Question 1

Which of the following statements is true?

Accepted Answer

A) A tax applied to an activity that generates a negative externality always brings about the socially optimal level of output. 
B) A subsidy applied to an activity that generates a positive externality always brings about the socially optimal level of output. 
C) A tax applied to an activity that generates a positive externality may bring about the socially optimal level of output. 
D) A tax applied to an activity that generates a negative externality may bring about the socially optimal level of output. 
A) A tax applied to an activity that generates a negative externality always brings about the socially optimal level of output. 
B) A subsidy applied to an activity that generates a positive externality always brings about the socially optimal level of output. 
C) A tax applied to an activity that generates a positive externality may bring about the socially optimal level of output. 
D) A tax applied to an activity that generates a negative externality may bring about the socially optimal level of output.

Question 2

The free-rider problem arises if goods are

Accepted Answer

A) nonrivalrous in consumption. 
B) rivalrous in consumption. 
C) nonexcludable. 
D) excludable. 
A) nonrivalrous in consumption. 
B) rivalrous in consumption. 
C) nonexcludable. 
D) excludable.

Question 3

It seems quite possible that cigarette companies concealed information about the effects of smoking on health, causing cigarette prices to be __________ and cigarette sales to be __________ than would have been the case under symmetric information.

Accepted Answer

A) higher; higher 
B) higher; lower 
C) lower; higher 
D) lower; lower 
A) higher; higher 
B) higher; lower 
C) lower; higher 
D) lower; lower

Question 4

Exhibit 30-2 ​
 
Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

Accepted Answer

A) Q1ABQ2. 
B) Q1AEQ2. 
C) Q1CBQ2. 
D) ABE. 
A) Q1ABQ2. 
B) Q1AEQ2. 
C) Q1CBQ2. 
D) ABE.

Question 5

If private property rights were established in the air, there would probably be

Accepted Answer

A) more air pollution. 
B) less air pollution. 
C) the same amount of air pollution that exists without private property rights in the air. 
D) better weather. 
A) more air pollution. 
B) less air pollution. 
C) the same amount of air pollution that exists without private property rights in the air. 
D) better weather.

Question 6

Exhibit 30-3   Refer to Exhibit 30-3. Suppose that Firms A, B, and C are the only polluters in the state and that each emits 4 tons of pollution into the atmosphere. To cut the level of pollution in half, the government mandates system whereby each firm must reduce its pollution level by one-half. The total cost of complying with the mandate is

Accepted Answer

A) $433. 
B) $1,540. 
C) $2,750. 
D) $8,570. 
E) $11,650. 
A) $433. 
B) $1,540. 
C) $2,750. 
D) $8,570. 
E) $11,650.

Question 7

The open lands in the early West were overgrazed largely because no one owned the land being used for grazing.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is false ?

Accepted Answer

A) A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive. 
B) Internalizing externalities is not the same as adjusting for externalities. 
C) An externality has been completely internalized if the socially optimal output emerges. 
D) Assigning property rights is one way to internalize externalities. 
A) A positive externality is internalized if the person that generated the externality incorporates into his or her own private cost-benefit calculations the external benefits that third parties receive. 
B) Internalizing externalities is not the same as adjusting for externalities. 
C) An externality has been completely internalized if the socially optimal output emerges. 
D) Assigning property rights is one way to internalize externalities.

Question 9

Externalities can be internalized through voluntary agreements as long as

Accepted Answer

A) transaction costs are low relative to expected benefits. 
B) transaction costs are high relative to expected benefits. 
C) the agreement is a short-run agreement. 
D) the agreement is a long-run agreement. 
A) transaction costs are low relative to expected benefits. 
B) transaction costs are high relative to expected benefits. 
C) the agreement is a short-run agreement. 
D) the agreement is a long-run agreement.

Question 10

Exhibit 30-3   Refer to Exhibit 30-3. What is the cost to Firm C of eliminating 2 tons of pollution?

Accepted Answer

A) $1,300 
B) $300 
C) $1,500 
D) $2,200 
E) $3,500 
A) $1,300 
B) $300 
C) $1,500 
D) $2,200 
E) $3,500

Question 11

If a positive externality exists, __________ in order for the socially optimal output to be reached.

Accepted Answer

A) supply needs to decrease 
B) demand needs to increase 
C) demand needs to decrease 
D) supply and demand both need to increase 
A) supply needs to decrease 
B) demand needs to increase 
C) demand needs to decrease 
D) supply and demand both need to increase

Question 12

If a negative externality exists, __________ in order for the socially optimal output to be reached.

