BUSA 201 EXAM GUIDE QUESTIONS WITH
CORRECT ANSWERS
an example of a positive externality - ✔✔Hillary's newly cut lawn makes her
neighborhood more attractive
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 - ✔✔above, less
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 - ✔✔increases, more
Which of the following statement's about corrective taxes is generally not true - ✔✔they
reduce the quantity sold in a market
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 - ✔✔$50
The Coase theorem does not apply if - ✔✔transaction costs make negotiating difficult
negative externality - ✔✔ air pollution from a nearby factory
positive externality - ✔✔ walking to work reduces air pollution for everyone in the city
draw a supply and demand diagram to explain the effect of a negative externality that
occurs as a result of a firm's production process - ✔✔
, In what way does the patent system help society solve an externality problem? - ✔✔The
patent laws protect the rights of inventors by giving them exclusive use of their inventions
for a period of time. When a firm makes a technological breakthrough, it can patent the
idea and capture much of the economic benefit for itself. The patent internalizes the
externality by giving the firm a property right over its invention.
What is a corrective tax - ✔✔Tax designed to induce private decision makers to take
account of the social costs that arise from a negative externality
Why do economists prefer corrective taxes to regulations as a way to protect the
environment from pollution - ✔✔Because they can reduce pollution at a lower cost to
society. When you charge (ex) 50,000 dollars for each ton of pollution the factories find
more efficient ways to rid of their waste.
imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase
theorem, what determines whether your roommate smokes in the room? Is this outcome
efficient? How do you and your roommate reach a decision? - ✔✔According to this
theorem, you and your roommate will bargain over whether your roommate can continue
to smoke in the room. If you value clean air more than your roommate values smoking,
the bargaining process will lead to your roommate not smoking. But if your roommate
values smoking more than you value clean air, the bargaining process will lead to your
roommate smoking. The outcome is efficient as long as transaction costs do not prevent
an agreement from taking place. The solution may be reached by one of you paying off
the other either not to smoke or for the right to smoke.
Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes
it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for
the police to catch the car thief who has stolen it. Which of these methods conveys a
positive externality? Do you think there are any policy implications of your analysis? -
✔✔The Club conveys a negative externality on other car owners because car thieves will
not attempt to steal a car with the Club visibly in place. This means that they will move on
to another car. A policy implication includes a tax on those who use the Club.
Consider the market for fire extinguishers.
Why might fire extinguishers exhibit positive externalities?
Draw a graph of the market for fire extinguishers.
CORRECT ANSWERS
an example of a positive externality - ✔✔Hillary's newly cut lawn makes her
neighborhood more attractive
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 - ✔✔above, less
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 - ✔✔increases, more
Which of the following statement's about corrective taxes is generally not true - ✔✔they
reduce the quantity sold in a market
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 - ✔✔$50
The Coase theorem does not apply if - ✔✔transaction costs make negotiating difficult
negative externality - ✔✔ air pollution from a nearby factory
positive externality - ✔✔ walking to work reduces air pollution for everyone in the city
draw a supply and demand diagram to explain the effect of a negative externality that
occurs as a result of a firm's production process - ✔✔
, In what way does the patent system help society solve an externality problem? - ✔✔The
patent laws protect the rights of inventors by giving them exclusive use of their inventions
for a period of time. When a firm makes a technological breakthrough, it can patent the
idea and capture much of the economic benefit for itself. The patent internalizes the
externality by giving the firm a property right over its invention.
What is a corrective tax - ✔✔Tax designed to induce private decision makers to take
account of the social costs that arise from a negative externality
Why do economists prefer corrective taxes to regulations as a way to protect the
environment from pollution - ✔✔Because they can reduce pollution at a lower cost to
society. When you charge (ex) 50,000 dollars for each ton of pollution the factories find
more efficient ways to rid of their waste.
imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase
theorem, what determines whether your roommate smokes in the room? Is this outcome
efficient? How do you and your roommate reach a decision? - ✔✔According to this
theorem, you and your roommate will bargain over whether your roommate can continue
to smoke in the room. If you value clean air more than your roommate values smoking,
the bargaining process will lead to your roommate not smoking. But if your roommate
values smoking more than you value clean air, the bargaining process will lead to your
roommate smoking. The outcome is efficient as long as transaction costs do not prevent
an agreement from taking place. The solution may be reached by one of you paying off
the other either not to smoke or for the right to smoke.
Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes
it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for
the police to catch the car thief who has stolen it. Which of these methods conveys a
positive externality? Do you think there are any policy implications of your analysis? -
✔✔The Club conveys a negative externality on other car owners because car thieves will
not attempt to steal a car with the Club visibly in place. This means that they will move on
to another car. A policy implication includes a tax on those who use the Club.
Consider the market for fire extinguishers.
Why might fire extinguishers exhibit positive externalities?
Draw a graph of the market for fire extinguishers.
