Question 1

Most economists believe that the market __________ produce nonexcludable public goods because of __________.

Accepted Answer

A) will; the monetary incentive they have to produce them 
B) will not; the externality problem 
C) will not; the free rider problem 
D) will; the market shortage that often accompanies the production of public goods. 
A) will; the monetary incentive they have to produce them 
B) will not; the externality problem 
C) will not; the free rider problem 
D) will; the market shortage that often accompanies the production of public goods.

Question 2

In the case of a negative externality, the entire marginal social cost curve lies

Accepted Answer

A) below the entire marginal private cost curve by the amount of the external costs associated with the negative externality. 
B) below the entire demand curve by the amount of the external costs associated with the negative externality. 
C) above the entire marginal private cost curve by the amount of the external costs associated with the negative externality. 
D) above the entire demand curve by the amount of the external costs associated with the negative externality. 
A) below the entire marginal private cost curve by the amount of the external costs associated with the negative externality. 
B) below the entire demand curve by the amount of the external costs associated with the negative externality. 
C) above the entire marginal private cost curve by the amount of the external costs associated with the negative externality. 
D) above the entire demand curve by the amount of the external costs associated with the negative externality.

Question 3

Which of the following is an example of a negative externality?

Accepted Answer

A) Bad weather reduces the size of the wheat crop. 
B) A reduction in the size of the wheat crop causes the income of wheat farmers to fall. 
C) Smoking harms the health of nonsmokers who are nearby. 
D) Smoking harms the health of the smoker. 
A) Bad weather reduces the size of the wheat crop. 
B) A reduction in the size of the wheat crop causes the income of wheat farmers to fall. 
C) Smoking harms the health of nonsmokers who are nearby. 
D) Smoking harms the health of the smoker.

Question 4

Under an emission tax, polluters ________ what price they have to pay to pollute, __________________________ how much pollution will be generated.

Accepted Answer

A) know; and government knows 
B) don't know; and government doesn't know 
C) know; but government doesn't know 
D) don't know; but government knows 
A) know; and government knows 
B) don't know; and government doesn't know 
C) know; but government doesn't know 
D) don't know; but government knows

Question 5

According to information in the textbook, in the early West, many of the open lands were overgrazed. This was largely because

Accepted Answer

A) landowners charged ranchers a fee to graze their cattle. 
B) the lands were unowned. 
C) a government policy in effect at the time subsidized cattle production. 
D) the government heavily taxed landowners. 
A) landowners charged ranchers a fee to graze their cattle. 
B) the lands were unowned. 
C) a government policy in effect at the time subsidized cattle production. 
D) the government heavily taxed landowners.

Question 6

Suppose the socially optimal output is 134 units of a good and the market output is 95 units of the good. A possible reason the market produces "too little" is that

Accepted Answer

A) marginal private benefits are less than marginal social benefits. 
B) marginal private benefits are greater than marginal private costs. 
C) marginal private benefits are greater than marginal social benefits. 
D) marginal private costs are greater than marginal private benefits. 
A) marginal private benefits are less than marginal social benefits. 
B) marginal private benefits are greater than marginal private costs. 
C) marginal private benefits are greater than marginal social benefits. 
D) marginal private costs are greater than marginal private benefits.

Question 7

Exhibit 30-4 ​
 
Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.

Accepted Answer

A) A and C; Q2 
B) D and B; Q1 
C) C and B; Q2 
D) A and B; Q2 
A) A and C; Q2 
B) D and B; Q1 
C) C and B; Q2 
D) A and B; Q2

Question 8

Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) the free-rider effect. 
D) asymmetric information before exchange. 
A) adverse selection. 
B) moral hazard. 
C) the free-rider effect. 
D) asymmetric information before exchange.

Question 9

Which of the following goods is least likely to be rivalrous in consumption?

