Question 1

Accepted Answer

A)  P1 and Q1 
B)  P2 and Q1 
C)  P3 and Q1 
D)  P2 and Q2 
A)  P1 and Q1 
B)  P2 and Q1 
C)  P3 and Q1 
D)  P2 and Q2

Question 2

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.

Accepted Answer

A)  I and III only 
B)  II and III only 
C)  I only 
D)  I, II, and III 
A)  I and III only 
B)  II and III only 
C)  I only 
D)  I, II, and III

Question 3

Reference: Ref 10-7 (Figure: Softella) 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. If the government were to subsidize the users of these tissues, what would the efficient quantity in this market be?

Accepted Answer

A)  700 
B)  500 
C)  1,200 
D)  200 
A)  700 
B)  500 
C)  1,200 
D)  200

Question 4

Make an argument that gun ownership creates external costs. How might the government address the external costs? Now make an argument that gun ownership creates external benefits. How might the government address the external benefits?

Accepted Answer

Gun ownership may lead to external costs

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Accepted Answer

A) True 
 B)False

Question 7

Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct?

Accepted Answer

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. 
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.

Question 8

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Accepted Answer

A) True 
 B)False

Question 9

Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

Accepted Answer

A)  1,200; greater 
B)  1,800; less 
C)  2,400; greater 
D)  1,800; greater 
A)  1,200; greater 
B)  1,800; less 
C)  2,400; greater 
D)  1,800; greater

Question 10

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

Accepted Answer

A)  less than the private cost. 
B)  greater than the private cost. 
C)  less than the total cost. 
D)  greater than the total cost. 
A)  less than the private cost. 
B)  greater than the private cost. 
C)  less than the total cost. 
D)  greater than the total cost.

Question 11

The market for aquarium cleaners can be defined by the following set of equations:   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 increase the mineral content in streams and rivers 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, that 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?

Accepted Answer

The answer of The market for aquarium cleaners can be...

Question 12

Which of the following statements is correct under a market with externalities?

Accepted Answer

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. 
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.

Question 13

Which of the following explains the difference between command and control policies and tradeable allowances?

Accepted Answer

A)  Command-and-control policies are a government solution to externalities, whereas tradeable allowances are a type of private market solution. 
B)  Tradeable 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 tradeable allowances allow some firms to pollute more than others by trading for pollution rights. 
D)  Tradeable 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. 
A)  Command-and-control policies are a government solution to externalities, whereas tradeable allowances are a type of private market solution. 
B)  Tradeable 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 tradeable allowances allow some firms to pollute more than others by trading for pollution rights. 
D)  Tradeable 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.

Question 14

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

Accepted Answer

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. 
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.

Question 15

Command and control policies are best suited for:

Accepted Answer

A)  reducing electricity consumption. 
B)  addressing the problem of acid rain. 
C)  the suppression of deadly infectious diseases. 
D)  All of the answers are correct. 
A)  reducing electricity consumption. 
B)  addressing the problem of acid rain. 
C)  the suppression of deadly infectious diseases. 
D)  All of the answers are correct.

Question 16

Figure: Market for Vaccines   Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________.

Accepted Answer

A)  cost; $15 
B)  cost; $10 
C)  benefit; $20 
D)  benefit; $5 
A)  cost; $15 
B)  cost; $10 
C)  benefit; $20 
D)  benefit; $5

Question 17

Reference: Ref 10-7 (Figure: Softella) 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. 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?

Accepted Answer

A)  $1,600 
B)  $2,800 
C)  $5,600 
D)  $800 
A)  $1,600 
B)  $2,800 
C)  $5,600 
D)  $800

Question 18

The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

Accepted Answer

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. 
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.

Question 19

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.

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III

Question 20

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?

Accepted Answer

Private parties may fail to bargain to a

Exam 10: Externalities: When the Price Is Not Right

Make an argument that gun ownership creates external costs. How might the government address the external costs? Now make an argument that gun ownership creates external benefits. How might the government address the external benefits?

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.

If the government subsidizes activities with external benefits, the market price falls and people consume more.

Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct?

According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present.

Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output.

The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be:

Which of the following statements is correct under a market with externalities?

Which of the following explains the difference between command and control policies and tradeable allowances?

Private markets fail to reach a socially optimal equilibrium when external benefits are present because the:

Command and control policies are best suited for:

Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________.

The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and:

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.

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?

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

Filters

Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The efficient level of output is vaccines, which is than the market's output.

Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The external of vaccination is .