Question 1

For all economies, the extra external benefit accruing to bystanders from one extra unit of production is:

Accepted Answer

A) the marginal external benefit. 
B) the marginal external cost. 
C) the optimal corrective tax. 
D) a technology spillover. 
A) the marginal external benefit. 
B) the marginal external cost. 
C) the optimal corrective tax. 
D) a technology spillover.

Question 2

The free-rider problem is most common when a good is:

Accepted Answer

A) private. 
B) nonexcludable. 
C) rival. 
D) a club good. 
A) private. 
B) nonexcludable. 
C) rival. 
D) a club good.

Question 3

(Figure: MSC and Supply Curves) Use the graph to answer the question.
The graph shows the marginal social cost curve and supply curve for Lin's business. When Lin produces eight units, what is the relevant marginal cost facing the community?

Accepted Answer

A) $4 
B) $8 
C) $12 
D) $20 
A) $4 
B) $8 
C) $12 
D) $20

Question 4

The extra external cost imposed on bystanders from one extra unit is _____ cost.

Accepted Answer

A) a marginal public 
B) a marginal private 
C) a marginal external 
D) an extra public 
A) a marginal public 
B) a marginal private 
C) a marginal external 
D) an extra public

Question 5

What conditions must be met for private bargaining to be effective in resolving an externality?

Accepted Answer

A) Bargaining costs must be low, and property rights must be clear. 
B) Property rights must be clear, and production must begin at a socially optimal level. 
C) There must be trade in public goods. 
D) Taxes must be low, and regulations must be minimal. 
A) Bargaining costs must be low, and property rights must be clear. 
B) Property rights must be clear, and production must begin at a socially optimal level. 
C) There must be trade in public goods. 
D) Taxes must be low, and regulations must be minimal.

Question 6

The extra external benefit accruing to bystanders from one extra unit is the marginal _____ benefit.

Accepted Answer

A) public 
B) private 
C) social 
D) external 
A) public 
B) private 
C) social 
D) external

Question 7

When a market transaction has a beneficial effect on bystanders who were not involved in the transaction, this effect is called:

Accepted Answer

A) an inverse externality. 
B) a positive consequence. 
C) nonmarket gains. 
D) a positive externality. 
A) an inverse externality. 
B) a positive consequence. 
C) nonmarket gains. 
D) a positive externality.

Question 8

Which of the following is NOT a problem that occurs when rules and regulations are used to control externalities?

Accepted Answer

A) Rules and regulations tend to eliminate rather than reduce externalities when reduction might be the better option. 
B) Rules and regulations may focus on an easy-to-monitor way to achieve a goal rather than the best way to achieve it. 
C) Rules and regulations tend to focus on the most extreme cases of an externality rather than the most common. 
D) Rules and regulations may stifle innovation and discovery of how to achieve the rule's goal. 
A) Rules and regulations tend to eliminate rather than reduce externalities when reduction might be the better option. 
B) Rules and regulations may focus on an easy-to-monitor way to achieve a goal rather than the best way to achieve it. 
C) Rules and regulations tend to focus on the most extreme cases of an externality rather than the most common. 
D) Rules and regulations may stifle innovation and discovery of how to achieve the rule's goal.

Question 9

External benefits are generated by garden supplies that are used to beautify gardens and yards in neighborhoods. In equilibrium, the market will:

Accepted Answer

A) produce too many garden supplies. 
B) price garden supplies at less than the marginal social cost. 
C) price garden supplies at less than the marginal social benefit. 
D) price garden supplies above the marginal social cost. 
A) produce too many garden supplies. 
B) price garden supplies at less than the marginal social cost. 
C) price garden supplies at less than the marginal social benefit. 
D) price garden supplies above the marginal social cost.

Question 10

Common resources have:

Accepted Answer

A) shared gains but private costs. 
B) private gains but shared costs. 
C) characteristics of being nonrival and nonexclusive. 
D) characteristics of being rival and exclusive. 
A) shared gains but private costs. 
B) private gains but shared costs. 
C) characteristics of being nonrival and nonexclusive. 
D) characteristics of being rival and exclusive.

Question 11

What step is omitted from the three-step recipe to analyze externalities in Table 3? (Note: Steps are not necessarily in order.)
$$\begin{array} { | l | } 
\hline \text { Table 3: Steps in the Three-Step Recipe to Analyze Externalities } \
\hline \text { Predict the equilibrium outcome. } \
\hline \text { Find the socially optimal outcome. } \
\hline
\end{array}$$

Accepted Answer

A) Predict the degree of market power. 
B) Determine the level of exploitation. 
C) Determine the role of the public sector. 
D) Assess what externalities are involved. 
A) Predict the degree of market power. 
B) Determine the level of exploitation. 
C) Determine the role of the public sector. 
D) Assess what externalities are involved.

Question 12

Which of the following illustrates a positive externality?

