Question 1

The tax-or-subsidy approach for solving externality problems was developed by:

Accepted Answer

A) Arthur Pigou. 
B) Ronald Coase. 
C) Eli Heckscher. 
D) Bertil Ohlin. 
A) Arthur Pigou. 
B) Ronald Coase. 
C) Eli Heckscher. 
D) Bertil Ohlin.

Question 2

Which of the following statements reflects a situation in which there are external benefits?

Accepted Answer

A) John paints his house and cleans his paintbrushes in the stream. 
B) John pays 5 percent of his income as taxes. 
C) John's decision to get vaccinated for smallpox reduces the chances that his neighbor Pete will get smallpox. 
D) John sells his car to his neighbor Pete at half the first-hand price. 
A) John paints his house and cleans his paintbrushes in the stream. 
B) John pays 5 percent of his income as taxes. 
C) John's decision to get vaccinated for smallpox reduces the chances that his neighbor Pete will get smallpox. 
D) John sells his car to his neighbor Pete at half the first-hand price.

Question 3

The figure given below shows the marginal external benefit curve (MEB) of the country from the production of domestic mopeds.   The increase in external benefits to the nation of the increased production of mopeds because of the tariff is:

Accepted Answer

A) $13.25 million. 
B) $2.5 million. 
C) $5 million. 
D) $7.5 million. 
A) $13.25 million. 
B) $2.5 million. 
C) $5 million. 
D) $7.5 million.

Question 4

Suppose that the domestic production of computer games creates enjoyment for those who play the games. Domestic production of computer games also results in knowledge spillovers that positively impact many other industries. One possible policy that could be employed to encourage increased production of computer games by domestic firms is:

Accepted Answer

A) to impose tariffs on computer game imports. 
B) to tax the production of computer games. 
C) to tax the consumption of computer games. 
D) to eliminate all restrictions on the importation of computer games. 
A) to impose tariffs on computer game imports. 
B) to tax the production of computer games. 
C) to tax the consumption of computer games. 
D) to eliminate all restrictions on the importation of computer games.

Question 5

The French highly value domestic production of traditional French cheese made by high-cost, traditional production methods. According to the specificity rule, the most efficient policy tool to protect this traditional industry would be:

Accepted Answer

A) to provide a production subsidy to the domestic firms. 
B) to impose an import tariff on cheeses produced in other countries. 
C) to impose an import ban on cheeses produced in other countries. 
D) to eliminate all barriers on cheese imports since no protectionist policy would be efficient. 
A) to provide a production subsidy to the domestic firms. 
B) to impose an import tariff on cheeses produced in other countries. 
C) to impose an import ban on cheeses produced in other countries. 
D) to eliminate all barriers on cheese imports since no protectionist policy would be efficient.

Question 6

Which of the following statements is true?

Accepted Answer

A) If new firms are struggling to obtain funds from underdeveloped financial markets, the most efficient policy solution would be to offer a production subsidy to these firms. 
B) If the government's goal is to induce early production even when the new firms are not cost-competitive by world standards, a barrier to the import of a substitute of the product produced by these firms would be an ideal policy. 
C) If young firms are struggling to retain their trained workers, then government should offer a subsidy to offset the costs of training workers. 
D) If the domestic firms do not supply anything at the world price, the government should lower the import barriers to boost domestic production. 
A) If new firms are struggling to obtain funds from underdeveloped financial markets, the most efficient policy solution would be to offer a production subsidy to these firms. 
B) If the government's goal is to induce early production even when the new firms are not cost-competitive by world standards, a barrier to the import of a substitute of the product produced by these firms would be an ideal policy. 
C) If young firms are struggling to retain their trained workers, then government should offer a subsidy to offset the costs of training workers. 
D) If the domestic firms do not supply anything at the world price, the government should lower the import barriers to boost domestic production.

Question 7

If it is desirable to enhance the incomes of factors used intensively in the import-competing industry, then a tariff would actually lower national welfare.

