Question 1

If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost,

Accepted Answer

A)  further reductions will make society better off. 
B)  the marginal benefit will rise and the marginal cost will fall as further reductions are made. 
C)  economic efficiency will be achieved when emissions are reduced to zero. 
D)  private businesses, rather the consumers, should be made to pay for the cost of further reductions. 
A)  further reductions will make society better off. 
B)  the marginal benefit will rise and the marginal cost will fall as further reductions are made. 
C)  economic efficiency will be achieved when emissions are reduced to zero. 
D)  private businesses, rather the consumers, should be made to pay for the cost of further reductions.

Question 2

A free market fails when

Accepted Answer

A)  there is government intervention. 
B)  there is an external effect in either production, consumption, or both. 
C)  firms that produce goods which create positive externalities go bankrupt. 
D)  firms that produce goods which create negative externalities earn high profits. 
A)  there is government intervention. 
B)  there is an external effect in either production, consumption, or both. 
C)  firms that produce goods which create positive externalities go bankrupt. 
D)  firms that produce goods which create negative externalities earn high profits.

Question 3

Figure 5-6   Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities.
-Refer to Figure 5-6. What is the deadweight loss resulting from producing at the market equilibrium?

Accepted Answer

A)  B + C 
B)  E + C 
C)  F 
D)  C 
A)  B + C 
B)  E + C 
C)  F 
D)  C

Question 4

State the Coase theorem.

Accepted Answer

The Coase theorem states that if transac

Question 5

Which of the following is an example of a product that is nonexcludable and rival?

Accepted Answer

A)  free concert (with limited seating) in a park 
B)  national defense 
C)  automobiles 
D)  flu vaccinations 
A)  free concert (with limited seating) in a park 
B)  national defense 
C)  automobiles 
D)  flu vaccinations

Question 6

Which of the following is an example of a common resource?

Accepted Answer

A)  the Sumatran tiger population in the wild 
B)  rabbit fur 
C)  the stock of knowledge in the public domain 
D)  taxicab services 
A)  the Sumatran tiger population in the wild 
B)  rabbit fur 
C)  the stock of knowledge in the public domain 
D)  taxicab services

Question 7

When there is a positive externality,

Accepted Answer

A)  the marginal private benefit received by consumers is greater than the external benefit. 
B)  the marginal social benefit received by consumers is greater than the marginal private benefit. 
C)  the marginal private benefit received by consumers is greater than the marginal private cost. 
D)  the marginal private benefit received by consumers is greater than the marginal social benefit. 
A)  the marginal private benefit received by consumers is greater than the external benefit. 
B)  the marginal social benefit received by consumers is greater than the marginal private benefit. 
C)  the marginal private benefit received by consumers is greater than the marginal private cost. 
D)  the marginal private benefit received by consumers is greater than the marginal social benefit.

Question 8

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

Accepted Answer

A)  It conducts public surveys to determine if consumers want the product. 
B)  It checks to see what current spending can be eliminated, and how much of the public good can be supplied from the spending cut. 
C)  It takes a vote in Congress. 
D)  It evaluates the costs and benefits of producing the good. 
A)  It conducts public surveys to determine if consumers want the product. 
B)  It checks to see what current spending can be eliminated, and how much of the public good can be supplied from the spending cut. 
C)  It takes a vote in Congress. 
D)  It evaluates the costs and benefits of producing the good.

Question 9

When production generates a negative externality, the true cost of production is the

Accepted Answer

A)  private cost of production. 
B)  public cost of production. 
C)  social cost of production. 
D)  average cost of production. 
A)  private cost of production. 
B)  public cost of production. 
C)  social cost of production. 
D)  average cost of production.

Question 10

The efficient output level of a public good occurs where the

Accepted Answer

A)  greatest number of free riders occurs. 
B)  marginal social cost of producing the last unit is equal to the marginal social benefit realized by consumers. 
C)  total cost of production is affordable. 
D)  marginal cost of production is minimized. 
A)  greatest number of free riders occurs. 
B)  marginal social cost of producing the last unit is equal to the marginal social benefit realized by consumers. 
C)  total cost of production is affordable. 
D)  marginal cost of production is minimized.

Question 11

Congress passed the Clean Air Act in 1970. Since this act was passed, emissions of the six main air pollutants

Accepted Answer

A)  have fallen by more than one-half. 
B)  have increased significantly due to the growth of the U.S. economy. 
C)  cannot be measured since Congress failed to appropriate money to monitor the level of emissions. 
D)  have remained essentially constant, even though significant economic growth has occurred in the United States since 1970. 
A)  have fallen by more than one-half. 
B)  have increased significantly due to the growth of the U.S. economy. 
C)  cannot be measured since Congress failed to appropriate money to monitor the level of emissions. 
D)  have remained essentially constant, even though significant economic growth has occurred in the United States since 1970.

