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Name: __________________________ Date: _____________
1. Which equation is TRUE?

A) private cost + average cost = social cost
B) social cost = private cost + external cost
C) external cost = private cost
D) private cost + social cost = external cost
2. Which statement illustrates the concept of external cost?

A) Margaret purchases all her food and clothing in the big city outside her residence.
B) A small business owner frequently buys raw materials by using her bank's line of
credit.
C) Raymond cannot open his windows at times because he lives downwind from a
mushroom farm.
D) Felicia, an economics major, asks the most insightful questions in class.
3. Antibiotics may be ________ since people consider only the ________.

A) underused; private and not the social costs of consumption
B) overused; private and not the social costs of consumption
C) underused; external and not the private costs of consumption
D) overused; external and not the private costs of consumption
4. An external cost:
A) causes markets to allocate resources efficiently.
B) affects producers but not consumers.
C) is a cost paid by people other than the producer or consumer trading in the market.
D) leads to economic efficiency only when private costs are greater than external
costs.
5. A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well
and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but
the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that
gets washed down the drain escapes into the environment and releases allergens that
cause respiratory problems for people. What is the social cost of a bottle of this cleaner?
A) $5.50 less the external cost of such a bottle of bathroom cleaner
B) the cost paid by other people as a result of the use of such a bottle of bathroom
cleaner
C) $5.50 plus the external cost of such a bottle of bathroom cleaner
D) $3.60
Page 1
6. Which equation correctly identifies social cost?
A) market price + external cost = social cost
B) external cost – market price = social cost
C) market price + cost of production = social cost
D) negative externality + positive externality = social cost
7. An external cost is a cost paid by:

A) the consumers trading in the market.
B) the producers trading in the market.
C) the government regulating the market.
D) people other than the consumer and the producer trading in the market.
8. When patients or farmers choose whether to use more antibiotics, they compare:
A) their private benefits with the social cost.
B) their private benefits with the market price.
C) the social benefits with the social cost.
D) the social benefits with the market price.
9. Since the price of antibiotics does not include all the costs of using antibiotics, the price
is too:
A) high, and so antibiotics are overused.
B) high, and so antibiotics are underused.
C) low, and so antibiotics are overused.
D) low, and so antibiotics are underused.
10. Which is an example of an external cost?

A) secondhand smoke
B) increased gas prices for drivers of SUVs
C) the cost you pay your plumber to install a new hot water heater
D) your high electric bill that results from leaving your lights on all night
11. The social cost of driving an SUV is equal to:

A) only the cost of the pollution emitted by the vehicle.
B) both the cost of the vehicle's pollution and its operation (gas, etc.).
C) the cost of producing the vehicle.
D) both the cost of producing and driving the vehicle.
Page 2
12. A private cost is:
A) a cost paid by the consumer or the producer trading in the market.
B) a cost paid by people other than the consumer or the producer trading in the
market.
C) the cost to everyone trading in all markets.
D) the cost of reaching an agreement.
13. An external cost is:

A) a cost paid by the consumer or the producer.
market.
C) the cost to everyone.
14. The social cost is:

market.
15. The price of antibiotics sends the wrong signal because it includes the:
A) social cost but not the private cost.
B) private cost but not the external cost.
C) external cost but not the private cost.
D) external cost but not the social cost.
16. If the social cost of an activity equals the private cost, what kind of externality exists?
A) an external cost
B) an external benefit
C) There is no externality.
D) This cannot be determined by the information given.
17. If the price of a good does not take into account all of the relevant costs of its
production, then the price of that good is too:
A) low, and the product will be overproduced.
B) high, and the product will be underproduced.
C) high, and the product will be overproduced.
D) low, and the product will be underproduced.
Page 3
18. What negative externality does antibiotic use create?
A) With greater use of antibiotics, bacteria become increasingly resistant to them, thus
increasing the likelihood of people dying from drug-resistant bacteria.
B) When drug companies increase the price of antibiotics, some people can no longer
afford to buy antibiotics, putting them at increased risk of death.
C) The taxes on companies that produce antibiotics are passed on to consumers in the
form of higher prices.
D) Because drug companies use very few workers in their production process, there is
a larger than necessary demand for unemployment insurance and other social
programs.
19. Suppose that the private cost of using antibiotics is less than its social cost—we would
then expect people to ________ antibiotics, leading to an ________ market outcome.
A) overuse; inefficient
B) underuse; inefficient
C) overuse; efficient
D) make efficient use of; equilibrium
Use the following to answer questions 20-22:
Table: Costs of Antibiotics
Quantity of Marginal Benefit Marginal Cost External Marginal Social

Antibiotics to Buyers to Sellers Cost Cost
1 $25 $5 $10 ?
2 $20 $10 $10 ?
3 $15 $15 $10 ?
4 $10 $20 $10 ?
5 $5 $25 $10 ?
20. (Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit
is:
A) $15.
B) $5.
C) $35.
D) $30.
Page 4
21. (Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is
________ and the efficient equilibrium quantity is ________.
A) 5; 1
B) 3; 4
C) 3; 2
D) 2; 5
22. (Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could
be eliminated if the government:
A) outlawed the production of the good.
B) added a $10 tax per unit.
C) equated marginal benefit with external cost.
D) subsidized consumption by $5 per unit.
23. Which of the following statements is TRUE?

I. If an activity creates an external cost of $15, the government should subsidize the
activity by $15.
II. Social surplus is maximized when the private marginal benefit equals the social cost.
III. External costs result in markets producing too much output.
IV. Someone pays external costs other than the producer or consumer.
A) I and III only
B) II, III, and IV only
C) III only
D) II and IV only
Figure: Market with External Cost
Page 5
24. (Figure: Market with External Cost) The figure displays a market with external costs.
The efficient level of output of ________ units would eliminate the deadweight loss
area of ________.
A) Q1; ce
B) Q0; ce
C) Q0; gh
D) Q1; de
25. (Figure: Market with External Cost) Suppose the figure displays the demand and supply
curves for dry cleaning, a service that creates pollution. The external cost of dry
cleaning is:
A) P2.
B) P1 – P0.
C) P0.
D) P2 – P0.
26. If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it
will:
A) emit a lower level of sulfur dioxide than is socially efficient.
B) emit a higher level of sulfur dioxide than is socially efficient.
C) emit an acceptable level of sulfur dioxide
D) not emit any sulfur dioxide in an attempt to avoid paying the entire cost.
27. If an external cost is present in a market, economic efficiency may be enhanced by:
A) increased competition.
B) weakening property rights.
C) better informed market participants.
D) government intervention.
28. When the government intervenes in markets with external costs, it does so in order to:
A) protect the interests of bystanders.
B) ensure all the costs are born by producers.
C) ensure all the costs are born by consumers.
D) increase the welfare losses of producers.
29. Markets are often inefficient when external costs are present because:
A) externalities cannot be corrected without government regulation.
B) social costs exceed private costs at the private market solution.
C) private costs exceed social costs at the private market solution.
D) production externalities lead to consumption externalities.
Page 6
30. Ideally, a market should maximize:
A) consumer surplus.
B) producer surplus.
C) consumer surplus plus producer surplus.
D) social surplus.
31. Which of these statements is TRUE in the case of externalities?

I. In the case of externalities, prices do not reflect the true cost or benefit of the product.
II. In the case of externalities, prices sometimes send the wrong signals about a market.
III. Externalities discourage new producers from entering the industry since the price
always remains about the efficient price.
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III
32. Social surplus is consumer surplus:

A) minus producer surplus.
B) plus producer surplus.
C) plus producer surplus minus everyone else's surplus.
D) plus producer surplus plus everyone else's surplus.
33. Which statement is correct under a market with externalities?

A) Social surplus is maximized as long as consumer surplus is maximized.
B) Social surplus is maximized as long as producer surplus is maximized.
C) Social surplus is maximized as long as both consumer surplus and producer surplus
are maximized.
D) None of these statements is correct.
34. When external costs are present in a market:

A) market prices are still able to send the correct signals.
B) market prices send incorrect signals.
C) social surplus is maximized.
D) consumer surplus is not maximized.
Page 7
35. In the presence of significant externalities, a market equilibrium maximizes:
A) social surplus.
B) nothing.
C) consumer surplus plus producer surplus plus everybody else's surplus.
D) consumer surplus plus producer surplus.
36. An efficient equilibrium occurs when:

A) private costs equals private benefits.
B) social costs equals private benefits.
C) private costs equals social benefits.
D) social costs equals social benefits.
37. Many remedies to resolving externalities involve “internalizing the externality.” Which
BEST approximates that goal?
A) placing a large dome over a polluting factory
B) punching people who smell nice
C) giving candy to disruptive children
D) buying yourself flowers to counteract the bad smell from a neighboring pig farm
38. An efficient equilibrium occurs whenever:

A) social surplus is maximized.
B) quantity demanded equals quantity supplied.
C) there is a negative externality in the market.
D) there is a positive externality in the market.
39. Antibiotic use carries an external ______ of building bacterial resistance against drugs.
A) benefit
B) cost
C) price
D) revenue
40. Externalities are:

A) always good.
B) always bad.
C) sometimes good and sometimes bad.
D) neither good nor bad.
Page 8
41. A free market with externalities ______ social surplus.
A) maximizes
B) does not maximize
C) sometimes maximizes
D) precludes
42. A free market void of externalities ______ social surplus.

A) maximizes
B) does not maximize
C) sometimes maximizes
D) precludes
43. If a market solution provides greater marginal social benefits than marginal social costs,
then:
A) a positive externality is present.
B) a negative externality is present.
C) no net externality is present.
D) any externality has already been internalized.
44. If a market solution provides greater marginal social costs than marginal social benefits,
then:
D) any externality has already been internalized.
45. If a market solution generates marginal social benefits equal to marginal social costs,
then:
D) social surplus has been maximized.
46. External costs caused by the use of antibiotics are the costs to people who are:
A) buying antibiotics.
B) selling antibiotics.
C) either buying or selling antibiotics.
D) neither buying nor selling antibiotics.
Page 9
Figure: Efficient Market Outcome
47. (Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity
are, respectively:
A) P1 and Q1.
B) P1 and Q2.
C) P2 and Q1.
D) P3 and Q2.
48. (Figure: Efficient Market Outcome) Refer to the figure. Which point represents the
efficient equilibrium?
A) A
B) B
C) C
D) None of the answers is correct.
49. The market equilibrium is not efficient when the consumption of a good creates external
costs, which cause social costs to be:
A) less than the private cost.
B) greater than the private cost.
C) less than the total cost.
D) greater than the total cost.
Page 10
50. If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the
social marginal cost of antibiotic use at the market equilibrium will be:
A) higher than the marginal cost to antibiotic sellers.
B) less than the marginal cost to antibiotic sellers.
C) higher than the marginal benefit to the antibiotic buyers.
D) less than the marginal benefit to the antibiotic buyers.
51. If antibiotic users are required to bear all the costs of antibiotic use, the supply curve
would:
A) shift left and would be above the social cost curve.
B) shift left and would be the same as the social cost curve.
C) shift left but would still be under the social cost curve.
D) remain unchanged.
Figure: Market for Bathroom Cleaner
52. (Figure: Market for Bathroom Cleaner) Refer to the figure. The figure shows a market
for cans of a bathroom cleaner that causes environmental damage, imposing costs on
people other than the consumers and producers of the cleaner. What is the efficient
quantity in this market?
A) 100
B) 85
C) 15
D) 9
Page 11
people other than the consumers and producers of the cleaner. What is the external cost
of the bathroom cleaner?
A) $6
B) $9
C) $12
D) $3
people other than the consumers and producers of the cleaner. If consumers were taxed
such that they only purchased the efficient quantity of the product, how much
deadweight loss would be removed from this market?
A) $90
B) $180
C) $45
D) $255
55. In the presence of external costs, the social cost curve lies ______ the supply curve.
A) above
B) below
C) with
D) sometimes above and sometimes below
56. In the case of an external cost, the social value curve lies ______ the demand curve.
A) above
B) below
C) with
57. In a market with external costs, the market price is:

