Externalities Quiz (chapter 10)

2.

A negative externality has an impact which is beneficial.

True
False

Correct Answer

A. False

Explanation

A negative externality refers to a situation where the actions of one person or entity impose costs on others without compensation. It is characterized by a harmful impact on third parties. Therefore, it is incorrect to say that a negative externality has a beneficial impact. The correct answer is false.

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3.

Externalities...

Affect economic well-being.
Cause markets to allocate resources inefficiently.
Cause governments to respond to decisions to protect third parties.
Cannot be represented in graph form.

Correct Answer(s)

A. Affect economic well-being.
A. Cause markets to allocate resources inefficiently.
A. Cause governments to respond to decisions to protect third parties.

Explanation

Externalities refer to the spillover effects of economic activities on third parties who are not directly involved in the transaction. These effects can either positively or negatively impact the economic well-being of individuals and society as a whole. When externalities exist, markets fail to account for the full social costs or benefits of production or consumption, leading to an inefficient allocation of resources. As a result, governments often intervene to correct these market failures and protect the interests of third parties affected by externalities. Therefore, externalities do affect economic well-being, cause markets to allocate resources inefficiently, and prompt government responses to protect third parties.

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4.

Incentivising buyers/sellers to take external effects of their actions into account is known as internalizing an externality.

True
False

Correct Answer

A. True

Explanation

Incentivizing buyers/sellers to take external effects of their actions into account is known as internalizing an externality. This means that individuals are encouraged to consider the positive or negative impacts their actions may have on others and adjust their behavior accordingly. By internalizing the externality, the aim is to align individual incentives with societal welfare, leading to more efficient outcomes. Therefore, the statement "Incentivizing buyers/sellers to take external effects of their actions into account is known as internalizing an externality" is true.

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5.

Positive externality:

Social cost curve lies to the LEFT of a supply (private cost)curve.
Social value curve lies to the RIGHT of demand (private benefit) curve.
Markets produce LARGER quantity than is socially desirable.
Markets produce SMALLER quantity than is socially desirable

Correct Answer(s)

A. Social value curve lies to the RIGHT of demand (private benefit) curve.
A. Markets produce SMALLER quantity than is socially desirable

Explanation

The answer is correct because when the social value curve lies to the right of the demand curve, it indicates that the benefits to society from consuming a good or service are higher than the private benefits experienced by individuals. This suggests that there is a positive externality present, as the social value exceeds the private benefit. In this situation, markets tend to produce a smaller quantity than is socially desirable because the private benefit does not fully capture the overall value to society.

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6.

Government action is the only way of solving externalities.

True
False

Correct Answer

A. False

Explanation

This statement is false because government action is not the only way of solving externalities. While government intervention can be effective in addressing externalities through regulations, taxes, and subsidies, there are also other ways to address externalities. For example, individuals and businesses can voluntarily take actions to internalize the costs or benefits of their actions, such as through the use of pollution control technologies or the creation of positive spillover effects. Additionally, market-based mechanisms like cap-and-trade systems can also be used to address externalities without direct government intervention. Therefore, government action is not the sole solution to externalities.

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2

7.

The Coase Theorem implies that private parties can solve externalitiy problems independantly if:

They can bargain over the allocation of resources by methods of payment.
They can bargain over the allocation of resources without cost.
The government is involved.
They ignore all costs to third parties.

Correct Answer

A. They can bargain over the allocation of resources without cost.

Explanation

The Coase Theorem states that private parties can solve externalitiy problems independently if they can bargain over the allocation of resources without cost. This means that if there are no transaction costs involved in negotiations between the parties, they can reach an efficient outcome on their own. In this scenario, the absence of costs allows the parties to freely negotiate and allocate resources in a way that maximizes their joint welfare.

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8.

The government can remedy externalities by:

Making certain behaviours required.
Making certain behaviours forbidden.
Ignoring certain behaviours.

Correct Answer(s)

A. Making certain behaviours required.
A. Making certain behaviours forbidden.

Explanation

The government can remedy externalities by making certain behaviors required and making certain behaviors forbidden. This means that the government can enforce regulations and laws that require individuals or businesses to engage in certain behaviors that have positive externalities, such as reducing pollution or promoting public health. Additionally, the government can also prohibit certain behaviors that have negative externalities, such as banning the use of harmful substances or activities that cause harm to others. By doing so, the government aims to internalize the costs and benefits of these behaviors and promote a more socially optimal outcome.

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9.

A Pigovian Tax is a:

Tax enacted to correct the effect(s) of a negative externality.
Tax enacted to correct the effect(s) of a positive externality.
Tax enacted to correct the effect(s) of governmental mistakes.
Tax enacted to correct the effect(s) of income poverty.

Correct Answer

A. Tax enacted to correct the effect(s) of a negative externality.

Explanation

A Pigovian Tax is a tax enacted to correct the effect(s) of a negative externality. Negative externalities occur when the production or consumption of a good causes harm to a third party, such as pollution or traffic congestion. By imposing a tax on the activity that generates the negative externality, the government aims to internalize the costs and discourage the behavior. The tax increases the price of the good or activity, reducing its demand and ultimately reducing the negative externality. This approach is based on the idea that individuals or firms should be held responsible for the costs they impose on others.

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10.

Tradable pollution permits...

Internalize the externality of pollution by making it cheap for firms to pollute.
Are cost-effective in terms of methods to keep the environment clean.
Are voluntary transfers of the right to pollute, from one firm to another.
May be worse than Pigovian Tax if the government doesn't know the demand curve.
Internalize the externality of pollution by making it costly for firms to pollute.

Correct Answer(s)

A. Are cost-effective in terms of methods to keep the environment clean.
A. Are voluntary transfers of the right to pollute, from one firm to another.
A. Internalize the externality of pollution by making it costly for firms to pollute.

11.

Property rights grant the exclusive right of a party to determine how a resource is used.

True
False

Correct Answer

A. True

Explanation

Property rights refer to the legal rights and protections granted to individuals or entities over their possessions, including resources. These rights give the owner the authority to control and make decisions regarding the use, transfer, or disposal of their property. By granting exclusive rights, property owners have the power to determine how their resources are utilized, ensuring that they can benefit from their investments and efforts. Therefore, the statement that property rights grant the exclusive right of a party to determine how a resource is used is true.

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1

Externalities Quiz (Chapter 10)

An externality is:

Quiz Preview

A negative externality has an impact which is beneficial.

Externalities...

Incentivising buyers/sellers to take external effects of their actions into account is known as internalizing an externality.

Positive externality:

Government action is the only way of solving externalities.

The Coase Theorem implies that private parties can solve externalitiy problems independantly if:

The government can remedy externalities by:

A Pigovian Tax is a:

Tradable pollution permits...

Property rights grant the exclusive right of a party to determine how a resource is used.