27. Negative externalities cause loss of welfare not transmitted by market factors. A) True.B) False.C) Uncertain.Ans: a
28. Externalities can be positive, as well as negative. A) True.B) False.C) Uncertain.Ans: a
29. A subsidy for pollution not produced can induce producers to pollute at the efficient level. A) True.B) False.C) Uncertain.Ans: a
30. Pollution rights can be traded and are always efficient. A) True.B) False.C) Uncertain.Ans: c
31. Regulation helps to correct for externalities. A) True.B) False.C) Uncertain.Ans: a
32. Any commodity market has the potential to have an externality. A) True.B) False.C) Uncertain.Ans: c
33. Market_oriented solutions to externalities rarely work. A) True.B) False.C) Uncertain.Ans: b
34. For market efficiency, MSC must be equated to MSB. A) True.B) False.C) Uncertain.Ans: a
35. College education is an example of a positive externality. A) True.B) False.C) Uncertain.Ans: c
36. An emissions fee is preferable to a cap-and-trade when MSB are elastic and costs are uncertain.
A) True.B) False.C) Uncertain.Ans: a
37. Incentive-based regulations provide polluters no incentive to reduce pollution and are thus not used often.
A) True.B) False.C) Uncertain.Ans: b Essay
38. How do social conventions help in alleviating externalities without government intervention? Ans: Social conventions help in alleviating externalities without government intervention by teaching others to make some form of compensation for damages caused.
39. Which policy is more effective when handling externalities: Cap-and-trade or emissions fee? Ans: Although answers may vary, the reader should take into account how responsive each policy is to inflation. In addition, there should be some mention of the responsiveness to cost changes and uncertainty. Therefore when marginal social benefits are inelastic and costs are higher than expected, cap-and-trade achieves too much reduction and an emissions fee achieves too little reduction
40. List and discuss three problems that might arise when using the Coase theorem.
Ans: Bargaining costs are generally not zero. Identifying damages is difficult. There is generally some amount of asymmetric information.
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