Question 1

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $12 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
A) They are equal.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that flu shots create a positive...

Question 2

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government impose a $5 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
A) They are equal.
B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
C) The after-tax equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that electricity producers create a negative...

Question 3

Which of the following statements is not correct?
A) Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level.
B) Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution.
C) Corrective taxes set the maximum quantity of pollution,whereas tradable pollution permits fix the price of pollution.
D) Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.

Accepted Answer

This statement is not correct as it is the opposite of reality. Corrective taxes set the price of pollution, whereas tradable pollution permits set the maximum quantity of pollution that can be released.

Question 4

Suppose that electricity producers create a negative externality equal to $6 per unit.Further suppose that the government imposes a $8 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
A) They are equal.
B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
C) The after-tax equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The tax reduces the quantity of electricity produced, as it raises the cost of production for the producers. The after-tax equilibrium quantity will be where the marginal cost of producing electricity (including the tax) intersects with the demand curve. Since the tax is greater than the negative externality (i.e. $8 > $6), the after-tax equilibrium quantity will be less than the socially optimal quantity, which is where the marginal benefit of producing electricity equals the marginal cost including the externality. Therefore, the socially optimal quantity will be greater than the after-tax equilibrium quantity.

Question 5

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government gives a $5 per-unit subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
A) They are equal.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that electricity producers create a negative...

Question 6

Suppose that smoking creates a negative externality.If the government imposes a per-cigarette tax equal to the per-cigarette externality,then
A) the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.
B) the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.
C) the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that smoking creates a negative externality.If...

Question 7

Figure 10-10 -Refer to Figure 10-10.Which of the following is not necessary in order for the corrective tax and pollution permit to have equivalent effects? A) P^B must be equivalent to the corrective tax. B) Q^A must be equivalent to the amount of pollution allowed to the pollution permit holders. C) The equilibrium price and quantity of pollution must be the same in both graphs. D) The amount of pollution emitted by each firm must be the same.

Accepted Answer

The corrective tax and pollution permit can have equivalent effects even if the amount of pollution emitted by each firm is different as long as the total amount of pollution allowed is the same. This is because the system aims to reduce overall pollution levels, not necessarily individual firm emissions. Therefore, the correct answer is D, as it is not necessary for the amount of pollution emitted by each firm to be the same for the two systems to have equivalent effects. The other three factors listed in the answer choices are necessary for equivalence between the two systems.

Question 8

Figure 10-10 
-Refer to Figure 10-10.Which graph illustrates a corrective tax?
A) the left graph
B) the right graph
C) both graphs
D) neither graph

Accepted Answer

A corrective tax is typically illustrated by a shift in the supply curve, which is shown in the left graph.

Question 9

Suppose that cookie producers create a positive externality equal to $2 per dozen.Further suppose that the government offers a $2 per-dozen subsidy to the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?
A) The equilibrium quantity is greater than the socially optimal quantity.
B) The equilibrium quantity is less than the socially optimal quantity.
C) They are equal.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that cookie producers create a positive...

Question 10

Suppose that alcohol consumption creates a negative externality.What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?
A) impose a tax on alcohol that is equal to the per-unit externality
B) offer a subsidy on alcohol that is equal to the per-unit externality
C) impose a regulation limiting the amount of alcohol that each consumer can purchase
D) nothing

Accepted Answer

By imposing a tax on alcohol, the cost of producing and consuming alcohol will increase. This will lead to a decrease in the quantity of alcohol demanded and supplied, moving the market closer to the socially optimal quantity. The tax should be equal to the per-unit externality to fully internalize the cost of alcohol consumption.

Question 11

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
A) They are equal.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The positive externality of $12 per shot means that the social value of each shot is higher than the private value, leading to a market failure where the equilibrium quantity is lower than the socially optimal quantity. The $5 per-shot subsidy shifts the supply curve to the right, increasing the equilibrium quantity, but it is still below the socially optimal quantity. Therefore, the socially optimal quantity is higher than the equilibrium quantity.

Question 12

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs.Suppose that the federal government gives grants to these researchers equal to the their per-unit production externality.What is the relationship between the equilibrium quantity of university research and the socially optimal quantity of university research produced?
A) The equilibrium quantity is greater than the socially optimal quantity.
B) They are equal.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of University researchers create a positive externality because...

Question 13

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer
A) externalize the positive externality.
B) externalize the negative externality.
C) internalize the positive externality.
D) internalize the negative externality.

