Chapter 11 — Quiz

Multiple choice

Q1. An externality is: a) A benefit that only affects the buyer b) A cost or benefit imposed on a third party without their consent c) A government policy d) A market equilibrium

Q2. A negative externality causes the market to produce: a) Too little of the good b) Exactly the right amount c) Too much of the good d) Nothing

Q3. A positive externality causes the market to produce: a) Too little of the good b) Exactly the right amount c) Too much of the good d) Too many externalities

Q4. The social cost of production equals: a) Private cost only b) External cost only c) Private cost plus external cost d) Private cost minus external cost

Q5. A Pigouvian tax is a tax equal to: a) The total cost of production b) The marginal external cost c) The total revenue of the firm d) The consumer surplus

Q6. The Coase theorem says that private bargaining can solve externalities when: a) The government mandates it b) Property rights are well-defined and transaction costs are low c) The externality is very large d) Only one party is affected

Q7. Why can't the Coase theorem solve climate change? a) Climate change isn't an externality b) Transaction costs are too high, too many parties, property rights over the atmosphere are unclear c) Climate change is too small d) The Coase theorem never works

Q8. Cap-and-trade guarantees: a) A specific price on pollution b) A specific quantity of pollution c) Both a specific price and a specific quantity d) Neither

Q9. The U.S. acid rain program (1990 Clean Air Act Amendments) used: a) Pigouvian taxes b) Cap-and-trade for sulfur dioxide c) Command-and-control regulation only d) Coase bargaining

Q10. About what percentage of surveyed economists support some form of carbon pricing? a) 30% b) 50% c) 70% d) 90%

Q11. A subsidy for vaccination is justified by the externality framework because: a) Vaccination is expensive b) Vaccination produces a positive externality (herd immunity) — the social benefit exceeds the private benefit c) Vaccination is a public good d) Vaccination is mandatory

Q12. The deadweight loss from a negative externality is: a) The total cost of pollution b) The area between the social cost and demand curves over the range of overproduction c) The firm's profit d) The government's tax revenue

Short answer

SA1. Define externality in your own words.

SA2. Why does a market with a negative externality produce too much of the good?

SA3. What are the four main solutions to negative externalities? Name and briefly describe each.

SA4. Under what conditions does the Coase theorem work? Under what conditions does it fail?

SA5. Why is climate change considered the largest externality in human history?

True / False

TF1. A positive externality means the market produces too much of the good. (True / False)

TF2. A Pigouvian tax set at the marginal external cost achieves the socially optimal quantity. (True / False)

TF3. Cap-and-trade and Pigouvian taxes always produce identical outcomes. (True / False)

TF4. The Coase theorem works best when there are many affected parties and high transaction costs. (True / False)

TF5. The efficient level of pollution is zero. (True / False)

Selected answers in appendices/answers-to-selected.md.