Externality & Internality MCQs

Option A: reduce the incentive for technological innovations to further reduce pollution.

Option B: set the price of pollution.

Option C: determine the demand for pollution rights.

Option D: Set the quantity of pollution

Correct Answer: Set the quantity of pollution ✔

Option A: a tradeable pollution permits.

Option B: an attempt to internalize a positive externality

Option C: an application of the Coase theorem

Option D: an attempt to internalize a negative externality.

Correct Answer: an attempt to internalize a negative externality. ✔

Option A: Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music

Option B: Roberto will pay Thomas €150 and Roberto will continue to play loud music

Option C: Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music

Option D: Roberto will pay Thomas €100 and Roberto will stop playing loud music

Correct Answer: Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music ✔

Option A: costs incurred due to lawyers’ fees

Option B: costs incurred to reduce the pollution

Option C: costs incurred to enforce the agreement

Option D: costs incurred due to a large number of parties affected by the externality

Correct Answer: costs incurred to reduce the pollution ✔

Option A: there are no transaction costs.

Option B: each affected party has equal power in the negotiations.

Option C: the party affected by the externality has the initial property right to be left alone.

Option D: There are a large number of affected parties.

Correct Answer: there are no transaction costs. ✔

Option A: a positive externality

Option B: a technology spillover

Option C: an efficient market outcome.

Option D: a negative externality

Correct Answer: a negative externality ✔

Option A: have the government take over the production of the good causing the externality

Option B: ban the production of all goods creating negative externalities

Option C: tax the good

Option D: subsidize the good

Correct Answer: tax the good ✔

Option A: optimal quantity to exceed the equilibrium quantity.

Option B: equilibrium quantity to be either above or below the optimal quantity

Option C: equilibrium quantity to equal the optimal quantity

Option D: equilibrium quantity to exceed the optimal quantity

Correct Answer: equilibrium quantity to exceed the optimal quantity ✔

Option A: a social cost curve that is below the supply curve (private cost curve) for a good

Option B: none of these answers

Option C: a social cost curve that is below the supply curve (private cost curve) for a good

Option D: a social value curve that is above the demand curve (private value curve) for a good

Correct Answer: a social cost curve that is below the supply curve (private cost curve) for a good ✔

Option A: Pigouvian taxes, command-and-control policies, tradable pollution permits.

Option B: tradable pollution permits, Pigouvian taxes, command-and-control policies

Option C: tradable pollution permits command-and-control policies, Pigovian taxes.

Option D: command-and-control policies, tradable pollution permits, Pigovian taxes.

Correct Answer: tradable pollution permits, Pigouvian taxes, command-and-control policies ✔

Option A: an attempt to internalize a positive externality

Option B: an attempt to internalize a negative externality

Option C: a Pigouvian tax

Option D: a command-and-control policy

Correct Answer: an attempt to internalize a positive externality ✔

Option A: Sets the quantity of pollution

Option B: reduces the incentive for technological innovations to further reduce pollution

Option C: Sets the price of pollution

Option D: determines the demand for pollution rights.

Correct Answer: Sets the price of pollution ✔

Option A: All of these answers are true

Option B: Pigouvian taxes and tradable pollution permits create an efficient market for pollution.

Option C: Tradable pollution permits efficiently reduce pollution only if they are initially distributed to the firms that can regulator pollution at the lowest cost.

Option D: To set the quantity of pollution with tradable pollution permits, the regulator must know everything about the demand for pollution rights.

Correct Answer: Pigouvian taxes and tradable pollution permits create an efficient market for pollution. ✔

Option A: It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound

Option B: it is efficient for Roberto to continue to play loud music

Option C: It is efficient for Roberto to stop playing loud music only if Thomas has the property right to peace and quiet

Option D: It is efficient for Roberto to stop playing loud music only if Roberto has the property right to play loud music

Correct Answer: It is efficient for Roberto to stop playing loud music regardless of who has the property right to the level of sound ✔

Option A: ban the good creating the externality

Option B: tax the good

Option C: subsidize the good

Option D: have the government produce the good until the value of an additional unit is zero

Correct Answer: subsidize the good ✔

Option A: the regulators decide how much each polluter should reduce its pollution.

Option B: no pollution of the environment is tolerated

Option C: each polluter reduces its pollution an equal amount

Option D: the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

Correct Answer: the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount ✔

Option A: by allocating tradable technology permits to high technology industry.

Option B: to internalize the positive externality associated with technology-enhancing industries.

Option C: to help stimulate private solution to the technology externality

Option D: to internalize the negative externality associated with industrial pollution

Correct Answer: to internalize the positive externality associated with technology-enhancing industries. ✔

Option A: equilibrium quantity to exceed the optimal quantity

Option B: equilibrium quantity to equal the optimal quantity

Option C: optimal quantity to exceed the equilibrium quantity

Option D: equilibrium quantity to be either above or below the optimal quantity

Correct Answer: optimal quantity to exceed the equilibrium quantity ✔

Option A: a social cost curve that is above the supply curve (private cost curve) for a good

Option B: none of these answers

Option C: a social value curve that is above the demand curve (private value curve) for good

Option D: a social value curve that is below the demand curve (private value curve) for a good

Correct Answer: a social value curve that is above the demand curve (private value curve) for good ✔

Option A: the benefit that accrues to the buyer in a market

Option B: the cost that accrues to the seller in a market

Option C: none of these answers

Option D: the compensation paid to a firm’s external consultants.

Correct Answer: E. The uncompensated impact of one person’s actions on the well-being of a bystander ✔