Accepted Answer

A) supply needs to increase 
B) supply needs to decrease 
C) demand needs to increase 
D) supply and demand both need to increase 
A) supply needs to increase 
B) supply needs to decrease 
C) demand needs to increase 
D) supply and demand both need to increase

Question 13

From an economist's point of view, zero pollution is always preferable to some pollution.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 30-5 ​
 
Refer to Exhibit 30-5.  If a positive externality exists, then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

Accepted Answer

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

Question 15

When a positive externality exists,

Accepted Answer

A) external benefits are necessarily greater than private benefits. 
B) social benefits are greater than private benefits. 
C) social benefits are less than private benefits. 
D) social benefits equal private benefits. 
A) external benefits are necessarily greater than private benefits. 
B) social benefits are greater than private benefits. 
C) social benefits are less than private benefits. 
D) social benefits equal private benefits.

Question 16

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

Accepted Answer

A) True 
 B)False

Question 17

If society is experiencing a net social cost from the production of a good, this implies that

Accepted Answer

A) the socially optimal level of output is being produced and society is willing to accept the costs that result. 
B) producers would rather produce the output at which marginal social cost equals the demand for the good. 
C) negative externalities are involved in the production of this good. 
D) positive externalities must be involved in the production of this good. 
A) the socially optimal level of output is being produced and society is willing to accept the costs that result. 
B) producers would rather produce the output at which marginal social cost equals the demand for the good. 
C) negative externalities are involved in the production of this good. 
D) positive externalities must be involved in the production of this good.

Question 18

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 30-2 ​
 
Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

Accepted Answer

A) Curve X, because if there is a positive externality, negative external benefits are associated with it: social costs external benefits - private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
B) Curve X, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
C) Curve Y, because if there is a positive externality, external costs are associated with it: social benefits = external costs + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit cost curve. 
D) Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve. 
A) Curve X, because if there is a positive externality, negative external benefits are associated with it: social costs external benefits - private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
B) Curve X, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie below the marginal private benefit curve. 
C) Curve Y, because if there is a positive externality, external costs are associated with it: social benefits = external costs + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit cost curve. 
D) Curve Y, because if there is a positive externality, external benefits are associated with it: social benefits = external benefits + private benefits, therefore the marginal social benefit curve must lie above the marginal private benefit curve.

Question 20

A good is a nonexcludable if

Accepted Answer

A) its consumption by one person does not reduce its consumption by others. 
B) it is impossible to prevent people from obtaining the benefits of the good once it has been produced. 
C) no negative externalities are associated with its production and consumption. 
D) it is free in the first place; that is, it is so abundant that people can get all they want at zero price. 
A) its consumption by one person does not reduce its consumption by others. 
B) it is impossible to prevent people from obtaining the benefits of the good once it has been produced. 
C) no negative externalities are associated with its production and consumption. 
D) it is free in the first place; that is, it is so abundant that people can get all they want at zero price.

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

Which of the following statements is true?

The free-rider problem arises if goods are

It seems quite possible that cigarette companies concealed information about the effects of smoking on health, causing cigarette prices to be __________ and cigarette sales to be __________ than would have been the case under symmetric information.

Exhibit 30-2 ​ Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q1 to Q2 is the area of

If private property rights were established in the air, there would probably be

The open lands in the early West were overgrazed largely because no one owned the land being used for grazing.

Which of the following statements is false ?

Externalities can be internalized through voluntary agreements as long as

Exhibit 30-3 Refer to Exhibit 30-3. What is the cost to Firm C of eliminating 2 tons of pollution?

If a positive externality exists, __________ in order for the socially optimal output to be reached.

If a negative externality exists, __________ in order for the socially optimal output to be reached.

From an economist's point of view, zero pollution is always preferable to some pollution.

Exhibit 30-5 ​ Refer to Exhibit 30-5. If a positive externality exists, then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

When a positive externality exists,

Ronald Coase stressed the necessity of using taxes to internalize negative externalities.

If society is experiencing a net social cost from the production of a good, this implies that

The free rider problem is the main source of market failure in the provision of nonexcludable public goods.

Exhibit 30-2 ​ Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?

A good is a nonexcludable if

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

It seems quite possible that cigarette companies concealed information about the effects of smoking on health, causing cigarette prices to be and cigarette sales to be than would have been the case under symmetric information.

Exhibit 30-2 Refer to Exhibit 30-2. If the exhibit represents a positive externality situation, the private benefit of expanding output from Q₁ to Q₂ is the area of

Exhibit 30-5 Refer to Exhibit 30-5. If a positive externality exists, then the external benefits associated with the positive externality equal the distance between points ____________ and the socially optimal output is

Exhibit 30-2 Refer to Exhibit 30-2. This graph represents a positive externality situation. Given this, which of the two curves, X or Y, represents marginal social benefits and why?