Question 1

Which of the following illustrates the concept of external cost?

Accepted Answer

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. 
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. C

Question 2

If only people who get a flu shot receive all the benefits of the vaccination, then the:

Accepted Answer

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. 
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. C

Question 3

Command and control may be the best approach to handling externalities if:

Accepted Answer

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. 
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. D

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Reference: Ref 10-6 (Figure: ABC Company) 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. 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?

Accepted Answer

A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200 
A)  $2,400 
B)  $3,000 
C)  $3,600 
D)  $1,200

Question 6

Which of the following is TRUE?

Accepted Answer

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 
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

Question 7

External costs caused by the use of antibiotics are the costs to people who are:

Accepted Answer

A)  buying antibiotics. 
B)  selling antibiotics. 
C)  either buying or selling antibiotics. 
D)  neither buying nor selling antibiotics. 
A)  buying antibiotics. 
B)  selling antibiotics. 
C)  either buying or selling antibiotics. 
D)  neither buying nor selling antibiotics.

Question 8

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

Accepted Answer

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. 
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.

Question 9

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

Accepted Answer

A) True 
 B)False

Question 10

The external benefit of honey production is internalized when:

Accepted Answer

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. 
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.

Question 11

When the number of tradeable allowances is set equal to the efficient market quantity:

Accepted Answer

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. 
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.

Question 12

Fewer people get flu shots than is efficient because:

Accepted Answer

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 taking take flu shots than the amount of flu shots available. 
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 taking take flu shots than the amount of flu shots available.

Question 13

Figure: ABC Company   Reference: Ref 10-6 (Figure: ABC Company) 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 dollar amount of the external benefit created per can of the cleaner?

Accepted Answer

A)  $12 
B)  $6 
C)  $3 
D)  $15 
A)  $12 
B)  $6 
C)  $3 
D)  $15

Question 14

An external benefit is a benefit received by:

Accepted Answer

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. 
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.

Question 15

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

Accepted Answer

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. 
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.

Question 16

In a market with external costs, suppose the efficient level of output is 1,000 units. Which of the following statements is TRUE?

Accepted Answer

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 tradeable 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 tradeable allowances to achieve the efficient level of output. 
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 tradeable 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 tradeable allowances to achieve the efficient level of output.

Question 17

(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?

Accepted Answer

a. 1,200 b

Question 18

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:

Accepted Answer

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. 
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.

Question 19

When the government uses a command-and-control policy to solve an externality, it:

Accepted Answer

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. 
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.

Question 20

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

Accepted Answer

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. 
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.

Exam 10: Externalities: When the Price Is Not Right

Which of the following illustrates the concept of external cost?

If only people who get a flu shot receive all the benefits of the vaccination, then the:

Command and control may be the best approach to handling externalities if:

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.

Which of the following is TRUE?

External costs caused by the use of antibiotics are the costs to people who are:

Since the price of antibiotics does not include all the costs of using antibiotics, the price is too:

Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange.

The external benefit of honey production is internalized when:

When the number of tradeable allowances is set equal to the efficient market quantity:

Fewer people get flu shots than is efficient because:

An external benefit is a benefit received by:

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

In a market with external costs, suppose the efficient level of output is 1,000 units. Which of the following statements is TRUE?

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:

When the government uses a command-and-control policy to solve an externality, it:

If the government wanted to maximize the number of people receiving a flu vaccination, it should:

The Big Ideas in Economics

The Power of Trade and Comparative Advantage

Business Fluctuations: Aggregate Demand and Supply

Equilibrium: How Supply and Demand Determine Prices

Elasticity and Its Applications

Taxes and Subsidies

The Price System: Signals, Speculation, and Prediction

Price Ceilings and Floors

International Trade

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination and Pricing Strategy

Oligopoly and Game Theory

Competing for Monopoly: the Economics of Network Goods

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Asymmetric Information: Moral Hazard and Adverse Selection

Consumer Choice

Gdp and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth, Capital Accumulation, and the Economics of Ideas: Catching up Vs the Cutting Edge

Saving, Investment, and the Financial System

Supply and Demand

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Transmission and Amplification Mechanisms

The Federal Reserve System and Open Market Operations

Monetary Policy

The Federal Budget: Taxes and Spending

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