A) higher than the efficient price.
B) lower than the efficient price.
C) equal to the efficient price.
D) regulated by the government.
Page 12
58. If the government forced external cost internalization with a tax on all firms that emit
pollution, then:
A) the market would be socially inefficient because taxes create deadweight losses.
B) the market price of these goods would fall.
C) production would actually increase.
D) deadweight loss to society would decrease.
Figure: External Cost 1
59. (Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting
horrible smells that impose external costs on those living around the mills. According to
the figure, what is the market price and quantity of paper?
A) P = $4; Q = 30
B) P = $5; Q = 30
C) P = $6; Q = 50
D) P = $4; Q = 50
60. (Figure: External Cost 1) Refer to the figure. Paper mills are notorious for emitting
horrible smells that impose external costs on those living around the mills. According to
the figure, what is the efficient price and quantity of paper?
A) P = $4; Q = 30
B) P = $5; Q = 30
C) P = $6; Q = 50
D) P = $4; Q = 50
Page 13
61. When there are significant external costs associated with its production, the market
produces ______ of that good.
A) too little
B) too much
C) just the right amount
D) an unknown amount
62. If a tin of sardines creates a noxious odor for non–sardine-eaters equivalent to $1 per tin,
it follows that the market produces:
A) too few tins of sardines relative to the social optimum.
B) too many tins of sardines relative to the social optimum.
C) the socially optimal level of sardines.
D) too many or too few tins of sardines, but it is impossible to say which.
the government could correct the odorous externality and achieve an efficient outcome
by:
A) taxing sardine tins at a rate of $1 per tin.
B) subsidizing sardine tins at a rate of $1 per tin.
C) capping total sardine consumption at 1000 tins per day.
D) banning sardines.
a $1 per tin tax on sardines would:
A) create a deadweight loss, as all taxes do, and correct the odorous externality.
B) decrease deadweight loss but fail to correct the odorous externality.
C) create a deadweight loss and fail to correct the odorous externality.
D) decrease deadweight loss by correcting the odorous externality.
65. You are considering planting a garden of beautiful flowers in your front yard. It would
cost you $45 in time and materials to plant it. You would get $40 worth of benefits from
the garden and your neighbor, who walks by your front yard every day, would get $10
worth of benefits from it. Which statement is TRUE?
A) Your private benefits exceed your private costs, so you would plant the garden.
B) The efficient equilibrium is to not plant the garden, but you would do so anyway
since the social benefits exceed your private costs.
C) The efficient equilibrium is to plant the garden, but you would not do so since your
private costs exceed your private benefits.
D) The external benefits are not significant enough to affect the efficiency of this
equilibrium.
Page 14
66. On the Price Is Right, Bob Barker (and now Drew Carey) encourages people to “Help
control the pet population. Have your pets spayed or neutered.” An overly large pet
population leads to many stray animals that are not only depressing but are also prone to
spread disease. Concerning pet ownership, Barker and Carey are attempting to do what?
A) internalize some of its costs
B) internalize some of its benefits
C) employ Pigouvian taxes
D) use the Coase theorem
67. In How Economics Saved Christmas, economist Art Carden retold the Dr. Seuss story of
the Grinch who hated Christmas and stole the decorations, food, and presents from
neighboring Whoville. Complete this passage from Carden's poem:
He reached for his textbooks; he knew what to do
He'd fight them with ideas from A.C. Pigou
This idea has merit, he thought in the frost
A ____ that was equal to _____ cost
A) subsidy; social
B) subsidy; private
C) tax; total
D) tax; external
Figure: Palm Oil
Page 15
68. (Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical
rainforests to grow the plants that excrete the oil. According to this diagram, what is the
external cost (per ton) of producing palm oil?
A) $4
B) $5
C) $6
D) $8
69. (Figure: Palm Oil) Refer to the figure. Indonesian palm oil producers deforest tropical
rainforests to grow the plants that excrete the oil. With this externality, what is the
deadweight loss (if any) of producing palm oil?
A) $100,000,000
B) $200,000,000
C) $400,000,000
D) There is no deadweight loss.
Figure: Dishwashing Detergent
70. (Figure: Dishwashing Detergent) Refer to the figure. Dishwashing detergent contains
phosphates that harm marine life. In this figure, what is the external cost of using
dishwashing detergent?
A) $6
B) $9
C) $12
D) $18
Page 16
phosphates that harm marine life. In this figure, SC represents the:
A) private cost of production plus the social cost of production.
B) social cost of production: the private cost plus the external cost.
C) social cost of production: the external cost less the private cost.
D) private cost of production.
phosphates that harm marine life. In this figure, the market equilibrium quantity is
______ units, and the efficient quantity is ______.
A) 6; 9
B) 12; 6
C) 9; 6
D) 12; 9
phosphates that harm marine life. According to this figure, which statement is TRUE?
A) The maximum willingness to pay for the 6th unit equals the private cost.
B) The social cost of the 9th unit is $9 while the value to consumers is $9, eliminating
the gains from trade.
C) The maximum willingness to pay for the 12th unit equals $18, or the private cost
plus the social cost.
D) The social cost of the 9th unit is $15 while the value to consumers is $9, creating a
deadweight loss equal to $6.
Page 17
74. Figure: External Cost 2
Refer to the figure. What is the deadweight loss in this figure at the market equilibrium?
A) $25.00
B) $4.00
C) $8.33
D) $11.25
75. A Pigouvian tax:

A) is levied on a good that creates a negative externality and should be set equal to the
external cost to eliminate the deadweight loss.
B) subsidizes a good that creates a negative externality and should be set equal to the
external cost to eliminate the deadweight loss.
C) is levied on a good that creates a positive externality and should be set equal to the
external benefit to eliminate the deadweight loss.
D) is levied on a good that creates a positive externality and should be set equal to the
social benefit to eliminate the deadweight loss.
76. In the case of an external cost, marginal private cost:

A) is equal to marginal social cost for all quantity levels.
B) is less than marginal social cost for all quantity levels.
C) is greater than marginal social cost for all quantity levels.
D) and marginal social cost cannot be compared at any quantity.
Page 18
77. A(n) ______ is a tax on a good with external costs.
A) specific tax
B) ad valorem tax
C) Orwellian tax
D) Pigouvian tax
78. Which is an example involving an external benefit?

A) the pollution of a stream
B) a person littering a public highway
C) air pollution
D) a nice garden in front of someone's house
79. An external benefit in a market will cause the market to produce:

A) more than the same market would produce in the presence of a negative externality.
B) more than is socially desirable.
C) less than is socially desirable.
D) the socially optimal equilibrium amount.
80. Private markets fail to reach a socially optimal equilibrium when external benefits are
present because the:
A) social value exceeds the private value at the private market solution.
B) private cost exceeds the social benefit at the private market solution.
C) private benefit equals the social benefit at the private market solution.
D) None of the answers is correct. Private markets DO achieve a socially optimal
equilibrium when external benefits are present.
81. Because there are external benefits from higher education:

A) private markets will oversupply college classes.
B) government intervention cannot improve the market for college classes.
C) the government should impose a tax on college students.
D) private markets will undersupply college classes.
Page 19
82. The Centers for Disease Control and Prevention (CDC) wants at least 90% of the
population vaccinated against preventable diseases, since the chance of a disease
outbreak decreases as vaccine coverage increases. We can conclude that:
A) the external benefits of vaccination likely decrease as more and more people are
vaccinated.
B) the private benefits of vaccination increase with vaccine coverage.
C) vaccines create a negative externality once the vaccine covers 90% of the
population.
D) vaccines create a positive externality once the vaccine covers 90% of the
population.
83. The market price for Good X is $10.75, and every time Good X is consumed it creates
an external benefit of $3.00. Therefore, which statement is correct?
A) The social benefit of Good X is $13.75, a justification for the government to give
buyers a $3.00 subsidy.
B) The social benefit of Good X is $7.75, a justification for the government to give
buyers a $3.00 subsidy.
C) The social benefit of Good X is $7.75, a justification for the government to tax
sellers $13.75 per unit.
D) The social benefit of Good X is $13.75, a justification for the government to tax
sellers $3.00 per unit.
84. Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to
get vaccinated. Therefore, which statement is correct?
A) It is socially optimal for Edgar to get the flu shot if the social benefits of the shot
exceed $20.
B) The external benefits of the flu shot equal $5 ($20 – $15).
C) Even without a government subsidy, Edgar is certain to be vaccinated.
D) The deadweight loss is eliminated if Edgar is vaccinated and the external benefits
are $4.
Page 20
Figure: Market for Vaccines
85. (Figure: Market for Vaccines) Refer to the figure. The figure represents the market for
vaccines with external benefits. The external ________ of vaccination is ________.
A) cost; $15
B) cost; $10
C) benefit; $20
D) benefit; $5
vaccines with external benefits. The efficient level of output is ________ vaccines,
which is ________ than the market's output.
A) 1,200; greater
B) 1,800; less
C) 2,400; greater
D) 1,800; greater
vaccines with external benefits. The market's outcome generates a(n):
A) deadweight loss of approximately $750.
B) shortage of 1,800 vaccines.
C) equilibrium price of $20.
D) All of the answers are correct.
Page 21
88. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of
consumption is $10. Efficiency in both markets could be achieved by:
A) a tax of $5 in Market X and a subsidy of $10 in Market Y.
B) subsidizing both markets.
C) taxing Market Y and subsidizing Market X.
D) taxing both markets.
Figure: ABC Company
89. (Figure: ABC Company) Refer to the figure. The figure depicts the market for a water
cleaner for home aquariums. After use it gets washed down drains and enters into
streams where it improves the mineral content of the water and thus leads to better water
quality and better fish growth. What is the efficient quantity in this market?
A) 1,600
B) 400
C) 2,000
D) 3,600
quality and better fish growth. If the users of the cleaner were given a subsidy to
compensate them for the benefit they are creating for the ecological system, how much
deadweight loss is removed from this market?
A) $2,400
B) $3,000
C) $3,600
D) $1,200
Page 22
quality and better fish growth. What is the dollar amount of the external benefit created
per can of the cleaner?
A) $12
B) $6
C) $3
D) $15
Figure: Softella
92. (Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues.
Assume that the only use for these tissues is to wipe and clean one's hands, thus
preventing germs from spreading to other people. What is the dollar amount of the
external benefit (per box) that is created by the use of this product?
A) $24
B) $12
C) $8
D) $16
Assume that the only use for these tissues is to wipe and clean one's hands, thus
preventing germs from spreading to other people. If the government were to subsidize
the users of these tissues, what would be the efficient quantity in this market?
A) 700
B) 500
C) 1,200
D) 200
Page 23
Assume that the only use for these tissues is to wipe and clean one's hands thus
preventing germs from spreading to other people. If the government were to subsidize
the users of these tissues, what is the dollar amount of deadweight loss that would be
removed from this market?
A) $1,600
B) $2,800
C) $5,600
D) $800
95. Which statement is INCORRECT?

A) When external benefits exist in a market, Qmarket < Qefficient.
B) When external benefits exist in a market, social surplus is maximized when social
benefits equal the marginal costs of production.
C) When external costs exist in a market, Qmarket > Qefficient.
D) Through taxation, government action can result in Qmarket = Qefficient.
96. Which statement correctly describes what a Pigouvian subsidy is?

A) Subsidies received by the producers are called Pigouvian subsidies.
B) Pigouvian subsidies are awarded to producers whose goods have external benefits.
C) Taxes on producers creating negative externalities are called Pigouvian subsidies.
D) Lower corporate tax rates are also known as Pigouvian subsidies.
97. Which statement about vaccines is correct?

A) Vaccines benefit only people who are vaccinated.
B) Everyone should be vaccinated in order to prevent the spreading of disease-causing
viruses.
C) Vaccines benefit people who are vaccinated but cannot prevent disease on those
people who are not vaccinated.
D) Vaccines not only benefit people who are vaccinated but also inhibit spreading
disease-causing viruses.
98. An external benefit is a benefit received by:

A) the consumers trading in the market.
B) the producers trading in the market.
C) both the consumers and producers trading in the market.
D) people other than the consumers or producers trading in the market.
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99. Fewer people get flu shots than is efficient because:
A) people usually perceive that the private cost of getting flu shots is higher than their
private benefit.
B) people usually perceive that the private benefit of getting flu shots is higher than
their private cost.
C) the cost of producing flu shots is too high in relation to profits.
D) there are always more people getting flu shots than the amount of flu shots
available.
100. Figure: Social Benefit
Refer to the figure. Which price and quantity combination represents the efficient
equilibrium?
A) P1 and Q1
B) P2 and Q1
C) P3 and Q1
D) P2 and Q2
101. When external benefits are significant:

A) market output is too low.
B) market output is too high.
C) market output is at the efficient level.
D) social surplus is maximized.
102. If only people who get a flu shot receive all the benefits of the vaccination, then the:
A) demand curve would shift downward.
B) supply curve would shift upward.
C) market outcome will be efficient.
D) deadweight loss will be higher than if the vaccinations benefited others as well.
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103. If the government wanted to maximize the number of people receiving a flu vaccination,
it should:
A) impose a mandatory vaccination program.
B) provide research grants to those firms engaging in increasing the supply of vaccine.
C) give a subsidy to people who are vaccinated.
D) impose a tax on people who are unwilling to be vaccinated.
104. When external benefits are present in a market:

A) the market is more efficient than if the externalities were not present.
B) the market outcome is inefficient.
C) overall social surplus is maximized because others are gaining in addition to the
market consumers.
D) the external benefit must be offset by an external cost.
105. In the case of an external benefit, the social cost curve lies ______ the supply curve.
A) above
B) below
C) with
106. In the case of an external benefit, the social value curve lies ______ the demand curve.
A) above
B) below
C) with
107. Which is an example of an external benefit?

