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Figure 10-14 Figure 10-14   -Refer to Figure 10-14. Which of the following statements is correct? A) To induce firms to internalize the externality in this market, the government should impose a tax measured by P<sub>2</sub> - P<sub>0</sub>. B) To induce firms to internalize the externality in this market, the government should offer a subsidy measured by P<sub>2</sub> - P<sub>0</sub>. C) To induce firms to internalize the externality in this market, the government should impose a tax measured by P<sub>2</sub> - P<sub>1</sub>. D) There is no externality in this market. -Refer to Figure 10-14. Which of the following statements is correct?


A) To induce firms to internalize the externality in this market, the government should impose a tax measured by P2 - P0.
B) To induce firms to internalize the externality in this market, the government should offer a subsidy measured by P2 - P0.
C) To induce firms to internalize the externality in this market, the government should impose a tax measured by P2 - P1.
D) There is no externality in this market.

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

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Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil needs a lot of practice to earn $250, which is his share of the band's profit. Thurman gets distracted by Phil's drumming but he needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution?


A) Phil offers Thurman $499 to allow Phil to continue drumming. Thurman accepts and both are better off.
B) Phil offers Thurman $249 to allow Phil to continue drumming. Thurman accepts and both are better off.
C) Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off.
D) Thurman offers Phil $501 to stop practicing his drumming. Phil agrees and both are better off.

E) None of the above
F) All of the above

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Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th 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.

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For the 500th fire extinguisher,...

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Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market, then


A) the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
B) the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.
C) the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.
D) There is not enough information to answer the question.

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

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If we know that the supply curve for good x fails to reflect the total cost to society of producing that good, then we know that


A) the market for good x is characterized by an externality, but we cannot determine whether the externality is positive or negative from this fact alone.
B) the market for good x is characterized by a positive externality.
C) the market for good x is characterized by a negative externality.
D) the demand curve for good x fails to reflect the value to society of that good.

E) All of the above
F) C) and D)

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Figure 10-11 Figure 10-11   -Refer to Figure 10-11. Which of the following statements is correct? A) The private value of the 420<sup>th</sup> unit of output is $15. B) The social value of the 420<sup>th</sup> unit of output is $42. C) The external benefit of the 420<sup>th</sup> unit of output is $27. D) All of the above are correct. -Refer to Figure 10-11. Which of the following statements is correct?


A) The private value of the 420th unit of output is $15.
B) The social value of the 420th unit of output is $42.
C) The external benefit of the 420th unit of output is $27.
D) All of the above are correct.

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

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According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as


A) the externalities that are present are positive, not negative.
B) government assigns property rights to the harmed party.
C) private parties can bargain with sufficiently low transaction costs.
D) businesses determine an appropriate level of production.

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

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Which of the following statements is correct?


A) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.
B) Corrective taxes distort economic incentives.
C) Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster rate.
D) Both a and b are correct.

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

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Which of the following would not be considered a negative externality?


A) Smelter, Inc. creates steel and pollution.
B) Your friend buys a new puppy that barks every night.
C) You have an adverse reaction to a medication your doctor prescribed for you.
D) Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.

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

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If an objective of public policy is to allocate pollution to those factories that face the highest cost of reducing it, then that objective could be achieved by


A) a corrective tax, but not by regulation.
B) regulation, but not by a corrective tax.
C) either regulation or a corrective tax.
D) neither regulation nor a corrective tax.

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

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Figure 10-9 Figure 10-9       -Refer to Figure 10-9, Panel (b)  and Panel (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by A) Q3 - Q2. B) Q5 - Q4. C) P3a - P3b. D) P4a - P4b. Figure 10-9       -Refer to Figure 10-9, Panel (b)  and Panel (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by A) Q3 - Q2. B) Q5 - Q4. C) P3a - P3b. D) P4a - P4b. Figure 10-9       -Refer to Figure 10-9, Panel (b)  and Panel (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by A) Q3 - Q2. B) Q5 - Q4. C) P3a - P3b. D) P4a - P4b. -Refer to Figure 10-9, Panel (b) and Panel (c) . The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse is represented by


A) Q3 - Q2.
B) Q5 - Q4.
C) P3a - P3b.
D) P4a - P4b.

E) C) and D)
F) All of the above

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Table 10-4 Table 10-4   -Refer to Table 10-4. Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible) . The maximum total surplus that can be achieved in this market is A) $29. B) $35. C) $40. D) $46. -Refer to Table 10-4. Take into account private and external costs and assume the quantity of output is always a whole number (that is, fractional units of output are not possible) . The maximum total surplus that can be achieved in this market is


A) $29.
B) $35.
C) $40.
D) $46.

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

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Scenario 10-4 The demand curve for fire extinguishers slopes downward and the supply curve for fire extinguishers slopes upward. The production of the 500th 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 500th fire extinguisher?

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The social value is equal to t...

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Figure 10-12 Figure 10-12   -Refer to Figure 10-12. The graph, as drawn, could apply to the market for A) fire extinguishers. B) immunizations such as flu shots. C) education. D) All of the above are correct. -Refer to Figure 10-12. The graph, as drawn, could apply to the market for


A) fire extinguishers.
B) immunizations such as flu shots.
C) education.
D) All of the above are correct.

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

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If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should


A) encourage the production of computer chips with subsidies.
B) discourage the production of potato chips with taxes.
C) encourage the production of potato chips with subsidies.
D) discourage the production of computer chips with taxes.

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

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Figure 10-10 Figure 10-10   -Refer to Figure 10-10. Which of the following statements is correct? A) The private cost of producing the 120<sup>th</sup> unit of output is $12. B) The social cost of producing the 120<sup>th</sup> unit of output is $22. C) The external cost of producing the 120<sup>th</sup> unit of output is $2. D) All of the above are correct. -Refer to Figure 10-10. Which of the following statements is correct?


A) The private cost of producing the 120th unit of output is $12.
B) The social cost of producing the 120th unit of output is $22.
C) The external cost of producing the 120th unit of output is $2.
D) All of the above are correct.

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

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The Coase theorem asserts that, in the presence of externalities,


A) private economic actors sometimes can reach a bargain that produces an efficient outcome.
B) private economic actors always can reach a bargain that makes everyone better off.
C) private solutions cannot be very effective.
D) corrective taxes cannot be very effective.

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

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Which of the following statements is 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) All of the above are correct.

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

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Figure 10-16 Figure 10-16   -Refer to Figure 10-16. 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 A) 25 B) 50 C) 75 D) 100 -Refer to Figure 10-16. 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


A) 25
B) 50
C) 75
D) 100

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

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Which theorem asserts that private economic actors can often solve the problem of externalities among themselves?

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The Coase ...

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