Multiple Choice Questions:
1. The Coase theorem suggests that private solutions to externality problems
a. Can lead to an optimal allocation of resources if private parties can bargain at relatively low cost.
b. Result in the efficient outcome under all conditions.
c. Will result in the same distribution of wealth no matter how property rights are assigned.
d. Will result in different efficiency levels of production, depending crucially on how property rights are assigned.
2. In the case of a private solution to the externality problem, the distribution of rights
a. Restricts the ability of private parties to properly price the externalities.
b. Enhances the market incentive to reach an efficient solution.
c. Determines who bears the cost of the solution but does not affect the efficient result.
d. Affects the efficiency of the outcome, but does not determine who bears the cost.
3. It is difficult to identify the efficient level of air pollution because
a. Private ownership of different portions of air is not possible.
b. There is no way to precisely determine the price that should be paid for fouling an individual’s air.
c. There are no private market transactions over air for politicians to look to when determining the appropriate level of pollution.
d. Of all of the above.
4. Pollution reduction will be achieved for the least cost when
a. Large polluters are required to reduce pollution by a greater extent than small polluters.
b. Small polluters are required to reduce pollution by a greater extent than large polluters.
c. All firms are required to reduce pollution by a proportionate amount.
d. All firms are required to reduce pollution by an equal absolute amount.
e. The cost of reducing pollution by an additional unit is the same for all polluting firms.
5. If the rivers, lakes, and air in the United States could all be privately owned, then
a. There would be less pollution.
b. Costs of production for many firms would rise.
c. Externalities would be internalized.
d. A market for the pollution rights would not be needed.
e. All of the above are correct.
6. Which of the following does not inhibit the ability of voluntary exchange to internalize external costs?
a. High transaction costs
b. Clear property rights
c. Large numbers of people affected by the external cost, but by a small amount each
d. The free-rider problem
e. All of the above do inhibit the ability of voluntary exchange to internalize external costs
7. If there were well-defined property rights in all goods, but positive transaction costs,
a. There would be no external costs.
b. External costs would be reduced but not eliminated.
c. There would be no effect on the magnitude of external costs.
d. The amount of external costs imposed would increase.