Question 12

Figure 5-1   Figure 5-1 shows a market with an externality. The current market equilibrium output of QS1U1B11S1U1B0 is not the economically efficient output. The economically efficient output is QS1U1B12S1U1B0.
-Refer to Figure 5-1. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does S2 represent?

Accepted Answer

A)  the market supply curve reflecting marginal private cost 
B)  the market supply curve reflecting marginal social cost 
C)  the market supply curve reflecting external cost 
D)  the market supply curve reflecting implicit cost 
A)  the market supply curve reflecting marginal private cost 
B)  the market supply curve reflecting marginal social cost 
C)  the market supply curve reflecting external cost 
D)  the market supply curve reflecting implicit cost

Question 13

Which of the following is an example of a Pigovian tax?

Accepted Answer

A)  payments by utilities to obtain tradable emission allowances 
B)  a payroll tax 
C)  payments for licenses to pollute 
D)  a tax imposed on a utility that internalizes the cost of externalities caused by the utility 
A)  payments by utilities to obtain tradable emission allowances 
B)  a payroll tax 
C)  payments for licenses to pollute 
D)  a tax imposed on a utility that internalizes the cost of externalities caused by the utility

Question 14

Figure 5-16   Amit and Bree are the only two homeowners on an isolated private road. Both agree that installing street lights along the road would be beneficial and want to do so. Figure 5-16 shows their willingness to pay for different quantities of street lights, the market demand for street lights, and the marginal cost of installing the street lights.
-Refer to Figure 5-16. How much is Amit willing to pay per street light to have 4 street lights installed?

Accepted Answer

A)  $3,600 
B)  $2,700 
C)  $1,800 
D)  $900 
A)  $3,600 
B)  $2,700 
C)  $1,800 
D)  $900

Question 15

Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?

Accepted Answer

A)  Ronald Coase 
B)  A. C. Pigou 
C)  Adam Smith 
D)  David Hume 
A)  Ronald Coase 
B)  A. C. Pigou 
C)  Adam Smith 
D)  David Hume

Question 16

Figure 5-7  
-Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units?

Accepted Answer

A)  PE 
B)  PE × QE  
C)  the value of the area BEF 
D)  the value of the area QBBFQE 
A)  PE 
B)  PE × QE  
C)  the value of the area BEF 
D)  the value of the area QBBFQE

Question 17

In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.

Accepted Answer

A) True 
 B)False

Question 18

Figure 5-4   Suppose there are several paper mills producing paper for a market. These mills, located upstream from a fishing village, discharge a large amount of wastewater into the river. The waste material affects the number of fish in the river and the use of the river for recreation and as a public water supply source. Figure 5-4 shows the paper market. Use this Figure to answer the following question(s).
-Refer to Figure 5-4. What is the deadweight loss from producing at the market equilibrium?

Accepted Answer

A)  area C 
B)  area E 
C)  area D 
D)  area F 
A)  area C 
B)  area E 
C)  area D 
D)  area F

Question 19

Which of the following conditions holds in an economically efficient competitive market equilibrium?

Accepted Answer

A)  The deadweight loss is positive but at a minimum. 
B)  Producer and consumer surplus are exactly equal in size. 
C)  There are no positive and no negative external effects from consumption and production. 
D)  The marginal benefit of the last unit produced and consumed is maximized. 
A)  The deadweight loss is positive but at a minimum. 
B)  Producer and consumer surplus are exactly equal in size. 
C)  There are no positive and no negative external effects from consumption and production. 
D)  The marginal benefit of the last unit produced and consumed is maximized.

Question 20

An externality is

Accepted Answer

A)  a benefit realized by the purchaser of a good or service. 
B)  a cost paid for by the producer of a good or service. 
C)  a benefit or cost experienced by someone who is not a producer or consumer of a good or service. 
D)  anything that is external or not relevant to the production of a good or service. 
A)  a benefit realized by the purchaser of a good or service. 
B)  a cost paid for by the producer of a good or service. 
C)  a benefit or cost experienced by someone who is not a producer or consumer of a good or service. 
D)  anything that is external or not relevant to the production of a good or service.

Exam 5: Externalities, Environmental Policy, and Public Goods

If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost,

A free market fails when

Figure 5-6 Figure 5-6 shows the market for measles vaccinations, a product whose use generates positive externalities. -Refer to Figure 5-6. What is the deadweight loss resulting from producing at the market equilibrium?

State the Coase theorem.

Which of the following is an example of a product that is nonexcludable and rival?

Which of the following is an example of a common resource?

When there is a positive externality,

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

When production generates a negative externality, the true cost of production is the

The efficient output level of a public good occurs where the

Congress passed the Clean Air Act in 1970. Since this act was passed, emissions of the six main air pollutants

Which of the following is an example of a Pigovian tax?

Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?

Figure 5-7 -Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units?

In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.

Which of the following conditions holds in an economically efficient competitive market equilibrium?

An externality is

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

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Figure 5-7 -Refer to Figure 5-7. What is the incremental benefit of increasing the quantity of pollution reduction from Q_Bto Q_Eunits?