A) You get a raise that increases your pay 20%.
B) Your neighbor's rooster wakes you up every morning before your alarm clock goes
off, reducing the amount of sleep you get at night.
C) Researchers at Johnson & Johnson are working on a cure for cancer.
D) Your neighbors fix up their homes, which raises property values on the entire
street.
108. Compared with the efficient outcome, the market price of a good that generates external
benefits is:
A) too low.
B) too high.
C) equal to the efficient price.
D) better than the efficient price.
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109. Which policy does the economics of externalities suggest would encourage an efficient
quantity in the corresponding market?
A) subsidizing polluting factories
B) subsidizing beautiful flower beds in public spaces
C) taxing convenient benches set up in public spaces
D) taxing healthy food
110. A plague called The Black Death swept Medieval Europe. At the time, people believed
cats spread the plague (cats were associated with the Devil) and started killing them to
prevent the spread of disease. In reality, rats spread the plague and the slaughter of their
natural predators only hastened the disease's proliferation. With this in mind, a market
for cats would have had a ______ externality because the cats ______.
A) positive; prevented rats from eating their owners' grain
B) positive; killed rats regardless of who those rats would infect
C) negative; spread disease to everyone regardless of who owned them
D) negative; made everyone sicker through their association with the Devil
111. When law-abiding citizens carry concealed weapons, they are better able to defend
themselves against criminal attack. This is the ______ of concealed carry. When
law-abiding citizens carry concealed weapons, criminals are also less likely to attack all
citizens because they cannot tell who is carrying a gun. This is the ______ of concealed
carry.
A) private cost; external cost
B) private benefit; external benefit
C) external benefit; private benefit
D) external cost; external benefit
112. Products that create external benefits are:

A) overconsumed because the private benefits exceed the private costs.
B) underconsumed because consumers only consider the private benefits of
consumption.
C) neither overconsumed nor underconsumed because the marginal benefits equal the
marginal costs.
D) underconsumed because the social costs exceed the social benefits.
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Figure: External Benefit
113. (Figure: External Benefit) Refer to the figure. Shingles is a painful and blistering skin
rash that generally affects older adults. The shingles virus is transmitted by those with
an active outbreak, and it can cause chicken pox in people who never had it. In this
figure depicting the market for shingles vaccinations, what is the external benefit of a
shingles vaccine?
A) $4
B) $10
C) $5
D) $7
an active outbreak, and it can cause chicken pox in people who never had it. The
efficient number of vaccinations is ______, and the market quantity of vaccinations is
______.
A) 14; 10
B) 8; 4
C) 7; 5
D) 10; 5
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an active outbreak, and it can cause chicken pox in people who never had it. The 6th unit
has a social value of ______ and a private cost of ______.
A) $4; $6, so no vaccine should be given
B) $6; $8, so the vaccine should be given
C) $4; $6, so the vaccine should be given
D) $8; $6, so the vaccine should be given
116. In the presence of an external benefit, a Pigouvian ______ that is set equal to the
______ the market output to its efficient level.
A) subsidy; external benefit can increase
B) tax; external benefit can increase
C) subsidy; private cost can increase
D) subsidy; external benefit can decrease

I. A Pigouvian subsidy reduces the market price to encourage consumption and correct
for the underproduction of a good.
II. A Pigouvian tax increases the market price to discourage consumption and correct for
the overproduction of a good.
III. Negative externalities create deadweight losses, but positive externalities do not.
A) III only
B) I, II, and III
C) I and II only
D) I only
118. In the case of an external benefit, marginal private benefit is ______ marginal social
benefit at all quantity levels.
A) equal to
B) less than
C) greater than
D) incomparable to
119. A free market with an external benefit is ______, and one with an external cost is
______.
A) efficient; efficient
B) inefficient; inefficient
C) efficient; inefficient
D) inefficient; efficient
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120. A(n) ______ subsidy is a subsidy on a good with external benefits.
A) specific
B) ad valorem
C) Orwellian
D) Pigouvian
121. Economist James Meade wrote that the market for honey was:
A) efficient.
B) Pigouvian.
C) externally costly.
D) externally beneficial.
122. Externalities are:

A) benefits received by people other than the producers and consumers exchanging in
the market.
B) costs paid by people other than the producers and consumers exchanging in the
market.
C) found either in the form of external benefits or external costs.
D) All of these statements are correct.
123. When significant externalities exist:

I. the market equilibrium is no longer efficient.
II. the market equilibrium is only efficient if the externality is an external benefit.
III. social surplus is not maximized.
IV. the government may increase efficiency by imposing a tax on the market.
A) I only
B) II and IV only
C) I and III only
D) II, III, and IV only
124. The market for honey is:

A) inefficient since beekeepers do not receive compensation for their bees pollinating
fruits and vegetables.
B) efficient since farmers pay beekeepers to pollinate their crops, which internalizes
the externality.
C) a public goods market.
D) in disequilibrium since the market quantity of honey is less than the socially
optimal quantity of honey.
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125. Private solutions to externalities are MOST likely to occur when there are:
A) well-defined property rights and low transaction costs.
B) communal property rights and large numbers of sellers.
C) private property rights and high transaction costs.
D) communal property rights and large numbers of buyers and sellers with equal
bargaining power.
126. Two parties fail to solve an externality problem because reaching an agreement requires
high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:
A) Pigouvian legal fees.
B) transaction costs.
C) legal inefficiency.
D) punitive-cost agreements.
127. Which statement is TRUE?

A) The Coase theorem suggests that the efficient equilibrium quantity of flu shots will
maximize the sum of producer and consumer surplus.
B) It is easy to internalize the benefits of getting a flu shot because only two
companies produce flu vaccines.
C) The market for flu shots could be efficient if the beneficiaries of the external
benefits sufficiently compensated those receiving the shot.
D) To internalize the costs of getting a flu shot, people who receive the vaccine should
pay other people to be vaccinated.
128. A beekeeper's hives are located in an orchard where the bees gather nectar to produce
honey and simultaneously pollinate the orchard, which increases the yield of fruit. This
benefits:
A) only the owner of the orchard.
B) only the beekeeper.
C) the beekeeper, but it creates a negative externality because the bees are a hazard to
the orchard owner.
D) both the beekeeper and the orchard owner.
129. The proposition that private parties with clearly defined property rights and low
transaction costs can resolve externalities problems on their own is called the:
A) voluntary tax theorem.
B) Bee theorem.
C) Coase theorem.
D) transaction cost theorem.
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130. Which answer suggests that private markets can be effective in dealing with external
costs and benefits?
A) external technology policy
B) the Coase theorem
C) the law of diminishing returns
D) the “invisible hand”
131. Transaction costs:

A) are incurred in the production process due to externalities.
B) are eliminated when the government intervenes in a market with externalities.
C) can keep private parties from solving externality problems.
D) increase when taxes are imposed to correct negative externalities.
132. Market solutions to externality problems work when:

I. property rights are easily identifiable.
II. transaction costs are relatively low.
III. the market quantity is above the efficient quantity.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
133. The Coase theorem posits that externality problems can be solved without government
intervention:
A) when transaction costs are low and property rights are clearly defined.
B) when trading in tradable allowances occurs.
C) if markets can reach the efficient quantity and if transaction costs exceed the
deadweight loss caused in the market.
D) only rarely, that in general, markets cannot maximize social surplus.
134. The text discusses private solutions for resolving externalities using the honey market.
Among the reasons why the market solution works well in the honey market is the fact
that:
A) bees don't fly far, and thus it is easy to identify which farmers are getting the
benefits of their pollination activities.
B) the owners of the beehives can clearly be identified.
C) the market limits the beneficial activities of the bees to those farmers who have
very small farms.
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135. Nobel Prize–winning economist James Meade argued that the market for honey was
inefficient because pollination is a(n):
A) external benefit of honey production.
B) external cost of honey production.
C) private benefit of honey production.
D) private cost of honey production.
136. The external benefit of honey production is internalized when:

A) farmers receive tax breaks from the government.
B) beekeepers receive tax breaks from the government.
C) farmers pay beekeepers to pollinate their crops.
D) beekeepers pay farmers to pollinate farmers' crops.
137. The Coase theorem says that private bargains can ensure an efficient market equilibrium
even when externalities exist if:
A) the government does not involve itself in the process.
B) the market is sufficiently competitive.
C) the number of market participants is large.
D) transaction costs are low and property rights are clearly defined.
138. The Coase theorem suggests that private bargains will ensure the efficiency of markets
even when externalities exist:
A) but only in the presence of government regulation.
B) if consumers have more information regarding the externality than suppliers.
C) if transaction costs are low and property rights are well defined.
D) if the cost of the negotiations are less than the price of the good.
139. According to the Coase theorem, which situation would MOST likely result in a private
bargaining solution and yield an efficient market?
A) A railroad train that runs the entire East Coast regularly emits both pollution and
loud noises for people living near the tracks.
B) People who get flu shots actually end up decreasing the spread of the virus.
C) Your neighbor's dog routinely gets out of his yard and does his “business” in your
yard.
D) A company recently turned an abandoned factory at the end of your street into a
paper mill that now stinks up the entire town.
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140. A properly-set Pigouvian subsidy ______ the price so that the after-subsidy price sends
______ signal.
A) raises; the correct
B) reduces; the correct
C) raises; an incorrect
D) reduces; an incorrect
141. If in an attempt to correct an externality the government sets a Pigouvian tax too high,
the equilibrium quantity will be:
A) higher than the efficient quantity.
B) lower than the efficient quantity.
C) equal to the efficient quantity.
D) zero.
142. If in an attempt to correct an externality the government sets a Pigouvian subsidy too
high the equilibrium quantity will be:
A) higher than the efficient quantity.
B) lower than the efficient quantity.
C) equal to the efficient quantity.
D) zero.
143. Why is the market for honey efficient despite the potential problem of pollination
externalities?
A) The government offers a Pigouvian subsidy for the production of honey.
B) The government imposes a Pigouvian tax on the production of honey.
C) The quantity of honey that can be produced each year is capped.
D) Beekeepers are paid for the pollination services their bees provide, thus
internalizing the externality.
144. A transaction cost is:

market.
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145. For an efficient equilibrium, the Coase theorem does NOT require that:
A) transaction costs are low.
B) the government sets a Pigouvian tax equal to the external cost.
C) property rights are clearly defined.
D) private bargains are possible.
146. Suppose Winston's loud music externalizes a cost onto his neighbor, Chloe. Suppose
Winston and Chloe decide to solve this problem using the Coase theorem. If they are
successful, what is a possible result of the execution of this theorem?
A) The government taxes Winston for his loud music.
B) Chloe pays Winston weekly to refrain from playing music loudly.
C) Chloe and Winston solve their differences in a market for tradable allowances of
loud music.
D) Winston pays Chloe once (as a fine) and refrains from playing music loudly.
147. Which would be the MOST likely place to find an internalized externality? (Keep
transaction costs in mind.)
A) a factory polluting the air surrounding a large suburb
B) a wind farm slightly disturbing the mountain view of a nearby city
C) a paper mill polluting a stream that only flows into a single farm
D) roadwork operating on a major highway, but only operating at night
148. In 2011, a tsunami along the Japanese coast damaged nuclear power plants that leaked
dangerous radiation into the surrounding population. If this leakage could have been
prevented, given a disaster of this level, which answer would be a Coasian solution to
this externality?
A) the government fining the firm which owns the power plants
B) the injured demanding compensation through a class-action law suit
C) a ban on all future Japanese nuclear power plants and the shutdown of existing
ones in Japan
D) None of these would be a Coasian solution.
149. Bees produce honey for beekeepers but also pollinate crops for farmers. In the absence
of pollination compensation, this external benefit:
A) means that there is an inefficient number of bees because beekeepers do not receive
the full social value from their bees.
B) is captured by beekeepers because they charge farmers to pollinate their crops.
C) means that there is an overproduction of bees and not enough pollination.
D) is not captured by beekeepers because it is difficult to control which farmer's crops
the bees pollinate.
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150. Market solutions to externality problems are more likely to occur when:
A) the costs of reaching an agreement are low and property rights are well defined.
B) the transaction costs are low and property rights are nonexistent.
C) transaction costs are high and property rights are well defined.
D) the costs of reaching an agreement are high and property rights are nonexistent.
151. The Coase theorem uses a ______ solution for a class of externality problems.
A) public
B) lottery-based
C) regulatory
D) private
152. Ronald Coase argued that market equilibriums would be efficient even in the presence
of externalities when property rights are ______ and transaction costs are ______.
A) uncertain; high
B) uncertain; low
C) certain; high
D) certain; low
153. Your neighbor has a tree that blocks your view of a distant hill. Your neighbor values
the tree at $100. You value the tree's removal at $150. Tree removal costs $60. In this
case, property rights are clear. Your neighbor owns the airspace extending above his
house for some distance. Transaction costs in this case:
A) would allow for a private solution to the external cost.
B) would prohibit a private solution to the external cost.
C) would be equal to zero.
D) are unknown.
154. All of the following would be government solutions to externality problems EXCEPT:
A) public sector charities.
B) taxes and subsidies.
C) command and control.
D) tradable allowances.
155. Which statement about taxes is INCORRECT?

