Question 1

It is generally difficult or impossible for private markets to take externalities into account because:
A)decision makers in the market fail to take account of the spillover effects of their behaviour
B)buyers and sellers in private markets are only interested in social wellbeing
C)people are only interested in short-term gains
D)governments are responsible for externality problems

Accepted Answer

Private market transactions involve only the buyers and sellers directly involved in the transaction, with little regard for external parties who may be affected by the transaction. This failure to take externalities into account leads to market inefficiencies and negative social welfare impacts.

Question 2

Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

Accepted Answer

Technology policy is a form of government intervention in the economy that aims to promote technology-enhancing industries through various means such as research and development funding, tax incentives, and regulatory policies.

Question 3

A petrol tax is a good way of encouraging people to use safer cars.

Accepted Answer

A petrol tax primarily incentivizes the use of more fuel-efficient vehicles or alternative modes of transportation to reduce fuel consumption, rather than directly encouraging the use of safer cars.

Question 4

While economists generally agree that markets are a good way to organise economic behaviour, there are some important exceptions.The exceptions include:
A)some markets produce negative externalities
B)some industries produce positive externalities
C)some markets are characterised by market failure
D)all of the above are true

Accepted Answer

All of the above choices are true. Some markets may produce negative externalities such as pollution, which can harm individuals who are not involved in the market transaction. Some industries may also produce positive externalities, such as education or research and development, which benefit society as a whole. Market failure can occur when the market does not allocate resources efficiently, such as with natural monopolies or public goods.

Question 5

Aaron and Katie are building a house.They want to make sure they have a good relationship with the neighbours and do not want to impose any negative externalities on them.Which of the following are measures to avoid negative externalities on Aaron and Katie's neighbours?
(i) making sure their windows do not look into the neighbours' yard
(ii) carefully insulating their house so that sound doesn't carry when they play loud music
(iii) building an environmentally friendly house.
A)(i), (ii) and (iii)
B)only (i) and (iii)
C)only (ii) and (iii)
D)only (i) and (ii)

Accepted Answer

The answer of Aaron and Katie are building a house.They...

Question 6

Contracts cannot solve the inefficiency that arises from externalities.

Accepted Answer

Contracts can be used to address inefficiencies from externalities by allowing parties to negotiate solutions that internalize the costs or benefits of externalities, thus leading to more efficient outcomes.

Question 7

Private parties can negotiate a solution to an externality in all cases.

Accepted Answer

In some cases, private parties may not have the incentive or ability to negotiate a solution to an externality. For example, if the negative externalities of a factory's pollution affect a large number of people, it may be difficult for those affected to organize and negotiate a solution with the factory owner. Additionally, if the transaction costs of negotiating a solution are too high, it may not be feasible for private parties to reach an agreement. In such cases, government intervention may be necessary to address the externality.

Question 8

When a tax is used to give buyers and sellers in a market the incentive to take into account the external effects of their actions, it is said to be 'internalising an externality'.

Accepted Answer

This is the definition of internalising an externality.

Question 9

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Accepted Answer

They aim to move the allocation of resources closer to the social optimum, not the private optimum, by accounting for external costs or benefits not considered in private transactions.

Question 10

Vaccinations are heavily subsidised in order to get the optimal number of people vaccinated.

Accepted Answer

The answer of Vaccinations are heavily subsidised in order to...

Question 11

The government attempts to resolve negative externalities caused by automobile exhaust by:
(i) taxing gasoline to reduce the amount that people drive
(ii) building safer highways
(iii) setting emission standards for automobiles
A)(i), (ii) and (iii) are all used to reduce emissions
B)only (i) and (iii) are used to reduce emissions
C)only (ii) and (iii) are used to reduce emissions
D)only (i) and (ii) are used to reduce emissions

Accepted Answer

Taxing gasoline (i) and setting emission standards for automobiles (iii) are direct methods to reduce emissions by either discouraging excessive driving or ensuring cars emit less pollution. Building safer highways (ii) is primarily aimed at reducing accidents, not emissions.

Question 12

Negative externalities occur when one person's actions:
A)cause another person to lose money in a stock-market transaction.
B)cause his or her employer to lose business.
C)adversely affect the wellbeing of a bystander (or bystanders) who is (are) not party to a market exchange.
D)reveal his or her preference for foreign produced goods.

Accepted Answer

Negative externalities refer to the negative impact of one person's actions on others who are not involved in the market exchange. This can manifest in the form of decreased wellbeing or harm to bystanders. Choices A, B, and D are not accurate descriptions of negative externalities.

Question 13

Charities are an example of a private solution to an externality.

Accepted Answer

Charities aim to address externalities by providing public goods and services that the market cannot easily provide. They are a form of private solution to societal problems that are not being adequately addressed by the government or the market.

Question 14

When the government decides to dredge a bay to let big ships into the port, they are causing:
A)a positive externality because the dredging will allow more of the bigger ships into the bay
B)a positive externality because the dredging will create profit for the dredging company
C)a negative externality because marine life will be displaced by the dredging
D)a negative externality because the dredging will take a long time to complete

Accepted Answer

Dredging a bay can disrupt marine ecosystems, displacing marine life and potentially causing environmental harm, which is considered a negative externality.

