Question

1.) Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?

A Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol.

B Because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders.

C Corrective taxes provide incentives for the conservation of natural resources.

D Corrective taxes do not affect deadweight loss.

2.) University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

A tax university researchers

B offer grants to university researchers

C eliminate subsidized student loans

D nothing

3.) Tradable pollution permits

A have prices that are set by the government.

B will be more valuable to firms that can reduce pollution only at high costs.

C are likely to create a higher level of total pollution.

D are less desirable than corrective taxes in reducing pollution.

4.) Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

A One neighbor lets his dog run through another neighbor’s garden, damaging her flowers.

B One neighbor doesn't mow her yard.

C One neighbor plays his music loudly.

D All of the above are correct.

5.) When a particular negative externality affects a very large number of people/parties, it is likely that

A government will not find it worthwhile to impose a corrective tax.

B private solutions to the problem will dominate any attempt by government to alleviate the problem.

C the solution to externalities suggested by the Coase theorem will work very well.

D the solution to externalities suggested by the Coase theorem will not work.

Answer 1

1) Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes?

Because of corrective taxes correct for market externalities, they take into consideration the well-being of bystanders option (B)

2) University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. What could the federal government do to equate the equilibrium quantity of university research and the socially optimal quantity of university research produced?

offer grants to university researchers option (B)

3) Tradable pollution permits

will be more valuable to firms that can reduce pollution only at high costs option (B)

4) Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an efficient solution for which of the following problems?

All of the above are correct option(D)

5) When a particular negative externality affects a very large number of people/parties, it is likely that

the solution to externalities suggested by the Coase theorem will not work option(D)