A) Taxes in markets always cause deadweight losses.
B) If the good causes an external cost, taxes actually reduce deadweight loss.
C) Both taxes and tradable allowances in a market that has external costs can lead to
the efficient quantity.
D) Taxes on producers cause the supply curve for the product to shift to the left.
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156. Government solutions to externality problems include:
A) taxing the consumption of goods that cause externalities.
B) subsidies.
C) allowing firms to trade the rights to create pollutants.
157. Government solutions to externality problems include:

I. Pigouvian taxes.
II. tradable allowances.
III. command and control.
A) I only
B) I and III only
C) II and III only
D) I, II, and III
158. If the government were to limit the release of air-pollution produced by a steel mill to 50
parts per million, the policy would be considered a:
A) corrective tax.
B) subsidy.
C) regulation.
D) market-based policy.
159. When the government uses a command-and-control policy to solve an externality, it:
A) usually involves taxing the consumption of a commodity.
B) relies on the Coase theorem to structure the policy.
C) creates policies that directly regulate behavior.
D) is usually the most effective policy option available.
160. ______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream.
A) Legislative transaction costs
B) Tradable pollution permits
C) A command-and-control policy
D) A market-based policy
161. A viable government solution to an external cost is a:

A) tax on the party producing the cost.
B) subsidy to the party producing the cost.
C) tax on the party incurring the cost.
D) subsidy to the party incurring the cost.
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162. A viable government solution to an external benefit is a:
A) tax on the party producing the cost.
B) subsidy to the party producing the cost.
C) tax on the party incurring the cost.
D) subsidy to the party incurring the cost.
163. A tax on an externally costly activity is ______ command and control regulation that
seeks to limit the activity.
A) more efficient than
B) less efficient than
C) equally efficient as
D) sometimes more and sometimes less efficient than
164. Which method achieves the lowest per-gallon cost of reducing water consumption?
A) low-flow toilets as mandated by the government
B) lawn watering restrictions for odd or even days only
C) shower heads with restricted water flow
D) a tax on water consumption
165. Command and control policies are best suited for:

A) reducing electricity consumption.
B) addressing the problem of acid rain.
C) the suppression of deadly infectious diseases.
166. The command and control method to solving an external cost problem usually involves:
A) the imposition of taxes on the consumption of the item that is causing the external
cost.
B) the institution of a subsidy on the consumption of the item that is causing the
external cost.
C) the issuance of a regulation on the production, operation, or use of the item that is
causing an external cost.
D) a price ceiling on the item that is causing an external cost.
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167. If you are a government official, under which of the following situations would you opt
for a command and control solution to an externality problem?
I. Lack of running water in part of the country is exacerbating the spread of cholera in
the population.
II. Foreign ships are dumping toxic wastes in the waters off your country's shores.
III. A large number of banks fail due to excessive risk taking.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
168. The problem with using command and control policies to eliminate external costs is that
there are typically many methods to achieve a goal and:
A) consumers may be reluctant to follow.
B) the situation may be difficult for the government to control.
C) the goal itself may not necessarily be the socially optimal outcome.
D) the government may not have enough information to choose the least costly
methods.
169. Which best creates incentives to reduce the pollution generated by washing machines?
A) regulating the capacity of washing machines
B) requiring appropriate filtering mechanisms on washing machines
C) taxing the pollutants directly caused by washing machines
D) allowing the Coase theorem to effectively reach an efficient market equilibrium

I. Taxes may reduce consumption by exactly the same amount as government
regulations.
II. Taxes typically cost more than government regulations because taxes raise prices
whereas regulations simply limit quantity.
III. Command and control policies effectively reduce consumption, but they may not be
the lowest cost method for doing so.
A) I and II only
B) I and III only
C) II only
D) II and III only
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171. Command and control may be the best approach to handling externalities if:
A) flexibility is desired.
B) the marginal social cost of the externality is greater than the social benefit.
C) taxes and/or subsidies fail to reach the efficient outcome.
D) success requires strong compliance.
172. The command and control method is a ______ solution to the externality problem.
A) democratic
B) private
C) regulatory
D) lottery-based
173. Command and control refers to:

A) military maneuvers that actually increase economic efficiency.
B) government regulations that directly limit the production or use of a good.
C) a market-based solution to the externality problem.
D) government taxes and/or subsidies in markets that generate externalities.
174. Command and control methods do not always produce the most efficient outcomes
because:
A) consumers sometimes are mislead regarding their own preferences.
B) they lack the flexibility to allow buyers and sellers to choose the least costly
methods to alter their behavior.
C) it does not always allow suppliers to produce the efficient market quantity.
D) it reduces consumption in all cases.
175. A number of cities and states have banned smoking in bars because of secondhand
smoke. In cities without the ban, the bar owner decides whether smoking is permitted. If
smokers have a greater willingness to pay to smoke than nonsmokers have to avoid
smoke, then bar owners will ______ smoking, which is an ______ outcome.
A) ban; efficient
B) ban; inefficient
C) permit; efficient
D) permit; inefficient
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176. The advantage of using command and control to solve an externality problem is that:
A) it is inflexible, and some problems require an inflexible approach.
B) it is a very flexible approach.
C) it solves the problem efficiently without the government requiring very much
information.
D) it is usually the least costly approach.
177. The text identifies one major disadvantage to command and control methods of
resolving externalities that can, however, sometimes be an advantage. What is it?
A) high transaction costs
B) inflexibility
C) inefficiency
D) priority over social surplus
178. In an effort to save energy, a 1992 federal law requires that new showerheads cannot
flow at a rate faster than 2.5 gallons per minute. Which of the following statements is
TRUE?
I. This law is an example of command and control.
II. This policy reduces energy use at a lower cost than a tax on water.
III. Economists would prefer to simply tax water consumption because this gives people
the flexibility to reduce water consumption in their lowest-valued use.
A) I only
B) I and II only
C) III only
D) I and III only
179. Rank economists' LEAST favorite to MOST favorite method of reducing electricity
consumption.
A) tax on electricity, command and control, tax on the pollutants generated from
electricity production
B) command and control, tax on electricity, tax on the pollutants generated from
electricity production
C) tax on electricity, tax on the pollutants generated from electricity production,
command and control
D) tax on the pollutants generated from electricity production, command and control,
tax on electricity
Page 41
180. Table: Costs of Reducing Sulfur Dioxide
Industry Sulfur Dioxide Emissions (tons) Cost of Reducing 1 Ton of Sulfur Dioxide
Industry X 20 $300
Industry Y 20 $400
Refer to the table. Which statement is FALSE?

A) Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X
emits zero tons.
B) Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301.
C) If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1
ton, the cost of reducing pollution rises by $100.
D) Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it
at least $1,500.
181. The paper industry and brewery industry each emit 60 tons of particulates into the air. It
costs the paper industry $1,000 to remove 1 ton of particulates, and it costs the brewery
industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate
pollution, the government gives each industry tradable allowances worth 50 tons of
particulates. We would expect that:
A) the paper industry will buy tradable allowances from the brewery industry at a cost
between $1,000 and $1,400 per allowance.
B) the paper industry will buy tradable allowances from the brewery industry at a cost
greater than $1,400 per allowance.
C) the brewery industry will buy tradable allowances from the paper industry at a cost
between $1,000 and $1,400 per allowance.
D) the brewery industry will buy tradable allowances from the paper industry at a cost
greater than $1,400 per allowance.
182. Which statement is TRUE?

A) Mandating that every firm emit no more than X amount of pollutants is the most
efficient method of reducing pollution.
B) A system of tradable allowances increases pollution because firms can pay for the
right to pollute.
C) To maximize social surplus, the burden of reducing pollution should be allowed to
vary by industry.
D) If the EPA cares about the sum of consumer and producer surplus, they should
ignore the impact of pollution reduction on the profitability of firms.
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183. Tradable pollution permits:
A) have helped reduce sulfur dioxide emissions but not carbon emissions.
B) have helped reduce sulfur dioxide and carbon emissions.
C) have not helped reduce any pollution emissions.
D) are widely viewed as an ineffective way to reduce pollution.
184. Which of answer best explains how the market for tradable allowances in pollution
works?
A) Firms are given a particular dollar subsidy value to clean up pollution, and they can
trade these subsidies between themselves if they fall below or surpass the limits.
B) Firms are taxed a particular percentage rate according to how much they pollute,
and they can trade the pollutants to reduce the effective tax rates they pay.
C) Firms are required to stick to particular production levels, and if they go beyond
these production levels, they are charged a percentage of their profits.
D) Firms are given a particular allowance amount of pollutants, and if they fall below
or surpass these targets they can trade their available allowances with other firms.
185. If a market for tradable allowances exists, a company that has used up its own
allowances can:
A) buy allowances from another firm that has surpassed its limit of pollution.
B) purchase additional allowances from the EPA on a temporary basis.
C) pay a fine to the EPA and purchase additional allowances from other firms.
D) buy allowances from another firm that will not reach its limit of pollution.
186. Suppose that the EPA limits the pollution level of two firms, firm High with high cost of
reducing pollution and firm Low with low cost of reducing pollution. Which statement
is correct?
A) The EPA should limit both firms' pollution to the same level.
B) The EPA should limit High's pollution level to a lower level than Low's in an
attempt to entice High to find more efficient ways to lower its costs.
C) The EPA should allow Low to increase its pollution level and trade with High who
would cut its pollution to lower than the required level.
D) The EPA should allow High to increase its pollution level and trade with Low who
would cut its pollution to lower than the required level.
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187. Which statement explains the difference between command and control policies and
tradable allowances?
A) Command and control policies are a government solution to externalities, whereas
tradable allowances are a type of private market solution.
B) Tradable allowances allow for less flexibility than command and control policies.
C) Command and control policies require all firms to reduce pollutants by a specific
quantity, whereas tradable allowances allow some firms to pollute more than others
by trading for pollution rights.
D) Tradable allowances sometimes result in higher overall levels of pollutants because
firms can simply purchase the rights to pollute more, whereas the quantity of
pollution is fixed under command and control.
188. Tradable allowances:

A) are typically hard to pass through the Environmental Protection Agency (EPA)
since they allow firms to legally pollute.
B) are an efficient way to reduce pollution at lower costs.
C) decrease the profitability of firms since now they have to pay for the rights to
pollute.
D) are equal to the social surplus in the market.
189. What is the importance of the Clean Air Act of 1990?

A) Under this act, the EPA distributes pollution allowances to electricity producers.
B) Under this act, the EPA sets the maximum amount of pollution that each firm may
emit.
C) The act lists the pollutants that are deemed harmful to the environment.
D) The act delineates which firms are allowed to emit more than 1 ton of sulfur
dioxide.

I. The EPA's tradable allowances program for sulfur dioxide establishes property rights
to pollute and helps reduce transaction costs by distributing allowances, maintaining
databases, and monitoring emissions.
II. One criticism of tradable allowances is that they prohibit nonbusinesses and
environmental groups from purchasing the allowances.
III. The tradable allowances for sulfur dioxide have performed poorly because
electricity output has increased, causing a rise in sulfur dioxide levels.
A) I only
B) II and III only
C) I, II, and III
D) III only
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191. The Clean Air Act of 1990:
A) established a tradable allowances program for sulfur dioxide.
B) is an application of the Coase theorem.
C) allows firms to profit by selling their unused pollution allowances.
Exhibit: EPA Regulations
There are two firms: Company A and Company B. The EPA enforces regulations saying that
neither firm can release more than 10 units of pollutants. Company A currently releases 10 units
and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit—the
company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1
unit for a cost of $400. Company B wants to save money by trading allowances with Company A.
After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650.
192. (Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants
released into the environment after the two firms have traded allowances?
A) 11
B) 9
C) 20
D) 10
193. (Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading
allowances?
A) A gains $650, and B saves $550.
B) A gains $250, and B saves $350.
C) A gains $650, and B saves $1,100.
D) A gains $1,050, and B saves $550.
194. Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators
of electricity, and firms trade allowances as they see fit. The EPA's tradable allowances
program has resulted in:
A) air quality that is neither improved nor worsened.
B) an improved air quality.
C) a worsening in air quality.
D) a less efficient market outcome.
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195. Tradable allowances for pollution:
A) allow firms to reduce pollution levels at lower costs.
B) decrease the availability of resources able to be utilized in other areas of
production.
C) typically decrease firms' profits.
D) seem good in theory but have never been successfully enacted in market
economies.
196. The EPA's system of tradable allowances:

A) was unable to internalize the external costs of pollution.
B) actually lead to increased levels of pollution.
C) was moderately successful in helping to decrease pollution levels.
D) is a successful application of the Coase theorem.
197. The system of tradable allowances for carbon dioxide proposed by President Obama:
I. would be easy to implement today if not for the political in-fighting in Congress.
II. would create incentives for firms to move toward the use of fuels that contribute less
to global warming (such as nuclear, solar, and so forth).
III. would create large revenues for the government, but do little to increase economic
efficiency.
A) I and II only
B) II and III only
C) II only
D) I, II, and III
198. Suppose the government limits the amount of pollution from cars by capping the
amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If
Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was
willing to sell a pound of his allowance for $30, would it be efficient for them to make
this trade?
A) No, it would raise the cost of pollution abatement.
B) Yes, it would lower the cost of pollution abatement.
C) It is impossible to say whether this would or would not be an efficient trade.
D) There is no incentive for Alex and Tyler to trade.
199. The Clean Air Act:

A) banned the emission of sulfur dioxide.
B) created markets in sulfur dioxide emissions.
C) reduced social surplus.
D) increased sulfur dioxide emissions.
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Table: Pollution Abatement
Pollution Level Cost of Removing One

Firm (tons of SO2) Ton of Pollution
A 30 $100
B 30 $500
200. (Table: Pollution Abatement) Refer to the table. If the government requires each firm in
the table to reduce pollution by 2 tons, what is the total cost of reducing 4 tons of
pollution?
A) $400
B) $2,000
C) $1,200
D) $2,400
201. (Table: Pollution Abatement) Refer to the table. If the government wants to reduce 4
tons of pollution, what is the total cost of doing so if firms trade pollution allowances?
A) $400
B) $2,000
C) $1,200
D) $2,400
202. President Barack Obama proposed using a system of:

A) Pigouvian taxes to reduce carbon dioxide emissions.
B) tradable allowances to reduce carbon dioxide emissions.
C) depreciation permits to reduce carbon emissions.
D) fines and levies to address greenhouse gas emissions.
203. Under the EPA's tradable allowances program, clean energy is ______ and dirty energy
is ______.
A) taxed; subsidized
B) taxed; taxed
C) subsidized; taxed
D) subsidized; subsidized
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204. In a market with external costs, suppose the efficient level of output is 1,000 units.
Which statement is TRUE?
A) To achieve the efficient level of output, the government should set a subsidy equal
to the external cost.
B) To achieve the efficient level of output, the government could set a tax equal to the
external cost or issue enough tradable allowances to restrict the output to the
efficient level.
C) With external costs, the government can use only taxes to achieve the efficient
level of output.
D) With external costs, the government can use only tradable allowances to achieve
the efficient level of output.
205. Why are taxes on pollutants and tradable allowances considered to have similar effects
in solving externality problems?
A) The companies who are taxed are also simultaneously subject to the allowances of
pollutants.
B) They both reduce pollution of exactly the same types of pollutants.
C) They both bring markets closer to the efficient quantity.
D) Companies can trade the taxes on pollutants just as they trade the allowances on
pollutant amounts.
206. Assume an EPA official observes the following situation in a small town on the banks
of a river. The town depends heavily on fish for its food and is heavily dependent on
coal for its power. A coal factory on the banks of the river empties pollutants into the
river causing health problems among the residents and the fish to develop toxic residues
in their livers and other organs. Which of the following solutions should the EPA
choose to mitigate this negative externality problem (at least in the short run)?
I. levy taxes on the coal factory's production of pollutants
II. levy taxes on the consumers' consumption of fish
III. create a market for tradable allowances
IV. subsidize firms that produce clean fish
A) I and III only
B) II and IV only
C) III and IV only
D) I, III, and IV only
207. The main difference between tradable allowances and taxes is:
A) only large firms may trade pollution allowances.
B) tradable allowances result in a more efficient outcome.
C) taxes decrease firms' profits.
D) purely political.
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208. When the number of tradable allowances is set equal to the efficient market quantity:
A) it is equivalent to a tax set equal to the level of the external cost.
B) the outcome will be more efficient than a tax on pollution.
C) it is equivalent to a government regulation set equal to the efficient market
quantity.
D) the price of the allowances will equal the social cost of pollution.
209. Which of the following statements are TRUE?