Accepted Answer

A) True 
 B)False

Question 8

Arthur Pigou put forward the idea that positive and negative externalities can be resolved by creating new private property institutions.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true of the specificity rule?

Accepted Answer

A) The specificity rule suggests that tariffs should be imposed only on specific products. 
B) According to the specificity rule, government policy should target as closely as possible the source of the distortion that separates private and social benefits (or costs). 
C) The specificity rule posits that tariff imposed on a good favors only the interests of a specific group within a country. 
D) According to the specificity rule, only specific industries should be allowed to participate in government lobbying. 
A) The specificity rule suggests that tariffs should be imposed only on specific products. 
B) According to the specificity rule, government policy should target as closely as possible the source of the distortion that separates private and social benefits (or costs). 
C) The specificity rule posits that tariff imposed on a good favors only the interests of a specific group within a country. 
D) According to the specificity rule, only specific industries should be allowed to participate in government lobbying.

Question 10

Suppose manufacturing of paper results in substantial ground-water pollution. One possible policy that can be used to fix this externality is:

Accepted Answer

A) to subsidize the production of paper by the domestic firms. 
B) to impose tax on the production of paper. 
C) to raise tariff barriers on paper imports. 
D) to provide tax benefits to the firms exporting paper. 
A) to subsidize the production of paper by the domestic firms. 
B) to impose tax on the production of paper. 
C) to raise tariff barriers on paper imports. 
D) to provide tax benefits to the firms exporting paper.

Question 11

If Social Marginal Benefit (SMB) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC), it implies that:

Accepted Answer

A) too much is supplied. 
B) not enough of a good is being demanded. 
C) the socially optimal amount is supplied. 
D) the buyers are not maximizing utility. 
A) too much is supplied. 
B) not enough of a good is being demanded. 
C) the socially optimal amount is supplied. 
D) the buyers are not maximizing utility.

Question 12

The figure given below shows the national market for mopeds in a country. Dd and Sd are the domestic demand and supply curves of mopeds respectively.   The figure given below shows the marginal external benefit curve (MEB) of the country from the production of domestic mopeds.   What will be the impact on the national well-being if, instead of imposing a tariff of $50 per unit, the government provides a subsidy of $50 per unit to the domestic manufacturers of mopeds?

Accepted Answer

A) The national welfare will increase by $5 million. 
B) The national welfare will decline by $2.5 million. 
C) The national welfare will increase by $10.75 million. 
D) The national welfare will decline by $5 million. 
A) The national welfare will increase by $5 million. 
B) The national welfare will decline by $2.5 million. 
C) The national welfare will increase by $10.75 million. 
D) The national welfare will decline by $5 million.

Question 13

While trade restrictions do provide gains to certain segments in the economy, such restrictions will always lower national welfare.

Accepted Answer

A) True 
 B)False

Question 14

The figure given below shows the national market for mopeds in a country. Dd and Sd are the domestic demand and supply curves of mopeds respectively.   The figure given below shows the marginal external benefit curve (MEB) of the country from the production of domestic mopeds.   If there is initially free trade, and then a $50 per unit subsidy is given to the domestic producers of mopeds, domestic consumption of mopeds would:

Accepted Answer

A) increase by 100,000 units. 
B) decrease by 200,000 units. 
C) decrease by 600,000 units. 
D) remain unchanged. 
A) increase by 100,000 units. 
B) decrease by 200,000 units. 
C) decrease by 600,000 units. 
D) remain unchanged.

Question 15

In a "second-best" world:

Accepted Answer

A) tariffs are economically optimal. 
B) private actions are dictated by government agencies. 
C) social marginal cost of a transaction equals social marginal benefit. 
D) private actions do not lead to the best possible outcomes for society. 
A) tariffs are economically optimal. 
B) private actions are dictated by government agencies. 
C) social marginal cost of a transaction equals social marginal benefit. 
D) private actions do not lead to the best possible outcomes for society.

