Test on Externalities and Public Policy

Question 1: The Coase Theorem posits that private parties are unable to reach an efficient agreement to solve externality problems on their own, even when they can bargain without cost.

A. Yes

B. No

Explanation: The Coase Theorem states that if private parties can bargain without cost, they can always reach an agreement in which resources are allocated efficiently, allowing them to solve the problem of externalities on their own.

Question 2: According to the provided study materials, what is a key objection that some individuals have regarding the economic analysis of pollution?

A. It fails to acknowledge that people face trade-offs when considering pollution elimination.

B. It overlooks the high opportunity cost associated with eliminating pollution entirely.

C. It allows companies to purchase the right to pollute.

D. It contradicts the Coase theorem regarding private solutions to externalities.

Explanation: The study materials explicitly state under 'Objections to the Economic Analysis of Pollution' that 'Some individuals dislike the idea of allowing companies to purchase the right to pollute'. The other options describe economic realities or principles that those individuals might fail to understand, rather than being their direct objection.

Question 3: Establishing a system of property rights to control pollution is a straightforward and inexpensive task.

A. Yes

B. No

Explanation: The study materials indicate that establishing a system of property rights is a complex task and they may be expensive to enforce.

Question 4: A Pigovian tax tells a firm to reduce its pollution by a specific amount.

A. Yes

B. No

Explanation: Regulation involves telling a firm to reduce its pollution by a specific amount. A Pigovian tax, in contrast, levies a tax of a given amount for each unit of pollution the firm emits.

Question 5: According to the study materials, which statement best defines a technology spillover as a type of positive externality?

A. It occurs when a firm's innovation exclusively benefits the firm through increased market share.

B. It exists when a firm’s innovation or design not only benefits the firm, but enters society’s pool of technological knowledge and benefits society as a whole.

C. It is characterized by an increase in private value exceeding the social value of a good due to technological advancements.

D. It describes any externality where the impact on a bystander is adverse, but the technology is advanced.

Explanation: A technology spillover is defined as a type of positive externality that exists when a firm’s innovation or design not only benefits the firm, but enters society’s pool of technological knowledge and benefits society as a whole. Option 1 directly states this definition from the study materials.