I. Market prices do not correctly signal the true costs and benefits to society when
external costs are present.
II. Market prices do not correctly signal the true costs and benefits to society when
external benefits are present.
III. Taxes and subsidies can adjust prices so that they do send the correct signals.
A) I and III only
B) II and III only
C) I only
D) I, II, and III
210. When external benefits are present, the market price is ________, however when
external costs are present, the market price is ________.
A) too low; too high
B) equal to the efficient price; too low
C) too high; too low
D) equal to the efficient price; too high
211. To ensure an efficient equilibrium outcome when external costs are present in the
market, the government could:
I. implement a tax equal to the level of the external cost.
II. create a system of tradable allowances to reduce output to the efficient quantity.
III. institute command and control policies to reduce output to the efficient quantity.
A) I and II only
B) II and III only
C) II only
D) I, II, and III
Page 49
212. Suppose there will be global catastrophe unless we hold total carbon dioxide emissions
at or below 35 million tons per year. As a result, each person on Earth is allocated 10
pounds of untradable emissions permits per year. Why would this be an inefficient
solution?
A) Flexibility is not desirable.
B) Transaction costs are very high.
C) Everybody has the same cost of emissions abatement.
D) Different people have different costs of emissions abatement.
213. Suppose there will be global catastrophe unless we hold total carbon dioxide emissions
at or below 35 million tons per year. As a result, 35 million tons of emissions permits
are auctioned off and the proceeds distributed equally between everybody on Earth. Is
this better, worse, or basically the same as allocating to each of 7 billion people on Earth
10 pounds of untradable emissions permits per year?
A) better, because it lowers the cost of emissions abatement
B) worse, because it raises the cost of emissions abatement
C) about the same
D) It is impossible to say.
214. Tradable allowances are ______ to Pigouvian taxes when the position of the supply
curve is ______, making it difficult to know the exact size of the tax.
A) superior; unknown
B) superior; known
C) inferior; unknown
D) inferior; known
215. The social cost of antibiotic consumption equals the private cost of producing antibiotics
plus the cost of increased bacterial resistance to antibiotics.
A) True
B) False
216. An external cost is built into the market price of a good and thus paid by the consumers.
A) True
B) False
217. In a market, the presence of an external cost causes the market equilibrium output to
exceed the efficient level of output.
A) True
B) False
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218. In an efficient market, the supply curve will decrease by the amount of the external cost.
A) True
B) False
219. When a transaction between a buyer and seller directly affects a third party, the effect is
called an externality.
A) True
B) False
220. The social cost of pollution includes the private producer costs plus the costs to
bystanders adversely affected by the pollution.
A) True
B) False
221. Barking dogs cannot be considered an externality because externalities must be

associated with some form of market exchange.
A) True
B) False
222. External costs lead markets to produce a smaller quantity of a good than is socially
desirable, while external benefits lead markets to produce a larger quantity of a good
than is socially desirable.
A) True
B) False
223. Antibiotics tend to be overused, as the producers of antibiotics are required to bear all
the costs of antibiotic use.
A) True
B) False
224. When externalities are present in a market, social surplus is maximized.

A) True
B) False
225. Markets in which externalities are present are economically inefficient.

A) True
B) False
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226. The efficient equilibrium is always equal to the market equilibrium.
A) True
B) False
227. The efficient equilibrium maximizes private surplus.

A) True
B) False
228. An externality is either an external cost or external benefit that spills over to bystanders.
A) True
B) False
229. Social surplus is consumer surplus plus producer surplus and is maximized in markets
with externalities.
A) True
B) False
230. If a good has an external cost, the efficient price is greater than the market price.
A) True
B) False
231. If the production of a good causes a negative externality, the efficient level of output of
that good is zero.
A) True
B) False
232. Overproduction occurs in the presence of a negative externality because the external
costs are paid by someone other than the producers and consumers.
A) True
B) False
233. External costs cause deadweight losses, whereas external benefits do not.
A) True
B) False
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234. If the government subsidizes activities with external benefits, the market price falls and
people consume more.
A) True
B) False
235. Vaccines benefit the person who is vaccinated but they also create an external cost for
others.
A) True
B) False
236. If the private benefit of getting a flu shot for a person is less than the social benefit, the
market quantity will be greater than the efficient quantity.
A) True
B) False
237. External benefits lead to inefficient market outcomes.

A) True
B) False
238. The market for a good that generates an external benefit is still considered efficient.
A) True
B) False
239. Deadweight loss results when a good generates external benefits.

A) True
B) False
240. Government subsidies for goods that generate external benefits may increase economic
efficiency.
A) True
B) False
241. According to the Coase theorem, the private market will need government intervention
in order to reach an efficient outcome when externalities are present.
A) True
B) False
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242. While the Coase theorem is appealing, private actors often fail to resolve the problems
caused by external costs and benefits.
A) True
B) False
243. If transaction costs are low and property rights are clearly identifiable, an efficient
market equilibrium can be achieved even when externalities exist.
A) True
B) False
244. Markets are always able to find solutions to externality problems and thus maximize
social surplus.
A) True
B) False
245. The Coase theorem says that if transaction costs are high and property rights are clearly
defined, the private bargains will ensure that the market equilibrium is efficient even
when there are externalities.
A) True
B) False
246. Conditions for the Coase theorem are typically met, and thus markets alone can solve
most externality problems.
A) True
B) False
247. If there were no transaction costs and property rights were always well-defined, there
would be no external costs after trade.
A) True
B) False
248. An example of a transaction cost for a shirt is the price you pay for a shirt.
A) True
B) False
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249. The Coase theorem states that private solutions can correct for the inefficiencies of
externalities if transaction costs are low and property rights are clearly defined.
A) True
B) False
250. The conditions under which the Coase theorem applies are common in cases of
externality.
A) True
B) False
251. Government intervention is necessary to correct all externalities.

A) True
B) False
252. One advantage of regulation as a method for reducing pollution is that the government
can determine the maximum quantity of pollution that is legally allowed.
A) True
B) False
253. Government can be used to solve externality problems that are too costly for private
parties to solve.
A) True
B) False
254. In a competitive market, a free market approach is always best when an external benefit
is present.
A) True
B) False
255. In a competitive market, a free market approach is always best when an external cost is
present.
A) True
B) False
256. In a competitive market, a free market approach is always best when no externalities are
present.
A) True
B) False
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257. Markets with external costs are inefficient, whereas markets with external benefits are
efficient.
A) True
B) False
258. Command and control policies ensure economic efficiency.

A) True
B) False
259. Everyone has the same cost of pollution abatement.

