BUSA 201 Exam 2026 Questions and
Answers
an example of a positive externality - Correct answer-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 - Correct answer-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 - Correct answer-increases, more
Which of the following statement's about corrective taxes is generally not true -
Correct answer-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 - Correct answer-$50
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
, The Coase theorem does not apply if - Correct answer-transaction costs make
negotiating difficult
negative externality - Correct answer-air pollution from a nearby factory
positive externality - Correct answer-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 - Correct answer-
In what way does the patent system help society solve an externality problem? -
Correct answer-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 - Correct answer-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 - Correct answer-Because they can reduce pollution at
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
Answers
an example of a positive externality - Correct answer-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 - Correct answer-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 - Correct answer-increases, more
Which of the following statement's about corrective taxes is generally not true -
Correct answer-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 - Correct answer-$50
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
, The Coase theorem does not apply if - Correct answer-transaction costs make
negotiating difficult
negative externality - Correct answer-air pollution from a nearby factory
positive externality - Correct answer-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 - Correct answer-
In what way does the patent system help society solve an externality problem? -
Correct answer-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 - Correct answer-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 - Correct answer-Because they can reduce pollution at
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