Accepted Answer

A) a car 
B) a pair of shoes 
C) a book 
D) a computer 
E) a sunset 
A) a car 
B) a pair of shoes 
C) a book 
D) a computer 
E) a sunset

Question 10

The Coase theorem states that

Accepted Answer

A) transaction costs consist of marginal private costs and marginal social costs and are higher when exchange is subject to increasing marginal costs. 
B) transaction costs are the difference between marginal social costs and marginal private costs and are higher when exchange is subject to decreasing marginal costs. 
C) when transaction costs are significant, the resource-allocative outcome will be the same regardless of who is assigned the property rights. 
D) when transaction costs are insignificant, the resource-allocative outcome will be the same regardless of who is assigned the property rights. 
A) transaction costs consist of marginal private costs and marginal social costs and are higher when exchange is subject to increasing marginal costs. 
B) transaction costs are the difference between marginal social costs and marginal private costs and are higher when exchange is subject to decreasing marginal costs. 
C) when transaction costs are significant, the resource-allocative outcome will be the same regardless of who is assigned the property rights. 
D) when transaction costs are insignificant, the resource-allocative outcome will be the same regardless of who is assigned the property rights.

Question 11

Adverse selection exists when

Accepted Answer

A) the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B) the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C) one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D) the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market. 
A) the parties on one side of the market, who have information not known to others, self select in a way that benefits the parties on the other side of the market. 
B) the parties on one side of a market charge more for something than the parties on the other side of the market want to pay. 
C) one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party. 
D) the parties on one side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market.

Question 12

Which of the following statements is false ?

Accepted Answer

A) A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality. 
B) Ronald Coase stressed the reciprocal nature of externalities. 
C) One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities. 
D) Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached. 
A) A subsidy can be used to internalize a negative externality; a tax can be used to internalize a positive externality. 
B) Ronald Coase stressed the reciprocal nature of externalities. 
C) One way to deal with negative externalities is for government to apply regulations directly to the activity that generates the externalities. 
D) Simply because taxes and subsidies are sometimes used to adjust for negative and positive externalities, respectively, it does not necessarily follow that the socially optimal level of output will be reached.

Question 13

A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

Accepted Answer

A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase 
A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase

Question 14

The Coase theorem states that

Accepted Answer

A) positive externalities are directly related to the weather-the better the weather, the more positive externalities. 
B) in the case of trivial or zero transaction costs, negative externalities are more likely to appear. 
C) when transaction costs are high, positive externalities will be minimized. 
D) in the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome. 
A) positive externalities are directly related to the weather-the better the weather, the more positive externalities. 
B) in the case of trivial or zero transaction costs, negative externalities are more likely to appear. 
C) when transaction costs are high, positive externalities will be minimized. 
D) in the case of trivial or zero transaction costs, the property rights assignment does not matter to the resource-allocative outcome.

Question 15

If an asymmetry of information is removed and laborers' preferences change against employment, this will shift the equilibrium in the labor market to the

Accepted Answer

A) northwest. 
B) northeast. 
C) southwest. 
D) southeast. 
A) northwest. 
B) northeast. 
C) southwest. 
D) southeast.

Question 16

Firm X pays firm Y $345 for a pollution permit. This expenditure on the part of firm X is considered a __________. Firm Y ends up spending $200 to eliminate some pollution. This expenditure on the part of firm Y is considered a __________.

Accepted Answer

A) resource cost; transfer 
B) fixed cost; sunk cost 
C) market environmental cost; standards cost 
D) transfer; resource cost 
A) resource cost; transfer 
B) fixed cost; sunk cost 
C) market environmental cost; standards cost 
D) transfer; resource cost

Question 17

A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.

Accepted Answer

A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase 
A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase

Question 18

Which of the following statements is false ?

Accepted Answer

A) Under an emission tax, a tax is set and then the quantity of permissible pollution is determined. 
B) Under both emission taxes and tradable pollution permits polluters must pay to pollute. 
C) One possible approach to dealing with the problem of environmental negative externalities is a policy of tradable pollution permits, also known as cap and trade. 
D) Under a tradable pollution permits system, a price of pollution is set and then the quantity of permissible pollution is determined based upon that price. 
A) Under an emission tax, a tax is set and then the quantity of permissible pollution is determined. 
B) Under both emission taxes and tradable pollution permits polluters must pay to pollute. 
C) One possible approach to dealing with the problem of environmental negative externalities is a policy of tradable pollution permits, also known as cap and trade. 
D) Under a tradable pollution permits system, a price of pollution is set and then the quantity of permissible pollution is determined based upon that price.