A) True
B) False
260. The EPA's system of tradable allowances is a successful application of the Coase
theorem.
A) True
B) False
261. One benefit of markets in pollution allowances is that environmentalists can pay to
permanently take emissions off the market.
A) True
B) False
262. The prime motivation for low-pollutant firms to enter into the market for tradable
allowances is profit.
A) True
B) False
263. A Pigouvian subsidy should be set equal to the amount of the external benefit.
A) True
B) False
264. Explain in your own words: 1) What is an externality? and 2) What is the difference
between a positive and negative externality. Provide examples.
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265. Make an argument that gun ownership creates external costs. How might the
government address the external costs? Next, make an argument that gun ownership
creates external benefits. How might the government address the external benefits?
266. Using a demand and supply diagram, demonstrate how the market equilibrium would
differ from the efficient equilibrium when external costs are present. Shade in the area
of deadweight loss, and be sure to label all axes and curves.
267. Figure: Negative Externality
The figure shows the market for a good that causes a negative externality when
consumed. The government decides to begin taxing its producers. Using the information
provided in the figure, answer the following questions.
a. What is the market quantity in this market?
b. What is the social cost of the product?
c. When the product is taxed, what is the dollar amount of the deadweight loss that is
removed from the market?
d. What is the new efficient quantity in this market after the tax has been imposed?
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268. The market for bathroom cleaners can be defined by this set of equations:
Qd = 24 – 2P
Qs = –4 + 2P
where P is the price of bathroom cleaners in dollars, and Q is quantity in thousands.
When bathroom cleaners are washed down the drain, they cause environmental
poisoning. The government estimates that the external cost related to the use of each
container of bathroom cleaner is $3 and is considering imposing a tax of $3 on the
producers of the bathroom cleaner. Using this information, answer the following
questions.
a. What are the market price and market quantity in the bathroom cleaner market?
b. What is the social cost of this quantity of bathroom cleaner?
c. If producers are charged a tax of $3, this would cause the supply curve to the shift to
the left, and the new equation for the supply curve would be Qs = –4 + 2(P – 3). What is
the efficient quantity traded in this market as a result of the tax?
d. Draw a graph to illustrate the old and new equilibriums in this market (before and
after the tax).
e. What is the dollar amount of the deadweight loss that would be removed from this
market as a result of the tax?
269. Figure: Positive Externality
The figure shows the market for a good that when consumed causes an external benefit.
Suppose the government decides to begin issuing a subsidy to the consumers of the
good. Using the information provided in the figure, answer the following questions.
a. What is the initial market quantity in this market?
b. What is the social benefit of the product?
c. When the consumers of the product are subsidized, what is the dollar amount of
deadweight loss that is removed from the market?
d. What is the new efficient quantity in this market after the subsidy has been allocated?
Page 58
270. The market for aquarium cleaners can be defined by the following set of equations:
Qd = 40 – 3P
Qs = –20 + 3P
P is the price of aquarium cleaners in dollars, and Q is quantity in thousands. After their
use, aquarium cleaners get washed down the drain, and these cleansers increase the
mineral content in streams and rivers, thus increasing the fish population. The
government estimates that the external benefit related to the use of each container of
aquarium cleaner is $3 and is considering a subsidy of $3 per container of the aquarium
cleaner. Using this information, answer the following questions.
a. What are the market price and market quantity in the aquarium cleaner market?
b. What is the social benefit of each container of aquarium cleaner?
c. If consumers are offered a subsidy of $3, this would cause the demand curve to shift
to the right, and the new equation for the demand curve would be Qd = 40 – 3(P – 3).
What is the efficient quantity traded in this market as a result of this subsidy?
d. Draw a graph to illustrate the old and new equilibriums in this market (before and
after the subsidy).
e. What is the dollar amount of the deadweight loss that has been removed from this
market as a result of the subsidy?
271. Explain and graphically illustrate why underuse of vaccines is not efficient and how the
inefficiency may be improved.
272. The Coase theorem suggests that efficient solutions to external costs and benefits can be
determined through bargaining. Under what circumstances will private bargaining fail to
produce a solution?
273. As bees make honey, they pollinate fruits and vegetables, which is an important benefit
to farmers. Since pollination is an external benefit of honey production, what are the
incentives for beekeepers to maintain efficient production of honey?
274. Briefly list some private and public solutions to the existence of externalities (negative
or positive) in markets.
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275. Table: Sulfur Dioxide
Industry Sulfur Dioxide Emissions (tons) Cost of Reducing 1 Ton of Sulfur Dioxide
Industry X 100 $100
Industry Y 120 $300
The table sets forth the sulfur dioxide emissions along with the costs of reducing sulfur
dioxide emissions for two industries. Suppose the government gives each industry 100
tradable allowances; each allowance allows for 1 ton of sulfur dioxide emissions.
Explain how the industries will trade the allowances and the range of prices that the
allowances will trade for. What is the final allocation of allowances between the
industries? How many tons of sulfur dioxide are removed from the air and at what cost?
276. Think of a market example that generates external costs. Is the market efficient under
the current conditions? How could the government help the market to reach economic
efficiency?
277. Is a market that generates external benefits considered economically efficient? Explain
why or why not.
278. In the past few years many state governments have made it illegal to smoke inside
public buildings (restaurants, subways stations, and so forth). Using the concept of
externalities, explain why governments are taking these measures and explain whether
the solution ensures an efficient outcome.
Page 60
Answer Key
1. B
2. C
3. B
4. C
5. C
6. A
7. D
8. B
9. C
10. A
11. B
12. A
13. B
14. C
15. B
16. C
17. A
18. A
19. A
20. C
21. C
22. B
23. B
24. C
25. D
26. B
27. D
28. A
29. B
30. D
31. A
32. D
33. D
34. B
35. B
36. D
37. A
38. A
39. B
40. C
41. B
42. C
43. A
44. B
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45. C
46. D
47. C
48. C
49. B
50. A
51. B
52. B
53. A
54. C
55. A
56. C
57. B
58. D
59. D
60. B
61. B
62. B
63. A
64. D
65. C
66. A
67. D
68. B
69. A
70. A
71. B
72. C
73. D
74. B
75. A
76. B
77. D
78. D
79. C
80. A
81. D
82. A
83. A
84. A
85. D
86. D
87. A
88. C
89. C
90. D
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91. B
92. C
93. A
94. D
95. B
96. B
97. D
98. D
99. A
100. D
101. A
102. C
103. C
104. B
105. C
106. A
107. D
108. A
109. B
110. B
111. B
112. B
113. A
114. C
115. D
116. A
117. C
118. B
119. B
120. D
121. D
122. D
123. C
124. B
125. A
126. B
127. C
128. D
129. C
130. B
131. C
132. B
133. A
134. A
135. A
136. C
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137. D
138. C
139. C
140. B
141. B
142. A
143. D
144. D
145. B
146. B
147. C
148. B
149. B
150. A
151. D
152. D
153. B
154. A
155. A
156. D
157. D
158. C
159. C
160. C
161. A
162. D
163. A
164. D
165. C
166. C
167. A
168. D
169. C
170. B
171. D
172. C
173. B
174. B
175. C
176. A
177. B
178. D
179. B
180. B
181. C
182. C
Page 64
183. B
184. D
185. D
186. D
187. C
188. B
189. A
190. A
191. D
192. C
193. B
194. B
195. A
196. D
197. C
198. B
199. B
200. C
201. A
202. B
203. C
204. B
205. C
206. A
207. D
208. A
209. D
210. C
211. A
212. D
213. A
214. A
215. A
216. B
217. A
218. A
219. A
220. A
221. B
222. B
223. B
224. B
225. A
226. B
227. B
228. A
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229. B
230. A
231. B
232. A
233. B
234. A
235. B
236. B
237. A
238. B
239. A
240. A
241. B
242. A
243. A
244. B
245. B
246. B
247. A
248. B
249. A
250. B
251. B
252. A
253. A
254. B
255. B
256. A
257. B
258. B
259. B
260. A
261. A
262. A
263. A
264. Externalities are side effects of a production process or its use. They are some sort of
additional impact from a good or service that is not captured by the price of the
product. This spillover or additional impact may be positive or negative. A positive
externality is one where the consumption of the good or service by the purchaser causes
additional benefits that are felt by others. Thus the price of the product that is equal to
the private marginal benefit does not reflect the social benefit experienced by other
parties. An example of a positive externality is reduced exposure to flu viruses for
people who are not part of the flu vaccine market. A negative externality is one where
the production or the consumption of the good or service causes additional costs that
are not captured by the price of the product. For example, a negative externality derives
from a product that causes environmental damage or health problems for people who
Page 66
are not part of the market transaction.
265. Gun ownership may lead to external costs if guns are misused and innocent people are
injured—for example, a gun stolen from a law-abiding citizen's home may be the
weapon responsible for harming someone in an armed robbery. One government
solution is to tax the purchase of guns to reduce their availability to their efficient level.
Command and control methods may also be appropriate in putting limits on the lethality
of guns, such as rate of fire. Gun ownership may create external benefits if the presence
of guns in a community deters criminals from committing crimes. For instance,
law-abiding citizens who carry concealed weapons may create external benefits. Since
criminals cannot determine who is carrying a concealed weapon, all people, even those
without guns, are less likely to be robbed. In this case, the government could subsidize
the purchase of guns to increase gun ownership to its efficient level.
266.
267. a. 1,500
b. $4
c. $1,200
d. 900
268. a. 24 – 2P = –4 + 2P
28 = 4P
P = 7 or the market price = $7 and market quantity = 10 units.
b. $7 + $3 = $10
c. 24 – 2P = –4 + 2(P – 3)
34 = 4P
P = 8.5 or the efficient market price = $8.50 and efficient quantity = 7
d. See the following figure.
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e. (3 × 3)/2 = $4.50
269. a. 1,200
b. $3
c. $375
d. 1,450
270. a. 40 – 3P = –20 + 3P
60 = 6P
P = 10 for a market price = $10 and a market quantity = 10 units.
b. $10 + $3 = $13
c. 40 – 3P = –20 + 3(P – 3)
69 = 6P
P = 11.5 for a market price = $11.50 and an efficient market quantity = 14.5 units.
d. See the following figure.
e. (3 × 4.5)/2 = $6.75
271.
Fewer people get flu shots than is efficient because the private cost of getting a flu shot
is less than the private benefit. When one person gets a flu shot the expected number of
people who get the flu falls by more than one, so getting a flu shot generates a social
benefit that is greater than the private benefit.
If people who got a flu shot did receive all the benefits of vaccination, their demand
curve would shift upward by the amount of external benefit, and therefore the market
equilibrium will be consistent with the efficient equilibrium. Thus, subsidizing flu shots
should result in more vaccinations and greater social benefit. Subsidies should occur
until the marginal social benefit equals the private marginal cost of production.
272. Private parties may fail to bargain to an efficient solution under varied circumstances.
Page 68
For example, the transaction costs of bargaining may be so high that one or both of the
parties decides not to bargain. Second, the bargaining may not take place if one or both
of the parties believes that the agreement cannot be enforced. Third, one or both of the
parties may try to “hold out” for a better deal, in which case the bargaining process
breaks down. Fourth, if there are a large number of parties taking part in the
negotiations, the costs of coordination may be so great that the bargaining is not
successful.
273. As farmers pay beekeepers to pollinate their crops the external benefits become
internalized—the beekeepers earn money from the pollination of fruits and vegetables
as well as from the production of honey. They expand production toward the efficient
quantity that takes into account the benefits of bees for honey production and for fruit
and vegetable production.
274. Private solutions include trade in externalities, or a market for tradable allowances
(where it exists without government mandate). Government solutions include the
command and control technique (used when external costs are severe and very
significant; this technique is not always efficient), and taxes and subsidies. Markets for
tradable allowances can also be government mandated as is, for example, the market
for carbon emissions.
275. Industry Y will pay between $100 and $300 for 20 allowances from Industry X. Industry
Y will now have 120 allowances and emit 120 tons of sulfur dioxide. Industry X traded
away 20 allowances, leaving it with 80 allowances and emitting 80 tons of sulfur
dioxide. Twenty tons of sulfur dioxide are removed (220 – total allowances). Since
Industry X removed all the pollution, the total cost is 20 × 100 = $200. (Note: In
calculating the cost, we ignore what Industry Y paid Industry X for the allowances,
since this merely represents a transfer from one industry to another.)
276. Answers will vary, but one example may be something like noise pollution. An example
of a market that generates an external cost is that of a noisy airport. Planes that fly into
airports at night impose an external cost on those living around the airport because the
planes generate a lot of noise and disrupt sleep. In the absence of any government
intervention, the market would not be efficient. To increase efficiency, the government
could either impose a tax on the airlines in order to force them to internalize the
external cost, or they could (as they currently do) restrict flights into airports after
certain hours of the evening to minimize the external costs imposed on neighboring
residents.
277. No, even markets that generate external benefits are not considered economically
efficient because the market generates too FEW of the good at too LOW a price. The
market demand curve does not incorporate ALL the benefits to society, and thus demand
is understated when external benefits are present. As a result, the efficient price of such
a good is higher than the market price, and the efficient quantity also exceeds what the
market currently produces. Figure 10.32 from the text illustrates this concept.
Page 69
278. Smoking creates an external cost to those near the smoker through secondhand smoke
(i.e., if you smoke and I am standing next to you, your smoke goes into my lungs making
me worse off as a result). Since it would be hard for EVERY smoker in the state to
negotiate with EVERY nonsmoker in the state to compensate for the secondhand smoke
(i.e., high transactions costs), governments have taken the second-best approach and
simply eliminated the externality by imposing restrictions on smoking. Although this
eliminates the external cost, it may not necessarily be the most efficient solution since
the most efficient solution is the one that maximizes social surplus. If it could be shown
that the benefit of smoking to the smokers is greater than the cost of the secondhand
smoke to the nonsmokers, and if the smokers are somehow able to compensate the
nonsmokers for the cost imposed on them, then it may be more economically efficient to
allow people to smoke as long as the external costs are internalized. Note, however, that
these conditions are so unlikely that banning is the least inefficient solution.
Page 70
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“That’s no good here and you know it’s no good,” said the officer.
“Wainboro! And a year old too. Why didn’t you come and get your
permit when you got to town? You’ve been in this game long enough
to know you’ve got to do that. All these concessions have permits,
except those under carnival management.”
“Some towns—” began McDennison.
“Never mind about some towns. You know you’ve got to get a
permit in this town. Why didn’t you do it?”
The harassed performer began again, “You guys⸺”
“Never mind about that now,” said the officer. “I was sent here to
see your permit and to bring you down to the office if you didn’t have
it. You know all about it; you were at the Elks’ Fair three years ago.
You better come along and get your permit, Charlie. You’ll have to
take care of a fine, too.”
“You don’t mean now?” the diving wonder asked. “Ain’t you going
to leave me do my trick? I go on in about five minutes. You fellers
sure got the knife in us. If I belonged in this here town⸺”
“Come on, McDennison,” said the officer in a way of quiet finality.
“You know the game as well as I do. We’re not interested in your
trick, only your permit. Come on, get your duds on. I guess you’ve
been through all this before. Come on, speed up.”
Diving Denniver cast his cigarette from him, bestowing a look of
unutterable contempt on the officer. In that sneering scorn he
seemed to include the whole of Farrelton and all constituted
authorities the world over. And Hervey joined him in his contempt
and loathing. Diving Denniver had been through all that before. He
knew the permit towns and the non-permit towns and the towns
where a “tip” would save him the expense of a permit. Hervey had
not dreamed that this enchanted creature ever had to do anything
but dive, he did not know that the wonder of two continents had hit
Farrelton penniless.
I will not recount the language used by Diving Denniver as he
pulled on a shabby suit of clothes and threw a funny little derby hat
on the back of his head. How prosaic and odd he looked! But his
language was not prosaic; it was quite as spectacular as his famous
exploit—his trick, as he called it. Poor McDennison, it was all he had
to sell—his trick. And sometimes he had so much trouble about it.
A funny little figure he made trotting excitedly along with the
officer, his derby hat on the back of his head bespeaking haste and
anger. He smoked a cigarette and talked volubly and swore as he
hurried away, leaving Hervey staring aghast.
Such a troublesome and distracting thing it is to be a wonder of
two continents.
CHAPTER XXIX
THE WHITE LIGHT
Well at all events, Hervey might now inspect freely the sanctum of
the diving wonder. His enthusiasm for the hero was not dimmed.
Even the derby hat had not entirely covered up Diving Denniver.
Here was just another exhibition authority. That a cop should make
so free with Diving Denniver, even calling him Charlie!
Hervey went into the tent, and stood looking about. Muffled by the
distance he could hear the frightful monotonous music of the merry-
go-round playing Little Annie Rooney for the millionth time. On the
red board were strewn the leavings of Diving Denniver’s supper. The
smutty little oil-stove reeked of kerosene. A long, up-ended box did
duty as a washstand and on this, beside a tin basin, was the
photograph of a girl. A couple of candles burned and sputtered. On
the tent pole hung a broken mirror.
Diving Denniver’s bathrobe and his white bathing suit trimmed
with gold braid lay on the converted couch just as he had thrown
them in his hurry and anger. The very bathrobe, half off and half on
the couch, seemed eloquent of his high disgust at the tyrannical
interruption of his work. Hervey surmised that he would speak with
the management of the carnival on his way out; he wondered why
the two had not gone in that direction. But in truth the diving wonder
did not love his public enough to consider it in his sudden dilemma.
He never went up when the wind was strong. And he was not
thinking of the expectant throng now.
Hervey longed to don that gorgeous exhibition suit. Could he slip it
on in a hurry? With him it was but one step from impulse to action
and in a few seconds he had thrown off his suit and was gazing at
himself in the dirty old mirror, clad in the white and gold habiliments
of the international wonder. How tightly it fitted! How thrillingly
professional it made him feel! What a moment in his young life!
Suddenly, something very extraordinary happened. The trodden
grass at his feet shimmered with a pale brightness. Clearly he saw a
couple of cigarette butts in the grass. It was as if some one had
spilled this brightness on the ground. Then it was gone. And there
was only a dim light where the candles sputtered on the makeshift
table. That was a strange occurrence.
He stepped out of the tent and there was the patch of brightness
near the Ford sedan. How plainly he could read the flaunting words
on the spare tire, THREE HUNDRED FOOT DIVE. Then suddenly,
the square tank and the foot of the dizzy ladder were bathed in light.
A long, dusty column was poking around as if it had lost something.
The sedan was again illuminated. The bright patch moved under the
tent and painted an area of the canvas golden. Was it looking for
Diving Denniver, the wonder of two continents, to come forth and
make his three hundred foot dive?
It found the tank and the ladder again and made them glowing
and resplendent. Then there was wafted on the air the robust sound
of the band playing real music. It drowned the tin-pan whining of the
merry-go-round and sent its rousing strains over the fence which
bore the forbidding sign. What a martial tumult! It made the cane
ringers pause, sent the carriers of kewpie dolls to a point of vantage,
and left the five-legged calf forlorn and alone. Louder and louder it
sent forth its rousing melody.
Come take a ride o’er the clouds with me
Up in the air mid the stars.
Hervey Willetts stood petrified. He was in the hands of the gods—
or the devils. I have sometimes wondered if he ever, ever thought.
Behind every act, good or bad, there is some kind of intention. And I
have told you about boys whose intentions were not of the best. But
what of this boy? There was just never anything behind his acts. No
boy could catch him. Yet the band and the waiting light caught him.
And what did they do to him? The light seemed to be waiting for him,
there at the foot of the ladder. All else was darkness. Only the area
of brightness bathing the ladder and the big tank with its metal
corners. It seemed to say, “Come, I am going up with you.” And, God
help him, he went to it as a moth flies to a flame.
When he had ascended a few feet, he remembered that Diving
Denniver went up very slowly seeming to test each rung. He knew
now that this had been for effect and to make the climb seem long.
For the rungs were sound and strong. Also the performer had
occasionally extended his arm. The substitute realized that there had
been good reason for that, for the breeze was more brisk as he
ascended and he knew that the diver had thus held out his hand by
way of keeping tabs on the breeze.
The small tank permitted no divergence from the straight descent.
To land outside it⸺
He went up slowly, but did not pause at each rung. He could be
reckless, but not theatrical. But he did hold out his hand every few
feet and the gay breeze cooled his sweaty palm. Was the wind too
strong? What would Diving Denniver do? Go back? But in any case
Hervey could not do that. He never turned back.
He continued ascending, up, up, up. He could feel the ladder
sway a little. When he was about half-way up, the breeze made a
little murmur where it was cut by one of the wires extending off
slantingways, far off down to the earth somewhere. It was funny how
he could see these wires in the circle of light that had accompanied
him in his long climb, but could not follow them with his eyes to their
distant anchorages. Each wire disappeared in the darkness, and he
had an odd fear that they did not go anywhere. He saw the lights of
the carnival, but no human beings. Were they gazing at him—
hundreds of upturned faces?
Up, up, up he went. Was there no end to it? Now he did really feel
the force of the breeze. Was it too strong? How could he decide
that? He could hear the band, but he knew it would cease playing
when he reached the top. In that one brief moment of suspense it