Question 16

The figure given below shows the national market for mopeds in a country. Dd and Sd are the domestic demand and supply curves of mopeds respectively.   Calculate the welfare loss arising from the consumption effect of the tariff.

Accepted Answer

A) $14 million 
B) $2.5 million 
C) $5 million 
D) $7.5 million 
A) $14 million 
B) $2.5 million 
C) $5 million 
D) $7.5 million

Question 17

Which of the following arguments for protection is derived from the fact that funding of public goods in some countries is difficult given little or no means to collect income or sales taxes?

Accepted Answer

A) The developing government argument 
B) The infant industry argument 
C) The dying industry argument. 
D) The national defense argument. 
A) The developing government argument 
B) The infant industry argument 
C) The dying industry argument. 
D) The national defense argument.

Question 18

"It is good to protect domestic production for a nation as a whole and not just for workers and firms receiving protection." Give three scenarios to justify this statement.

Accepted Answer

The case for protection can be made when

Question 19

External effects from a transaction indicate that there is a misalignment between private and social benefits or costs.

Accepted Answer

A) True 
 B)False

Question 20

In the U.S., the trade adjustment assistance:

Accepted Answer

A) provides workers who have been displaced from import-competing firms with an unemployment compensation for at least 24 months. 
B) provides subsidies to firms who produce exportable commodities. 
C) provides incentives for workers to search for new jobs outside the import-competing industry before they lose their jobs in these industries. 
D) is often criticized on the ground that it leads to a huge drain of government funds. 
A) provides workers who have been displaced from import-competing firms with an unemployment compensation for at least 24 months. 
B) provides subsidies to firms who produce exportable commodities. 
C) provides incentives for workers to search for new jobs outside the import-competing industry before they lose their jobs in these industries. 
D) is often criticized on the ground that it leads to a huge drain of government funds.

Exam 10: Arguments for and Against Protection

The tax-or-subsidy approach for solving externality problems was developed by:

Which of the following statements reflects a situation in which there are external benefits?

The figure given below shows the marginal external benefit curve (MEB) of the country from the production of domestic mopeds. The increase in external benefits to the nation of the increased production of mopeds because of the tariff is:

The French highly value domestic production of traditional French cheese made by high-cost, traditional production methods. According to the specificity rule, the most efficient policy tool to protect this traditional industry would be:

Which of the following statements is true?

If it is desirable to enhance the incomes of factors used intensively in the import-competing industry, then a tariff would actually lower national welfare.

Arthur Pigou put forward the idea that positive and negative externalities can be resolved by creating new private property institutions.

Which of the following is true of the specificity rule?

Suppose manufacturing of paper results in substantial ground-water pollution. One possible policy that can be used to fix this externality is:

If Social Marginal Benefit (SMB) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC), it implies that:

While trade restrictions do provide gains to certain segments in the economy, such restrictions will always lower national welfare.

In a "second-best" world:

The figure given below shows the national market for mopeds in a country. Dd and Sd are the domestic demand and supply curves of mopeds respectively. Calculate the welfare loss arising from the consumption effect of the tariff.

Which of the following arguments for protection is derived from the fact that funding of public goods in some countries is difficult given little or no means to collect income or sales taxes?

"It is good to protect domestic production for a nation as a whole and not just for workers and firms receiving protection." Give three scenarios to justify this statement.

External effects from a transaction indicate that there is a misalignment between private and social benefits or costs.

In the U.S., the trade adjustment assistance:

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

The Foreign Exchange Market

Forward Exchange and International Financial Investment

What Determines Exchange Rates

Government Policies Toward the Foreign Exchange Market

International Lending and Financial Crises

How Does the Open Macroeconomy Work

Internal and External Balance With Fixed Exchange Rates

Floating Exchange Rates and Internal Balance

National and Global Choices: Floating Rates and the Alternatives

Filters

The figure given below shows the national market for mopeds in a country. D_dand S_d are the domestic demand and supply curves of mopeds respectively. Calculate the welfare loss arising from the consumption effect of the tariff.