Accepted Answer

Corrective taxes are used to internalize negative externalities by making the producer pay for the harm they are causing to society. In this case, the nasty smell is a negative externality that affects the people around the producer. By imposing a tax on the producer, they are forced to internalize the cost of the smell and may be incentivized to reduce the smell in order to avoid paying the tax.

Question 14

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $15 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
A) They are equal.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that flu shots create a positive...

Question 15

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs.What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?
A) tax university researchers
B) offer grants to university researchers
C) eliminate subsidized student loans
D) nothing

Accepted Answer

Offering grants to university researchers provides a positive incentive for them to conduct more research to reach the socially optimal quantity, without imposing a negative consequence like a tax would. Eliminating subsidized student loans or doing nothing would not directly address the issue of externalities in university research.

Question 16

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then
A) the equilibrium quantity of education will equal the socially optimal quantity of education.
B) the equilibrium quantity of education will be greater than the socially optimal quantity of education.
C) the equilibrium quantity of education will be less than the socially optimal quantity of education.
D) There is not enough information to answer the question.

Accepted Answer

When the government subsidies education by an amount equal to the per-unit externality it creates, it shifts the demand curve for education to the right by the exact amount of the externality. As a result, the equilibrium quantity of education will be equal to the socially optimal quantity of education. This is because the subsidy eliminates the divergence between private and social benefits, making it rational for individuals to acquire the socially optimal level of education.

Question 17

Suppose that cigarette smokers create a negative externality.Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?
A) They are equal.
B) The after-tax equilibrium quantity is greater than the socially optimal quantity.
C) The after-tax equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Accepted Answer

The answer of Suppose that cigarette smokers create a negative...

Question 18

Figure 10-10 
-Refer to Figure 10-10.Which graph illustrates a pollution permit program?
A) the left graph
B) the right graph
C) both graphs
D) neither graph

Accepted Answer

The right graph typically illustrates a pollution permit program by showing a fixed supply of permits, leading to a vertical supply curve, which is characteristic of such programs.

Question 19

Figure 10-10 
-Refer to Figure 10-10.The supply of pollution permits is
A) elastic and represented by line A.
B) inelastic and represented by line A.
C) elastic and represented by line F
D) inelastic and represented by line F.

Accepted Answer

The supply of pollution permits is inelastic and represented by line F. This is because the supply of permits is fixed and cannot be easily increased or decreased, thus making it less responsive to changes in price.

Question 20

Suppose that planting trees creates a positive externality equal to $25 per tree.Further suppose that the local government offers a $25 per-tree subsidy to planters.What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?
A) The equilibrium quantity is less than the socially optimal quantity.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) They are equal.
D) There is not enough information to answer the question.

Accepted Answer

The $25 per-tree subsidy internalizes the positive externality, aligning the private benefit with the social benefit, thus making the equilibrium quantity equal to the socially optimal quantity.

Quiz 10: Externalities

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $12 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government impose a $5 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

Which of the following statements is not correct?

Suppose that electricity producers create a negative externality equal to $6 per unit.Further suppose that the government imposes a $8 per-unit tax on the producers.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

Suppose that electricity producers create a negative externality equal to $5 per unit.Further suppose that the government gives a $5 per-unit subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of electricity to be produced?

Suppose that smoking creates a negative externality.If the government imposes a per-cigarette tax equal to the per-cigarette externality,then

Figure 10-10 -Refer to Figure 10-10.Which of the following is not necessary in order for the corrective tax and pollution permit to have equivalent effects?

Figure 10-10 -Refer to Figure 10-10.Which graph illustrates a corrective tax?

Suppose that cookie producers create a positive externality equal to $2 per dozen.Further suppose that the government offers a $2 per-dozen subsidy to the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

Suppose that alcohol consumption creates a negative externality.What can the government do to equate the equilibrium quantity of alcohol and the socially optimal quantity of alcohol?

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell because the tax makes the producer

Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $15 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?

Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then

Suppose that cigarette smokers create a negative externality.Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality.What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?

Figure 10-10 -Refer to Figure 10-10.Which graph illustrates a pollution permit program?

Figure 10-10 -Refer to Figure 10-10.The supply of pollution permits is

Suppose that planting trees creates a positive externality equal to $25 per tree.Further suppose that the local government offers a $25 per-tree subsidy to planters.What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?