would cease playing. His companion light moved with him like a
good pal. And beyond and below all was darkness except for the
lights of the carnival.
Up, up, up he climbed. And he came at last to the little platform at
the top, as big as the top of a stepladder. It was just a little shelf fixed
to the fifth or sixth rung from the top. But the part of the ladder above
that would serve as a back and he could lean against it. By fancying
the ground was right below him, by eliminating the distance from his
mind, he was able to squirm around and get onto this tiny shelf. He
did not know how Diving Denniver did this, but he managed it.
Standing on the little shelf and leaning back, he could feel the
ladder shake under him. Of course, there were several ladders
clamped together and the extending wires could not hold the
towering structure absolutely taut. But it was steady at the top.
Far below him was a square frame of lights marking the sides of
the tank which had been illuminated during his ascent. Within it the
water shimmered. His senses swam and he closed his eyes, then
opened them and got control of himself. A straight down dive would
do it. Would it? Yes, he was sure. He let go the ladder and laid his
two hands palm to palm above his head.
There was no music now.
HERVEY MADE THE GREAT DIVE.
CHAPTER XXX
STUNT OR SERVICE
The next thing he knew he was lying propped up against a tree
and people were crowding about him. He knew this was not in tribute
to him for he heard a voice say, “Some crazy little fool, all right.”
“Did you ’phone?” he heard some one ask.
“Yes, he’ll be here soon.”
“He isn’t the regular one, is he?” another asked.
“Don’t ask me,” another answered; “I just followed the crowd.”
All the while a boy in a scout suit was moving his hand around
near Hervey’s foot. Emerging from his stunned condition, Hervey
had an odd impression that this boy was stirring something in a bowl.
Far off was the monotonous, incessant music of the merry-go-round.
Then, as Hervey blinked his eyes and brushed his soaking hair back
with a wet hand it seemed as if this boy were playing the music, for
his hand moved in time with that muffled clamor. Hervey lapsed off
into unconcern again and closed his eyes. It was only giddiness.
When he opened them again, he watched the boy with a kind of
detached curiosity. He felt a tightening sensation in his leg. Then he
realized that the boy had been drawing a bandage tighter and tighter
around his calf by revolving a stick. Still Hervey was only vaguely
interested.
“Stopped?” some one asked.
“Yep,” said the boy. He sat at Hervey’s feet with hands clasped
around his drawn-up knees. Soon he arose and stood looking as if to
ascertain on his own account if some one were coming.
“Who are you looking for?” Hervey asked weakly.
“The doctor,” answered the boy. He was a tall boy. As he stood
looking, he kicked something with his foot.
“What’s that?” Hervey asked.
The boy picked it up and dangled it in front of him, laughing. It was
just about recognizable as the body of a kewpie doll, and it was a
ghastly sight, for the head hung loose and the body was mangled
and out of shape. “Glad you’re not as bad off as that, hey?” said the
scout. “I won that blamed thing ringing canes and I got—I bet I got
three yards of cloth off it; there goes.” And twirling it cruelly by one
leg, he hurled it gayly over the heads of the throng.
“You people get away from here, go on,” said the robust voice of a
policeman. “Go on, all of yer, get away from here; he ain’t hurt much.
Go on, chase yourselves, you kids.”
“He can’t chase me anyway,” said Hervey.
“That’s a good one,” laughed the boy. “Nor me either; I’m the
surgeon general or whatever you call it.”
“You can’t chase me,” said Hervey to the policeman. “That’s
where I’ve got the laugh on you.”
“If I was your father, I’d chase you to the padded cell,” the
policeman commented, then busied himself clearing away the
loiterers.
The scout examined his twisted bandage and gave it one more
twist. Then he sat down on the ground beside Hervey. Two or three
men and the policeman lingered about, but did not bother these two.
“That was some crazy stunt all right,” said the scout.
“Did I—where did I fall?” Hervey asked.
“You went in the tank, but only just, I guess. Your foot must have
knocked the edge; four of the electric bulbs were broken. I don’t think
there’s any glass in your foot; anyway, I stopped it bleeding. Gee,
boy, I did murder that kewpie doll! How the dickens did you happen
to do that, anyway?” Hervey told him briefly.
“Good night, some daredevil! I dived to-day, but I had the whole
river to dive in. Me for that tank stuff—not.”
“Are you a scout in this town?” Hervey asked. “Yep, South
Farrelton. I was here last night and I had my fortune told and the old
woman told me I’d be lucky. I was all right. And believe me, so were
you.”
“How were you lucky?” Hervey asked.
“Oh, things came my way. I’m here with my patrol to-night; I guess
the cop chased them—good thing. They’d have trampled all over
you.”
“They’re always chasing people,” Hervey said. “They came and
got that diving wonder even, they’re so blamed fresh. And he’s a
wonder of two continents. Anyway, I’m always lucky.”
“I’ll say you are!”
“I’m going out to Montana, maybe to South America. I bet you can
do what you want down there. They weave Panama hats under the
water; gee, I bet I could do that. I always land right side up, that’s
one thing about me.”
“It’s a darned good thing,” said the scout.
Hervey did not bother to ask him his name, but the boy told him; it
was Wyne Corson. “That’s a good first name, hey?” he said. “Wyne?
It’s better than lose. There’s a scout in our troop named Luze—they
call us Win and Lose. He’s a Hungarian on his great granddaughter’s
side, I guess. Here comes the crowd back; I guess the doctor’s
coming.”
The doctor came and kneeled down, brisk, smiling and efficient.
He seemed not to take any interest in the spectacular exploit, only in
the injured foot. “Well, I guess you’re all right,” he said after treating
and bandaging the foot. “You won’t be able to run any marathon
races to-morrow.”
“Can I the next day?” Hervey asked.
“No, you can’t the next day,” the doctor laughed. “Who’s going to
take you home?”
Then he offered to do it himself and Wyne Corson got the hero’s
brown shirt and knickerbockers from the tent and maneuvered him
into them. He even placed the treasured hat on his head at an
unconventional angle. He seemed to have an inspired appreciation
of Hervey’s bizarre character. Then they helped him to the waiting
car. Gaping stragglers watched the self-appointed understudy of the
diving wonder as he limped between the doctor and the scout, past
the enclosure of the five-legged calf, and around the festooned
platform where the merry dance was on. Whirling couples paused to
stare at him and one girl ran out and boldly inspected the celebrity
from head to foot. “Oh, he has the brightest eyes,” she confided to
her waiting partner, “and the funniest little hat with all sorts of buttons
on it. Do you know who he reminds me of? Peter Pan.”
At the doctor’s car half a dozen scouts stood about gazing at
Hervey. They hardly knew what to make of him, but they had a kind
of instinctive respect for him and showed it. I am not sure that this
was just on account of his daredevil exploit. There was something
about him and that’s all there is to it. Good or bad, he was different.
“Did I do the right thing?” Wyne Corson ventured to ask the
doctor. He had hoped he might be asked to accompany Hervey, but
apparently this was not to be.
“Oh yes indeed—the only thing,” said the doctor. “You were on the
job and efficient and clever. That’s the kind of thing I like to see.”
“You ought to have seen what he did,” Wyne ventured. Was he
falling for this cracked-brained youngster too?
“I don’t believe I’d care to see that,” said the doctor with brisk
good-humor.
And there stood Wyne Corson with his scout comrades about him.
They did not comment upon his efficiency nor the doctor’s ready
compliment.
“Did he talk to you? What did he say?” asked one.
“Where does he live?” asked another.
“Is he friendly, sort of?” asked a third.
“For the love of Christopher, why didn’t you talk to him
yourselves?” laughed Wyne. “He wouldn’t eat you up. Come on, I’m
going to treat to ice cream again, then let’s go home.”
CHAPTER XXXI
HOPELESS
He sat in a big old-fashioned chair in the living room with his
injured foot upon a stool, in deference to the powers that be. There
was a knock on the front door and presently young Mr. Ebin Talbot,
scoutmaster, poked his head around the casing of the living room in
a way of mock temerity.
“May I come in and have a look at the wonder of wonders?” he
asked. “How are we; getting better?”
“It hurts a little when I stand on it.”
“Then the best thing is not to stand on it, hey? Like the advice to a
young man about to stand on his head on a steeple—Don’t. Good
advice, huh? Well Herve, old boy, I’ve got you where I want you at
last; your foot’s hurt and you can’t get away from me. Did you ever
hear the story about the donkey that kicked the lion? Only the lion
was dead. Well, I’m the donkey and you’re the lion; I’ve got you
where you can’t jump down my neck. Do you know that was a crazy
thing you did, Herve? You just put yourself in my power. Maybe you
did it so you wouldn’t have to go to school, huh? Where’s your dad?”
“He’s at the store.”
“Have you heard about this conspiracy to send you to military
school?” Poor man, he was trying to reach Hervey by the good pal
method. He drew his chair close and spoke most confidentially. “I
think we can beat it,” he said.
“Leave it to me,” said Hervey.
“You’re not worrying?”
“I’d be there about three days,” said Hervey.
“I think you’d be there about three years, my boy.”
“What do you bet? Everybody’s calling me a crazy daredevil. Do
you think I wouldn’t be enough of a daredevil to get away from a
military school? Bimbo, that’s a cinch.”
It seemed to be something that Hervey was quite looking forward
to; a lure to new adventure. Mr. Talbot went on another tack.
“Well, I thought if we could slip you into the Scouts in time, we
could beat your dad to it.”
“I’ll beat them all to it, all right,” said Hervey vaguely. “They
arrested that wonder—even of two continents he’s a wonder—but I
gave them a good run. I nearly bit that feller’s hand off when he
grabbed me. Do you dare me that I won’t get away from military
school?”
“Oh goodness no, but listen, Herve.” He became soft and serious.
“You can listen, can’t you? You haven’t got anything else to do—now.
You know that boy who put the jigamerig around your leg?”
“Carter—something like that?”
“You don’t remember his name, Herve? Wyne Corson. That fellow
is in the troop they’ve got down in the south end; they’ve got quite an
outfit. One of them—he’s just a kid—wants to have a hat like yours.
When you jumped, you jumped right into the hearts of the Raccoon
Patrol; you didn’t hit the tank at all. Well, that fellow was—now listen,
here’s a knockout for you. Do you know how those fellows happened
to be at the carnival last night?”
“Do you think I bother ringing canes?” said Hervey.
“Well, it’s good he won a kewpie doll, now isn’t it? But that’s not
the knockout. He won a prize yesterday and he was giving his patrol
a kind of a blowout last night at the carnival. I think there’s going to
be a shortage of pop-corn for the next forty-’leven years.”
“Well, yesterday morning he was up the river with that scout—that
little stocky fellow; did you notice him?”
“No.”
“Well, he noticed you. They were up on Blackberry Cliff; as near
as I can make out they’re always out for eats. There was a girl in a
canoe down below; she belongs in that white house right across
from the cliff. What I’m telling you is in this afternoon’s paper—you
can see it. Well sir, the canoe upset, and this Wyne, he dived from
the Cliff—that’s pretty high, you know, Herve, and he got her and
swam to shore with her—now wait. Here’s the punch. He gets the
Ellen C. Bentley reward for this year. You remember nobody got it
last year. He goes on a trip to California next summer—six weeks.
Naturally he was feeling pretty good last night. And he never told you
a word about it! Think of those two things that scout did yesterday!
Dived from a cliff and saved a life, won a trip across the continent,
then put a what-d’ye-call-it around your leg when you might have
bled to death after making a crazy dive that didn’t get you anything—
not one blessed thing.”
“Do you think I didn’t have any fun?”
“Hervey, boy, why did you do it? Why—why did you do it? A crazy
fool thing like that!” Hervey was silent, a trifle abashed by the
seriousness and vehemence of his visitor.
“Why did you do it?”
“I—I couldn’t help it.”
Young Ebin Talbot just looked at him as a wrestler might look,
trying to decide where to take his adversary. “I guess so,” he said
low and resignedly.
But he was not to be beaten so easily. “Hervey, there are only two
boys in this town who could do what Wyne Corson did, and he is one
of them and you’re the other one. Why are you never in the right
place at the right time?”
Hervey flared up, “Do you mean to tell me I don’t know any one
who could do that—what Wyne Corson did? Do you bet me I don’t?”
“Oh, for goodness’ sakes, Hervey! You did a hair-brained thing, a
big stunt if you will; and Corson did a heroic act. And here you are
making bets with me about something of no importance. What’s the
matter with you? Why I was paying you a compliment!”
“You said I don’t know anybody who could swim out like that. Do
you say I can’t—do you dare me⸺”
Young Mr. Talbot held up his hand impatiently. Hervey not only
never did the right thing, but he even couldn’t talk about the right
thing. Like many men who are genial in hope, he was impatient in
failure. He had not Mr. Walton’s tolerant squint.
“Please don’t dare me, Hervey. Dares and stunts never get a boy
anywhere.”
“How do you know how many fellers can do a thing?” Hervey
demanded.
“Well, all right then, Hervey, I don’t,” said Mr. Talbot rising. “But let
me just say this to you. I know you could do what Corson did
yesterday and it was a glorious thing, and brings him high reward.
Also, if it’s any satisfaction for you to know it, I believe you could find
a way of escaping from a military school. You see, I give you full
credit. I think there is hardly a single thing that you could not do—
except to do something with a fine purpose. Just to stand on your
head isn’t enough; do you see? The first time you do a brave,
reckless thing for service you’ll be the finest scout that ever lived.
None of them can touch you on action, but action means nothing
without motive. It’s just like a car jacked up and the wheels going
round; it never gets anywhere.”
“Didn’t I do a service to Diving Denniver?” Hervey demanded.
“Well, did you? Honor bright; did you? Did you want to help him?
Was that the idea? Come on now, Hervey. Fair and square, was it?”
“No, it wasn’t.”
“You did it because⸺”
“Didn’t I tell you it was because I couldn’t help it?” said Hervey
angrily.
CHAPTER XXXII
UPS AND DOWNS
Young Mr. Talbot gave Hervey up. I think he lost patience too
readily. As for Mr. Walton, he was past the stage of quiet argument
with his stepson. He was as firm in resolve as he was patient in
discussion. And never was Hervey more bent on action that was his
harassed guardian from the moment he was apprised of the carnival
escapade. Even gentle Mrs. Walton, who had pled after the satchel
episode, thought now that it was better for Hervey to go to military
school than to break his neck.
“Well, he won’t even break rules there,” said Mrs. Walton.
As for Hervey, he was not worrying about military school. He
never thought or worried about anything. He would meet every
situation as it came. He was not staggered by Wyne Corson’s
opportunity to go west. To give him credit, he was not selfish or
envious. He forgot all about Wyne Corson.
One matter he did bear in mind and it was the very essence of
absurdity. With his own narrow escape to ponder on, and Wyne
Corson’s splendid deed to thrill him (if he was capable of a thrill) he
must set off as soon as he was able to prove his all-important claim
that there was another individual capable of doing what Mr. Talbot
had said that only he and Corson could do. He accepted the young
scoutmaster’s declaration not as a compliment, but as a kind of dare.
That is how his mind worked and I am giving you just the plain facts.
I told you in the beginning that no one understood him.
But now he was to receive something as near to a shock as he
had ever received. He sought out Diving Denniver in his sanctum
and approached him rather sheepishly (for him) for he knew not how
his feat had impressed the wonder of two continents. It was the last
day of the carnival, the matter of the permit had been adjusted, and
Diving Denniver was that evening to dive for the last time in
Farrelton. On this occasion he wore his regular clothes and his little
derby hat was on the back of his head as he packed his trunk in
anticipation of departure.
“Hello,” said Hervey.
“Hello, yer gol blamed little fool.”
“Well, I did it, didn’t I?” said Hervey defensively.
“Sure you did it, but you were just lucky. You’re just a crazy kid,
that’s all. That there kid that’s got his name in the papers fer savin’ a
girl’s life, now he’s a regular guy, he is. If you want to jump why don’t
you get in the big parade, kid?” He folded some clothing and did not
pay much attention to Hervey as he talked. “If yer want ter pull the
big stuff why don’t yer get in with them guys. This here ain’t narthin’.”
“Do you know what a scoutmaster told me?” demanded Hervey,
somewhat aroused. “He said that only two fellers—me and that other
feller—could dive off that cliff and swim to shore with a girl. So as
long as you’re a friend of mine will you come and show him that you
can do it? Just to show him he’s not so smart. Then he’ll see you’re
a friend of mine, and he’ll see you can do it. Hey? So I can put it all
over him. Hey?”
“Naah, cut that stuff, kid. Why wuz yer thinkin’ I can swim and
save lives? I ain’t much on swimmin’, kid.” He reached over to where
Hervey sat dangling his legs from the makeshift table and good-
naturedly ruffled his hair. “Yer got me wrong, kid. What’s bitin’ yer
anyways? This here is a trick, that’s all it is. I know me little trick.
Why wouldn’ I? I been doin’ it fer seven years. There ain’t narthin’ to
it when yer once get it right. Did yer think this here wuz a kind of an
adventure like? Hand me them two saucers, will yer. Listen here, kid.
Here’s how it is. When yer know how ter do it there’ ain’t narthin’ to
it; see? An’ if yer try it when yer don’t know how, yer a blame fool. I
bet yer kin swim better’n what I can, at that. I jus’ do me turn, kid.
See?”
Hervey was staggered. “Ain’t you the wonder of two continents?”
he asked. “Don’t you say it yourself?”
“Sure thing, and I’m sorry I didn’t make it five continents when I
wuz printin’ it. What’s a couple of continents more or less? Pull that
there broken glass down and let’s have it, will yer? Yer don’t think yer
done narthin’ big do yer?” He paused and faced Hervey for just a
moment. “Dis here is just a trick, kid. Go on and join them kids
what’s doin’ the divin’. Come out o’ yer trance, little brother. You’ze
got the makin’s of a regular hop, skip and jumper, yer has. Wuz yer
old man sore at yer?”
Hervey felt as if the bottom had fallen out of the earth. Not that he
wanted praise and recognition; he never craved those. But what he
had done was just nothing at all. He was no more a hero than a man
who tried to commit suicide is a hero. And the wonder of two
continents was just a good-humored, tough little young man who
knew a trick! How brave and splendid seemed the exploit of Wyne
Corson now! That was not a trick.
“You beat it home now,” said McDennison, “and don’t go inter no
business what yer ain’t got the dope on. A kid like you oughter had
that trip ter the coast. Look at me, I ain’t got the carfare ter open up
in Bridgeburgh Fair.”
Hervey went away, not exactly heavy-hearted, for he was never
that. And not exactly thoughtful, for he certainly was never that. But
disgruntled. And even that was unusual with him. He might have had
that trip to the coast. Or at least on a dozen different occasions, he
might have won such a reward. But for all his fine bizarre deeds he
got just nothing; not even honor. And the pity of it was he could not
figure this out. He never remembered what anybody told him; he
never pondered. Yet I think that poor Diving Denniver did some
good; I think he almost reached him.
On the way home, he was saved from any of the perils of thought
by the allurements of action. Near the entrance to the carnival was a
basket full of booklets about Farrelton the Home Town. There was a
sign above this basket which read. Free—Take One. Hervey did not
take a booklet, but he took the sign. It was an oblong wooden sign
and had a hole in it to hang it up by. By inserting a stick in this hole,
he could twirl the sign around as he ambled homeward. He became
greatly preoccupied with this pastime and his concentration
continued till he reached the Aunt Maria Sweet Shoppe. Here were
bottles of honey and tempting jars of preserves standing on a display
shelf outside, and he coyly set the Free—Take One sign on these,
proceeding homeward with that air of innocence that he knew how to
affect.
Crossing the deserted Madden farm, he discovered a garter
snake. It was a harmless little snake, but it filled its destiny in
Hervey’s life. It was necessary for him to lift it on the end of his stick
and, before it wriggled off, send it flying through the broken window
of the Madden barn. This was not easy to do, because the snake
would not hold still. With each cast, however, it seemed to become
more drowsy, until finally it hung over the stick long enough for
Hervey to get a good aim and send the elongated missile flying
through the broken, cobweb-filled window.
The shot was so successful that Hervey could not refrain from
giving an encore. One good sling deserved another. So up he
vaulted to the sill of the old window, brushing ancient cobwebs out of
his eyes and hair, and down he went inside. But he went down
further than he had expected to, for the flooring was quite gone from
the old barn and he alighted all in a heap on a pile of dank straw in
the cellar.
Four unbroken walls of heavy masonry arose to a height of ten or
twelve feet. Far above him, through the shrunken, rotted shingles,
little glints of sunlight penetrated. A few punky boards strewn in this
stenchy dungeon gave evidence that the flooring above had rotted
away before being entirely removed. Perhaps there had been an
intention to lay a new flooring. But it was many years since the
Maddens had gone away and now there were rumors that the
extensive farm land was to become a bungalow colony.
As Hervey lifted one of the punky boards it broke in the middle
and fell almost in shreds at his feet. A number of little flat bugs,
uncovered in their damp abode, went scooting this way and that after
similar shelter. The snake too, recovered from the shock of being a
missile, wriggled off to some agreeable refuge amid the rotting litter
of that dank prison.
CHAPTER XXXIII
STORM AND CALM
Hervey’s fortunes were never at a lower ebb than when he stood
in that damp cellar as the night came on and tried to reconcile
himself to sleeping on the straw. Even the morrow held only the hope
that by chance some one would discover him in his dreadful
dungeon. It was not until a rotten board, laid diagonally against the
foundation, had collapsed with him that he gave up and threw
himself down with a feeling as near to despair as his buoyant nature
had ever experienced.
Through the cracks and crevices of the shingles high overhead,
he watched the light die away. A ray from the declining sun streamed
through the window from which he had fallen, lingered for a few
moments, then withdrew leaving the place almost in darkness. Such
a price to pay for a merry little game with a snake!
Meanwhile, events occurred which were destined to have a
bearing on Hervey’s life. At about half past nine that night, young Mr.
Talbot emerged from the Walton house and encountered Wyne
Corson coming in through the gateway. They both laughed at the
encounter.
“Missionary work?” Mr. Talbot inquired.
“You beat me to it?” laughed Wyne.
“No, I’m through,” Mr. Talbot said. “He isn’t even home; nobody
knows where he is. No, I’m through working on that prospect, and I
wouldn’t waste my time if I were you, Corson. He’s going to military
school and I guess that’s the best place for him.”
“The fellows in my troop are crazy about him,” said Wyne.
“They might better be crazy about you,” Mr. Talbot answered. “If
they’re as crazy as all that, they’re better off without another crazy
fellow in their troop. Come on, walk along with me; there’s no one