Question 15

The social cost of an externality can be described as:
A)always equal to the tax the government imposes on production of the good
B)the cost imposed on society that is neglected during the production of the good
C)the situation that arises when two parties cannot reach an agreement over the production of a good
D)the value people place on the production of a good

Accepted Answer

The social cost of an externality refers to the cost imposed on society as a result of the production of a good, which is often neglected by the producer of the good. This cost includes both the private costs incurred by the producer and the external costs imposed on third parties, such as pollution or environmental degradation. It is not necessarily equal to the tax imposed by the government on the production of the good, nor is it simply the value that people place on the production of the good. It is also not related to a situation where two parties cannot agree on the production of a good.

Question 16

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods.Policies to reduce this noise problem include:
A)charging passengers an airport departure tax
B)charging excise taxes on airline fuel
C)encouraging people to drive rather than fly
D)requiring aircraft to use 'whisper' technology to quieten their engines

Accepted Answer

Requiring aircraft to use 'whisper' technology to quieten their engines would directly address the issue of noise pollution caused by airports. Charging passengers an airport departure tax or excise taxes on airline fuel may discourage air travel, but would not necessarily solve the noise problem. Encouraging people to drive rather than fly could actually worsen environmental problems and traffic congestion.

Question 17

Inventors in developing countries are usually unable to capture the full benefit of their innovations.They therefore tend to devote too few resources to research.Government can address this problem of under-investment in research by:
(i) increasing restrictions on trade
(ii) establishing a patent system to provide inventors with exclusive control over their inventions for a period of time
(iii) subsidising the purchase of technology from other countries.
A)only (i) is used
B)only (ii) is used
C)only (iii) is used
D)(i), (ii) and (iii) are all used

Accepted Answer

Increasing restrictions on trade (option i) would likely make it more difficult for developing country inventors to access the resources they need for research, as trade restrictions often limit the flow of goods and services across borders.

Establishing a patent system (option ii) would provide inventors with legal protection for their inventions, allowing them to capture more of the benefits of their innovations and potentially increasing their incentive to invest in research.

Subsidizing the purchase of technology from other countries (option iii) could potentially help inventors in developing countries access the resources they need for research, but this may also be a costly and inefficient solution.

Overall, option ii (establishing a patent system) is the best solution presented as it directly addresses the problem of inventors being unable to capture the full benefits of their innovations, and provides a clear incentive for them to invest in research.

Question 18

When Jake takes into account how his actions affect Jill, and changes these, an externality is solved.

Accepted Answer

When Jake considers the impact of his actions on Jill and changes them accordingly, he is internalizing the externality and solving it. Thus, the answer is true.

Question 19

A positive externality exists when:
A)a person engages in an activity that has a spillover that makes a bystander better off
B)the market has only one seller
C)a firm sells its product in an external foreign market
D)a person engages in an activity that has a spillover that makes a bystander worse off

Accepted Answer

A positive externality occurs when the consumption or production of a good or service benefits a third party, who is not involved in the transaction. This means that the good or service has a spillover effect on someone other than the buyer or seller, and this effect is positive in nature, making the bystander better off.

Question 20

Brent and Jess live together.Every morning, Jess makes a smoothie before work and wakes Brent, angering him, since he usually likes to sleep in.How can Brent and Jess solve this problem?
A)They will not be able to solve the problem unless it is clear whether Jess has the right to make smoothies or Brent has the right to sleep in
B)Brent can offer to pay Jess adequately to stop making the smoothies
C)They must hire a negotiator to solve the dispute
D)Jess should make a smoothie for Brent too

Accepted Answer

Brent offering to compensate Jess for not making smoothies in the morning is a direct approach to solving the conflict by addressing the root cause: the noise from making smoothies. This solution involves negotiation and compromise, which are key to resolving disputes in a shared living situation.

Quiz 10: Externalities

It is generally difficult or impossible for private markets to take externalities into account because:

Government intervention in the economy that aims to promote technology-enhancing industries is called technology policy.

A petrol tax is a good way of encouraging people to use safer cars.

While economists generally agree that markets are a good way to organise economic behaviour, there are some important exceptions.The exceptions include:

Contracts cannot solve the inefficiency that arises from externalities.

Private parties can negotiate a solution to an externality in all cases.

When a tax is used to give buyers and sellers in a market the incentive to take into account the external effects of their actions, it is said to be 'internalising an externality'.

All remedies that attempt to solve an externality problem share the goal of moving the allocation of resources closer to the private optimum.

Vaccinations are heavily subsidised in order to get the optimal number of people vaccinated.

The government attempts to resolve negative externalities caused by automobile exhaust by: (i) taxing gasoline to reduce the amount that people drive (ii) building safer highways (iii) setting emission standards for automobiles

Negative externalities occur when one person's actions:

Charities are an example of a private solution to an externality.

When the government decides to dredge a bay to let big ships into the port, they are causing:

The social cost of an externality can be described as:

Airports can generate a negative externality with the noise the landing aircraft makes on neighbourhoods.Policies to reduce this noise problem include:

When Jake takes into account how his actions affect Jill, and changes these, an externality is solved.

A positive externality exists when:

Brent and Jess live together.Every morning, Jess makes a smoothie before work and wakes Brent, angering him, since he usually likes to sleep in.How can Brent and Jess solve this problem?