Externality And Internality(Economics ) Questions and Answers

Question 1. Tradable pollution permits ?
  1.    reduce the incentive for technological innovations to further reduce pollution.
  2.    set the price of pollution.
  3.    determine the demand for pollution rights.
  4.    Set the quantity of pollution
Explanation:-
Answer: Option D. -> Set the quantity of pollution
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 2. Roberto and Thomas live in a university hall of residence. Reberto values playing loud music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the following statements is true about an efficient solution to this externality problem if Roberto has the right to play loud music and if there are no transaction costs ?
  1.    Thomas will pay Roberto between €100 and €150 and Roberto will continue to play loud music
  2.    Roberto will pay Thomas €150 and Roberto will continue to play loud music
  3.    Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music
  4.    Roberto will pay Thomas €100 and Roberto will stop playing loud music
Explanation:-
Answer: Option C. -> Thomas will pay Roberto between €100 and €150 and Roberto will stop playing loud music
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 3. According to the Coase theorem, private parties can solve the problem of externalities if ?
  1.    there are no transaction costs.
  2.    each affected party has equal power in the negotiations.
  3.    the party affected by the externality has the initial property right to be left alone.
  4.    There are a large number of affected parties.
  5.    the government requires them to negotiate with each other
Explanation:-
Answer: Option A. -> there are no transaction costs.
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 4. When an individual buys a car in a congested urban area, it generates ?
  1.    a positive externality
  2.    a technology spillover
  3.    an efficient market outcome.
  4.    a negative externality
Explanation:-
Answer: Option D. -> a negative externality
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 5. Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality ?
  1.    costs incurred due to lawyers’ fees
  2.    costs incurred to reduce the pollution
  3.    costs incurred to enforce the agreement
  4.    costs incurred due to a large number of parties affected by the externality
  5.    All of these answers are considered transaction costs
Explanation:-
Answer: Option B. -> costs incurred to reduce the pollution
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 6. The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an example of ?
  1.    a tradeable pollution permits.
  2.    an attempt to internalize a positive externality
  3.    an application of the Coase theorem
  4.    an attempt to internalize a negative externality.
Explanation:-
Answer: Option D. -> an attempt to internalize a negative externality.
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 7. A negative externality generates ?
  1.    a social cost curve that is below the supply curve (private cost curve) for a good
  2.    none of these answers
  3.    a social cost curve that is below the supply curve (private cost curve) for a good
  4.    a social value curve that is above the demand curve (private value curve) for a good
Explanation:-
Answer: Option A. -> a social cost curve that is below the supply curve (private cost curve) for a good
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 8. Suppose an industry emits a negative externality such a pollution and the possible methods to internalize the externality are command-and-control policies, pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency ease of implementation and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favored to least favored) ?
  1.    Pigouvian taxes, command-and-control policies, tradable pollution permits.
  2.    tradable pollution permits, Pigouvian taxes, command-and-control policies
  3.    tradable pollution permits command-and-control policies, Pigovian taxes.
  4.    command-and-control policies, tradable pollution permits, Pigovian taxes.
  5.    They would all rank equally high because the same result can be obtained from any one of the policies
Explanation:-
Answer: Option B. -> tradable pollution permits, Pigouvian taxes, command-and-control policies
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 9. To internalize a negative externality an appropriate public policy response would be to ?
  1.    have the government take over the production of the good causing the externality
  2.    ban the production of all goods creating negative externalities
  3.    tax the good
  4.    subsidize the good
Explanation:-
Answer: Option C. -> tax the good
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 10. A negative externality (that has not been internalized) causes the ?
  1.    optimal quantity to exceed the equilibrium quantity.
  2.    equilibrium quantity to be either above or below the optimal quantity
  3.    equilibrium quantity to equal the optimal quantity
  4.    equilibrium quantity to exceed the optimal quantity
Explanation:-
Answer: Option D. -> equilibrium quantity to exceed the optimal quantity
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
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