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Modern Principles Microeconomics 3rd

Edition Cowen Test Bank

Modern Principles Microeconomics 3rd Edition Cowen

Modern Principles Macroeconomics 3rd Edition Cowen Test

Modern Principles of Economics 3rd Edition Cowen Test

Modern Principles Macroeconomics 3rd Edition Cowen

Modern Principles of Economics 2nd Edition Cowen Test

Principles of Microeconomics Brief Edition 3rd Edition

Microeconomics A Modern Approach 1st Edition Schotter

Intermediate Microeconomics A Modern Approach 9th

1. Which equation is TRUE?

2. Which statement illustrates the concept of external cost?

3. Antibiotics may be ________ since people consider only the ________.

7. An external cost is a cost paid by:

10. Which is an example of an external cost?

11. The social cost of driving an SUV is equal to:

13. An external cost is:

14. The social cost is:

Use the following to answer questions 20-22:

Table: Costs of Antibiotics

Quantity of Marginal Benefit Marginal Cost External Marginal Social

23. Which of the following statements is TRUE?

Use the following to answer questions 24-25:

Figure: Market with External Cost

31. Which of these statements is TRUE in the case of externalities?

32. Social surplus is consumer surplus:

33. Which statement is correct under a market with externalities?

34. When external costs are present in a market:

36. An efficient equilibrium occurs when:

38. An efficient equilibrium occurs whenever:

40. Externalities are:

42. A free market void of externalities ______ social surplus.

Figure: Efficient Market Outcome

Use the following to answer questions 52-54:

Figure: Market for Bathroom Cleaner

57. In a market with external costs, the market price is:

Use the following to answer questions 59-60:

Figure: External Cost 1

Use the following to answer questions 68-69:

Figure: Palm Oil

Use the following to answer questions 70-73:

Figure: Dishwashing Detergent

75. A Pigouvian tax:

76. In the case of an external cost, marginal private cost:

78. Which is an example involving an external benefit?

79. An external benefit in a market will cause the market to produce:

81. Because there are external benefits from higher education:

Figure: Market for Vaccines

Use the following to answer questions 89-91:

Figure: ABC Company

Use the following to answer questions 92-94:

95. Which statement is INCORRECT?

96. Which statement correctly describes what a Pigouvian subsidy is?

97. Which statement about vaccines is correct?

98. An external benefit is a benefit received by:

100. Figure: Social Benefit

101. When external benefits are significant:

104. When external benefits are present in a market:

3. Antibiotics may be since people consider only the .