Multiple Choice Questions
1. Which of the following is an example of a positive externality?
a. Bob mows Hillary's lawn and is paid $100 for performing the service.
b. While mowing the lawn, Bob's lawnmower spews out smoke that Hillary's neighbor Kristen has to breathe.
c. Hillary's newly cut lawn makes her neighborhood more attractive.
d. Hillary's neighbors pay her if she promises to get her lawn cut on a regular basis.
2. If the production of a good yields a negative externality, then the social-cost curve lies ___________ the supply curve, and the socially optimal quantity is ___________ than the equilibrium quantity.
a. Above, greater
b. Above, less
c. Below, greater
d. Below, less
3. When the government levies a tax on a good equal to the external cost associated with the good's production, it ___________ the price paid by consumers and makes the market outcome ___________ efficient.
a. Increases, more
b. Increases, less
c. Decreases, more
d. Decreases, less
4. Which of the following statements about corrective taxes is NOT true?
a. Economists prefer them to command-and-control regulation.
b. They raise government revenue.
c. They cause deadweight losses.
d. They reduce the quantity sold in a market.
5. The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25,000. This policy is equivalent to a corrective tax of ___________ per unit of pollution.
a. $10
b. $50
c. $450
d. $500
6. The Coase theorem does NOT apply if
a. There is a significant externality between two parties.
b. The court system vigorously enforces all contracts.
c. Transaction costs make negotiating difficult.
d. Both parties understand the externality fully.