ECON 110 ZIRLOTT FINAL EXAM QUESTIONS
WITH CORRECT ANSWERS 2026/2027
Externality - CORRECT ANSWER -the uncompensated impact of one person's actions on the
well-being of a bystander (fancy term for side effect)
What type of externalities are these?
-being vaccinated against contagious diseases protects not only you, but people who sit next to
you in class
-vaccinating your pets
-R&D creates knowledge others can use
-people going to college raise the population's education level, which reduces crime and
improves government - CORRECT ANSWER -Positive
What type of externalities are these?
-air pollution from a factory -> Most Common
-the neighbor's barking dog
-late-night stereo blasting from the dorm room next to yours
-noise pollution from construction projects
-health risk to others from second-hand smoke
-texting on cell phones while driving makes the roads less safe for others - CORRECT ANSWER -
Negative
Private costs - CORRECT ANSWER -supply curve, cost directly incurred by sellers
Private value - CORRECT ANSWER -demand curve, the value to buyers (the prices they are
willing to pay)
,Social cost - CORRECT ANSWER -private + external cost
External cost - CORRECT ANSWER -value of the negative impact on bystanders
In the presence of a positive externality, the social value of a good includes.. - CORRECT
ANSWER -private value and external benefit
External benefit - CORRECT ANSWER -the value of the positive impact on bystanders
Internalizing the externality - CORRECT ANSWER -altering incentives so that people take account
of the external effects of their actions
Command and control policies - CORRECT ANSWER --regulate behavior directly
-Examples: limits on quantity of pollution emitted; requirements that firms adopt a particular
technology to reduce emissions
Market based policies - CORRECT ANSWER --provide incentives so that private decision-makers
will choose to solve the problem of their own.
-Examples:corrective taxes and subsidies; tradable pollution permits
Corrective tax - CORRECT ANSWER -a tax designed to induce private decision-makers to take
account of the social costs that arise from a negative externality (also called a Pigouvian tax
after Arthur Pigou)
Tradable pollution permits system - CORRECT ANSWER -reduces pollution at lower cost than
regulation
, Private solutions to externalities (4) - CORRECT ANSWER --moral codes and social sanctions, e.g.
The "Golden Rule"
-charities, e.g. The Sierra Club
-contracts between market participants and the affected bystanders
-the coase thereom
Coase Theorem - CORRECT ANSWER -if private parties can costlessly bargain over the allocation
of resources, they can solve the externalities problem on their own
Why do private solutions not always work? (3) - CORRECT ANSWER -transaction costs,
stubbornness, and coordination problems
Excludable - CORRECT ANSWER -a person CAN be prevented from using it
Starbucks, wireless internet acces, your U of A education - CORRECT ANSWER -excludable
Not excludable - CORRECT ANSWER -a person CANNOT be prevented from using it
FM radio signals, national defense - CORRECT ANSWER -not excludable
Rival - CORRECT ANSWER -if one person's use diminishes others' use
Starbucks, tacos, apple ipad - CORRECT ANSWER -rival
Not rival - CORRECT ANSWER -one person's use has no effect on others' use
An MP3 file or youth video - CORRECT ANSWER -not rival
WITH CORRECT ANSWERS 2026/2027
Externality - CORRECT ANSWER -the uncompensated impact of one person's actions on the
well-being of a bystander (fancy term for side effect)
What type of externalities are these?
-being vaccinated against contagious diseases protects not only you, but people who sit next to
you in class
-vaccinating your pets
-R&D creates knowledge others can use
-people going to college raise the population's education level, which reduces crime and
improves government - CORRECT ANSWER -Positive
What type of externalities are these?
-air pollution from a factory -> Most Common
-the neighbor's barking dog
-late-night stereo blasting from the dorm room next to yours
-noise pollution from construction projects
-health risk to others from second-hand smoke
-texting on cell phones while driving makes the roads less safe for others - CORRECT ANSWER -
Negative
Private costs - CORRECT ANSWER -supply curve, cost directly incurred by sellers
Private value - CORRECT ANSWER -demand curve, the value to buyers (the prices they are
willing to pay)
,Social cost - CORRECT ANSWER -private + external cost
External cost - CORRECT ANSWER -value of the negative impact on bystanders
In the presence of a positive externality, the social value of a good includes.. - CORRECT
ANSWER -private value and external benefit
External benefit - CORRECT ANSWER -the value of the positive impact on bystanders
Internalizing the externality - CORRECT ANSWER -altering incentives so that people take account
of the external effects of their actions
Command and control policies - CORRECT ANSWER --regulate behavior directly
-Examples: limits on quantity of pollution emitted; requirements that firms adopt a particular
technology to reduce emissions
Market based policies - CORRECT ANSWER --provide incentives so that private decision-makers
will choose to solve the problem of their own.
-Examples:corrective taxes and subsidies; tradable pollution permits
Corrective tax - CORRECT ANSWER -a tax designed to induce private decision-makers to take
account of the social costs that arise from a negative externality (also called a Pigouvian tax
after Arthur Pigou)
Tradable pollution permits system - CORRECT ANSWER -reduces pollution at lower cost than
regulation
, Private solutions to externalities (4) - CORRECT ANSWER --moral codes and social sanctions, e.g.
The "Golden Rule"
-charities, e.g. The Sierra Club
-contracts between market participants and the affected bystanders
-the coase thereom
Coase Theorem - CORRECT ANSWER -if private parties can costlessly bargain over the allocation
of resources, they can solve the externalities problem on their own
Why do private solutions not always work? (3) - CORRECT ANSWER -transaction costs,
stubbornness, and coordination problems
Excludable - CORRECT ANSWER -a person CAN be prevented from using it
Starbucks, wireless internet acces, your U of A education - CORRECT ANSWER -excludable
Not excludable - CORRECT ANSWER -a person CANNOT be prevented from using it
FM radio signals, national defense - CORRECT ANSWER -not excludable
Rival - CORRECT ANSWER -if one person's use diminishes others' use
Starbucks, tacos, apple ipad - CORRECT ANSWER -rival
Not rival - CORRECT ANSWER -one person's use has no effect on others' use
An MP3 file or youth video - CORRECT ANSWER -not rival