Question 19

Explain why the socially optimal output is not always the same as the market output.

Accepted Answer

It is only when there are no externaliti

Question 20

Which of the following statements is false ?

Accepted Answer

A) If a negative externality exists, the market output is greater than the socially optimal output. 
B) If a positive externality exists, the market output is less than the socially optimal output. 
C) If there are no external costs or benefits, then it follows that marginal private costs equal marginal social costs and marginal private benefits equal marginal social benefits. 
D) When a positive externality exists, marginal social benefits are greater than marginal private benefits. 
A) If a negative externality exists, the market output is greater than the socially optimal output. 
B) If a positive externality exists, the market output is less than the socially optimal output. 
C) If there are no external costs or benefits, then it follows that marginal private costs equal marginal social costs and marginal private benefits equal marginal social benefits. 
D) When a positive externality exists, marginal social benefits are greater than marginal private benefits.

Exam 17: Market Failure: Externalities, Public Goods, and Asymmetric Information

Most economists believe that the market __________ produce nonexcludable public goods because of __________.

In the case of a negative externality, the entire marginal social cost curve lies

Which of the following is an example of a negative externality?

Under an emission tax, polluters ________ what price they have to pay to pollute, __________________________ how much pollution will be generated.

According to information in the textbook, in the early West, many of the open lands were overgrazed. This was largely because

Suppose the socially optimal output is 134 units of a good and the market output is 95 units of the good. A possible reason the market produces "too little" is that

Exhibit 30-4 ​ Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points __________, and the socially optimal output is __________.

Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of

Which of the following goods is least likely to be rivalrous in consumption?

The Coase theorem states that

Adverse selection exists when

Which of the following statements is false ?

A subsidy may be used as a corrective device in the case of a positive externality because it will __________ marginal private benefits and __________ demand.

The Coase theorem states that

If an asymmetry of information is removed and laborers' preferences change against employment, this will shift the equilibrium in the labor market to the

Firm X pays firm Y $345 for a pollution permit. This expenditure on the part of firm X is considered a __________. Firm Y ends up spending $200 to eliminate some pollution. This expenditure on the part of firm Y is considered a __________.

A tax may be used as a corrective device in the case of a negative externality because it will __________ marginal private costs and __________ supply.

Which of the following statements is false ?

Explain why the socially optimal output is not always the same as the market output.

Which of the following statements is false ?

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, Controlled, and Relative

Supply, Demand, and Price: Applications

Elasticity

Consumer Choice: Maximizing Utility and Behavioral Economics

Production and Costs

Perfect Competition

Monopoly

Monopolistic Competition, Oligopoly, and Game Theory

Government and Product Markets: Antitrust and Regulation

Factor Markets: With Emphasis on the Labor Market

Wages, Union, and Labor

The Distribution of Income and Poverty

Interest, Rent, and Profit

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

The Economic Case for and Against Government: Five Topics Considered

Stocks, Bonds, Futures, and Options

Filters

Most economists believe that the market produce nonexcludable public goods because of .

Under an emission tax, polluters what price they have to pay to pollute, __________________ how much pollution will be generated.

Exhibit 30-4 Refer to Exhibit 30-4. If a negative externality exists, then the external costs associated with the negative externality equal the distance between points , and the socially optimal output is .

A subsidy may be used as a corrective device in the case of a positive externality because it will marginal private benefits and demand.

Firm X pays firm Y $345 for a pollution permit. This expenditure on the part of firm X is considered a . Firm Y ends up spending $200 to eliminate some pollution. This expenditure on the part of firm Y is considered a .

A tax may be used as a corrective device in the case of a negative externality because it will marginal private costs and supply.