost,


A) further reductions will make society better off.
B) further reduction will make society worse off.
C) pollution taxes should be imposed on producers to pay for further reductions.
D) economic efficiency will be increased if further reductions are made.

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

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Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain.This is an example of


A) a transaction cost.
B) a Pigovian tax.
C) a Pigovian subsidy.
D) the Coase Theorem.

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

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Which of the following is an example of the U.S.government's use of a "command and control" approach to reducing pollution?


A) In 1990 Congress approved measures designed to reduce sulfur dioxide emissions to 8.5 million tons annually by 2010.
B) The U.S.government imposed a tax on electric utilities to reduce damages from acid rain.
C) The government issued electric utilities tradable emissions allowances in other to reduce emissions of nitrogen oxide.
D) In the 1980s the U.S.government required the installation of catalytic converters to reduce emissions from all new automobiles.

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

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Which of the following is an example of a common resource?


A) elephants in the wild
B) lions in a zoo
C) a college education
D) public transportation

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

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Kenneth Chay and Michael Greenstone examined the impact of reductions in air pollution since the passage of the Clean Air Act of 1970.Which of the following statements summarizes their findings?


A) The marginal benefit of reductions in air pollution was less than the marginal cost.
B) The marginal cost of reducing emissions of sulfur dioxide has increased over time as the marginal benefit of the reductions has increased.
C) The benefits of reducing the six main air pollutants in the two years following the Act greatly exceeded the costs.
D) In the two years following passage of the Act,fewer infants died than would have died if the Act had not been passed.

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

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A negative externality is an example of market failure.The root of the problem lies in the definition and enforcement of property rights.Explain.

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If harmed parties do not have rights or ...

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Figure 5-1 Figure 5-1 Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s) . -Refer to Figure 5-1.Why is there a deadweight loss? A) because the marginal social cost of producing each additional unit in excess of Q<sub>2</sub> exceeds the marginal benefit B) because the marginal private cost of producing each additional unit in excess of Q<sub>2</sub> exceeds the marginal benefit C) because the marginal social benefit of producing each additional unit in excess of Q<sub>2</sub> exceeds the private cost D) because the marginal private benefit of producing each additional unit in excess of Q<sub>2</sub> exceeds the social cost Suppose there are several paper mills producing paper for a market.These mills,located upstream from a fishing village,discharge a large amount of wastewater into the river.The waste material affects the number of fish in the river,and the use of the river for recreation and as a public water supply source.Figure 5-1 shows the paper market.Use this Figure to answer the following question(s) . -Refer to Figure 5-1.Why is there a deadweight loss?


A) because the marginal social cost of producing each additional unit in excess of Q2 exceeds the marginal benefit
B) because the marginal private cost of producing each additional unit in excess of Q2 exceeds the marginal benefit
C) because the marginal social benefit of producing each additional unit in excess of Q2 exceeds the private cost
D) because the marginal private benefit of producing each additional unit in excess of Q2 exceeds the social cost

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

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