CHAPTER 34-Externalities
TRUE/FALSE
1. A trade between two people is an example of an externality.
ANS: F DIF: 1
2. The only known way to eliminate externalities is through taxes or subsidies.
ANS: F DIF: 1
3. The efficient amount of air pollution is in general independent of whether polluters or pollutees pay to
reduce pollution.
ANS: F DIF: 1
4. A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution detection by
the government.
ANS: F DIF: 1
5. If there are negative externalities in production or consumption, competitive equilibrium is unlikely to
be Pareto efficient but positive externalities enhance the efficiency of the market.
ANS: F DIF: 2
6. The “tragedy of the commons” refers to the tendency for common property to be overused.
ANS: T DIF: 1
7. If preferences are quasilinear, then the delineation of property rights has no distributional
consequences.
ANS: F DIF: 1
8. If your consumption of toothpaste produces positive externalities for your neighbors (which you
ignore), then you are consuming less toothpaste than is Pareto optimal.
ANS: T DIF: 1
9. Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious gas
vapors per day at its Torrance, California, refinery. This suggests that allowing pollution rights to be
marketed is likely to lead to more pollution than there would be if there were no restrictions on
polluting.
ANS: F DIF: 1
MULTIPLE CHOICE
, 1. A mountain village owns a common pasture where villagers graze their goats. The cost to a goat owner
of owning and caring for a goat is 4 groschens. The pasture gets overgrazed if too many goats share the
pasture. The total revenue from all goats on the common pasture is f(g) = 48g – 2g2, where g is the
number of goats on the pasture. The town council notices that total profit from the pasture is not
maximized if villagers are allowed to pasture goats for free. The council decides to allow a goat to use
the common pasture only if its owner buys it a goat license. To maximize total profit (of villagers and
council), how many groschens per goat should the council charge?
a. 12
b. 20
c. 24
d. 26
e. 22
ANS: E DIF: 2
2. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 22f – f2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 10
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
a. 6
b. 11
c. 4
d. 7
e. Campers will be best off if they are free to choose their own amounts of campfire.
ANS: A DIF: 2
3. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 17f – f 2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 7
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
a. 3
b. 6
c. 8.50
d. 5
e. Campers will be best off if they are free to choose their own amounts of campfire.
ANS: D DIF: 2
4. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 25f – f2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 11
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
TRUE/FALSE
1. A trade between two people is an example of an externality.
ANS: F DIF: 1
2. The only known way to eliminate externalities is through taxes or subsidies.
ANS: F DIF: 1
3. The efficient amount of air pollution is in general independent of whether polluters or pollutees pay to
reduce pollution.
ANS: F DIF: 1
4. A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution detection by
the government.
ANS: F DIF: 1
5. If there are negative externalities in production or consumption, competitive equilibrium is unlikely to
be Pareto efficient but positive externalities enhance the efficiency of the market.
ANS: F DIF: 2
6. The “tragedy of the commons” refers to the tendency for common property to be overused.
ANS: T DIF: 1
7. If preferences are quasilinear, then the delineation of property rights has no distributional
consequences.
ANS: F DIF: 1
8. If your consumption of toothpaste produces positive externalities for your neighbors (which you
ignore), then you are consuming less toothpaste than is Pareto optimal.
ANS: T DIF: 1
9. Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious gas
vapors per day at its Torrance, California, refinery. This suggests that allowing pollution rights to be
marketed is likely to lead to more pollution than there would be if there were no restrictions on
polluting.
ANS: F DIF: 1
MULTIPLE CHOICE
, 1. A mountain village owns a common pasture where villagers graze their goats. The cost to a goat owner
of owning and caring for a goat is 4 groschens. The pasture gets overgrazed if too many goats share the
pasture. The total revenue from all goats on the common pasture is f(g) = 48g – 2g2, where g is the
number of goats on the pasture. The town council notices that total profit from the pasture is not
maximized if villagers are allowed to pasture goats for free. The council decides to allow a goat to use
the common pasture only if its owner buys it a goat license. To maximize total profit (of villagers and
council), how many groschens per goat should the council charge?
a. 12
b. 20
c. 24
d. 26
e. 22
ANS: E DIF: 2
2. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 22f – f2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 10
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
a. 6
b. 11
c. 4
d. 7
e. Campers will be best off if they are free to choose their own amounts of campfire.
ANS: A DIF: 2
3. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 17f – f 2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 7
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
a. 3
b. 6
c. 8.50
d. 5
e. Campers will be best off if they are free to choose their own amounts of campfire.
ANS: D DIF: 2
4. The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their
neighbors’ campfires. Each camper’s utility function is U = 25f – f2 – s, where f is the number of hours
her own campfire burns per day and where s is the amount of smoke in the air. It happens that s is 11
times the average amount of hours that campers use their fires. The campground authority could make
all campers better off by limiting the number of hours of campfire per day for everyone. How many
hours of campfire per day should the authority allow each camper in order to make the typical camper
as well off as possible?
