1. Which of the following could create an efficient response to an externality: a.Following the Golden Rule b.Charitable organizations c.Inter-related businesses d.Private Contracts e.All of the above f.None of the above g.( b ) and ( d ) only

2. The proposition that private parties can bargain with each other to solve the problem of externalities is called……… Coase Theorem

3. Refer to the last question and answer: This proposition will be successful in solving the problems caused by the externalities as long as ….. is true The benefits are greater than (or equal) to the costs (MB = MC)

4. Which of the following could be a reason why private solutions to externalities may not work a.Hiring lawyers b.Human stubbornness c.A large number of participants in the situation d.Court Costs e.Transaction Costs f.All of the above g.None of the above

5. List two public policies toward a negative externality pigovian tax Regulation

6. Which public policy toward negative externalities would most economists prefer and why? Pigovian tax More efficient – incentives to develop more efficient production to avoid tax …..Regulation does not provide that incentive Very costly to enforce regulation

7. List two public policies toward a positive externality Subsidy Patents / copyrights – incentives to create new…ability to protect your ideas and profit from them

8. The government regulates pollution from two firms (A and B) Each firm is required to reduce pollution by 10 tons each. Firm A has reduced its pollution by 10 tons. Firm B has only reduced its pollution by 8 tons. Instead of reducing its pollution by 2 more tons, Firm B offers to pay Firm A to reduce its pollution by 2 more. This would be an example of : a.Positive externality b.Subsidy c.Pigovian Tax d.Tradable Pollution Permits e. EPA