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A positive externality is an external benefit that accrues to the buyers in a market while a negative externality is an external cost that accrues to the sellers in a market.

A) True
B) False

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If a market generates a positive externality, the social value curve is above the demand curve (private value curve).

A) True
B) False

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A positive externality (that has not been internalised) causes the


A) equilibrium quantity to exceed the optimal quantity.
B) equilibrium quantity to equal the optimal quantity.
C) optimal quantity to exceed the equilibrium quantity.
D) equilibrium quantity to be either above or below the optimal quantity.

E) A) and B)
F) C) and D)

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Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

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blured image When a positive externality exists, the...

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A positive externality will cause a market to produce


A) more than is socially desirable.
B) less than is socially desirable.
C) the socially optimal equilibrium amount.
D) more than the same market would produce in the presence of a negative externality.

E) B) and C)
F) A) and B)

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When a person drives a car that pollutes the air the


A) private cost of consuming the car's services exceeds the social cost.
B) private benefit of consuming the car's services exceeds the social benefit.
C) social cost of consuming the car's services exceeds the private cost.
D) social benefit of consuming the car's services exceeds the private benefits.

E) A) and C)
F) A) and D)

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An externality is


A) the benefit that accrues to the buyer in a market.
B) the cost that accrues to the seller in a market.
C) the unanticipated effect on a business of a decision that it makes.
D) the compensation paid to a firm's external consultants.
E) the uncompensated impact of one person's actions on the well-being of a bystander.

F) A) and D)
G) D) and E)

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Erick and Sandile live in a university hall of residence. Erick values playing loud music at R100. Sandile values peace and quiet at R150. Which of the following statements is true about an efficient solution to this externality problem if Erick has the right to play loud music and if there are no transaction costs?


A) Sandile will pay Erick between R100 and R150 and Erick will continue to play loud music.
B) Erick will pay Sandile R150 and Erick will continue to play loud music.
C) Sandile will pay Erick between R100 and R150 and Erick will stop playing loud music.
D) Erick will pay Sandile R100 and Erick will stop playing loud music.

E) A) and B)
F) A) and C)

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Use a graph to illustrate the quantity of pollution that would be emitted (a) after a corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these two quantities ever be equivalent?

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blured image Yes, these two quantities cou...

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To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increase the yields of these fields at no additional cost to the farmer. What might be a reasonable private solution to this externality, and how might the solution be reached?

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One solution would be to have one person own both the farm fields and the beehives, in which case the externality is internalised. Another solution would be to have the farmer and beekeeper enter into a contract so that they can coordinate the number of beehives and acres of crops to maintain an efficient outcome.

-Refer to the figure above. This diagram represents the tobacco industry. The socially optimal price and quantity exchanged are A) R19.00 and 38 units. B) R18.00 and 35 units. C) R16.00 and 42 units. D) R13.50 and 58 units. -Refer to the figure above. This diagram represents the tobacco industry. The socially optimal price and quantity exchanged are


A) R19.00 and 38 units.
B) R18.00 and 35 units.
C) R16.00 and 42 units.
D) R13.50 and 58 units.

E) None of the above
F) A) and B)

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B

Rent seeking best describes where


A) individuals or groups take actions to redirect resources to generate income for themselves or the group.
B) there is rational ignorance.
C) politicians will reflect the interests of the local communities because they want to be re-elected.
D) all of the above.

E) All of the above
F) B) and C)

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To internalise a negative externality, an appropriate public policy response would be to


A) have the government take over the production of the good causing the externality.
B) ban the production of all goods creating negative externalities.
C) tax the good.
D) subsidise the good.

E) A) and B)
F) All of the above

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C

-Refer to the figure above. Assume the production of the product imposes a cost on society of R70.00 per unit. If the free market equilibrium output is 50 units, the government should A) impose a tax of R25.00 per unit. B) reduce the output of the firm by approximately 39 units. C) impose a lump-sum tax of R3 500 per period. D) impose a tax of R70.00 per unit. -Refer to the figure above. Assume the production of the product imposes a cost on society of R70.00 per unit. If the free market equilibrium output is 50 units, the government should


A) impose a tax of R25.00 per unit.
B) reduce the output of the firm by approximately 39 units.
C) impose a lump-sum tax of R3 500 per period.
D) impose a tax of R70.00 per unit.

E) All of the above
F) A) and D)

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Why do economists prefer Pigovian taxes over regulations as a way to protect the environment?

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Pigovian taxes are taxes used to correct...

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Market failure in the form of externalities arises when


A) production costs are included in the prices of goods.
B) there are costs and/or benefits that result from a transaction and affect someone other than the parties involved in the transaction.
C) the benefits exceed the costs of consuming goods.
D) the market fails to achieve equilibrium.

E) None of the above
F) B) and D)

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Tax avoidance is


A) illegal, finding loopholes in the system.
B) legal, finding loopholes in the system.
C) legal and includes the informal economy.
D) illegal and includes the informal economy.

E) C) and D)
F) B) and C)

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Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. How might the government help to eliminate this inefficiency?

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blured image When a negative externality exists, the...

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Erick and Sandile live in a university hall of residence. Erick values playing loud music at R100. Sandile values peace and quiet at R150. Which of the following statements is true?


A) It is efficient for Erick to stop playing loud music regardless of who has the property right to the level of sound.
B) It is efficient for Erick to continue to play loud music.
C) It is efficient for Erick to stop playing loud music only if Sandile has the property right to peace and quiet.
D) It is efficient for Erick to stop playing loud music only if Erick has the property right to play loud music.

E) A) and B)
F) All of the above

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Tax evasion is


A) illegal, finding loopholes in the system.
B) legal, finding loopholes in the system.
C) legal and includes the informal economy.
D) illegal and includes the informal economy.

E) A) and B)
F) A) and C)

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