Accepted Answer

A) Martin's company experiences an increase in profits due to his cost-cutting initiatives. 
B) Artem loses sleep when an airport is built near his home, and planes fly overhead. 
C) The value of Maria's house rises when the city builds a park nearby, enhancing her view. 
D) Ella can buy a shirt at half price because someone else returned it. 
A) Martin's company experiences an increase in profits due to his cost-cutting initiatives. 
B) Artem loses sleep when an airport is built near his home, and planes fly overhead. 
C) The value of Maria's house rises when the city builds a park nearby, enhancing her view. 
D) Ella can buy a shirt at half price because someone else returned it.

Question 13

What type of good is rival and nonexcludable?

Accepted Answer

A) private goods 
B) club goods 
C) common resources 
D) public goods 
A) private goods 
B) club goods 
C) common resources 
D) public goods

Question 14

All of the solutions to externality problems involve:

Accepted Answer

A) setting regulations that impose the socially optimal price and quantity in the market. 
B) turning private costs and benefits into external costs and benefits. 
C) getting buyers and sellers to consider marginal external costs and benefits. 
D) converting social costs into private costs. 
A) setting regulations that impose the socially optimal price and quantity in the market. 
B) turning private costs and benefits into external costs and benefits. 
C) getting buyers and sellers to consider marginal external costs and benefits. 
D) converting social costs into private costs.

Question 15

The idea that society should produce another unit of a product if the marginal social benefit exceeds the marginal social cost is known as the:

Accepted Answer

A) Optimizing Social Rule. 
B) Public Welfare Guide. 
C) Marginal Gain Rule. 
D) Rational Rule for Society. 
A) Optimizing Social Rule. 
B) Public Welfare Guide. 
C) Marginal Gain Rule. 
D) Rational Rule for Society.

Question 16

(Figure: Market 3) Use the graph to answer the question.
The graph shpws the marginal social cost, demand, and supply curves in the salad dressing market. In this market, the socially optimal output is _____, and the market-determined output is _____.

Accepted Answer

A) 12; three 
B) four; eight 
C) eight; two 
D) eight; 12 
A) 12; three 
B) four; eight 
C) eight; two 
D) eight; 12

Question 17

Marginal social cost equals marginal _____ cost plus marginal _____ cost.

Accepted Answer

A) consumer; production 
B) government; private 
C) private; external 
D) public; internal 
A) consumer; production 
B) government; private 
C) private; external 
D) public; internal

Question 18

When a quota is used to control an externality, the government must determine both _____ and _____.

Accepted Answer

A) the socially optimal quantity; how to distribute that quantity across suppliers 
B) the socially optimal quantity; the socially optimal price 
C) how large a tax to use; which external impact to address 
D) how to bargain with companies; whether to use a subsidy 
A) the socially optimal quantity; how to distribute that quantity across suppliers 
B) the socially optimal quantity; the socially optimal price 
C) how large a tax to use; which external impact to address 
D) how to bargain with companies; whether to use a subsidy

Question 19

Why would the government allow companies to buy and sell permits that allow companies to emit specified amounts of pollutants?

Accepted Answer

A) It reduces the externality even more than setting limits without the possibility of trading emissions permits. 
B) It eliminates bias in the allocation of emissions rights. 
C) It ensures that emissions reductions are primarily undertaken by firms that can reduce emissions at a lower cost than others can. 
D) It eliminates the costs of any externalities. 
A) It reduces the externality even more than setting limits without the possibility of trading emissions permits. 
B) It eliminates bias in the allocation of emissions rights. 
C) It ensures that emissions reductions are primarily undertaken by firms that can reduce emissions at a lower cost than others can. 
D) It eliminates the costs of any externalities.

Question 20

(Figure: Market 5) Use the graph to answer the question.
The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market. Market forces would yield a quantity of _____, whereas the socially optimal quantity is _____.

Accepted Answer

A) four; six 
B) eight; four 
C) six; four 
D) four; eight 
A) four; six 
B) eight; four 
C) six; four 
D) four; eight

Exam 10: Externalities and Public Goods

For all economies, the extra external benefit accruing to bystanders from one extra unit of production is:

The free-rider problem is most common when a good is:

(Figure: MSC and Supply Curves) Use the graph to answer the question. The graph shows the marginal social cost curve and supply curve for Lin's business. When Lin produces eight units, what is the relevant marginal cost facing the community?

The extra external cost imposed on bystanders from one extra unit is _____ cost.

What conditions must be met for private bargaining to be effective in resolving an externality?

The extra external benefit accruing to bystanders from one extra unit is the marginal _____ benefit.

When a market transaction has a beneficial effect on bystanders who were not involved in the transaction, this effect is called:

Which of the following is NOT a problem that occurs when rules and regulations are used to control externalities?

External benefits are generated by garden supplies that are used to beautify gardens and yards in neighborhoods. In equilibrium, the market will:

Common resources have:

What step is omitted from the three-step recipe to analyze externalities in Table 3? (Note: Steps are not necessarily in order.) Table 3: Steps in the Three-Step Recipe to Analyze Externalities Predict the equilibrium outcome. Find the socially optimal outcome.

Which of the following illustrates a positive externality?

What type of good is rival and nonexcludable?

All of the solutions to externality problems involve:

The idea that society should produce another unit of a product if the marginal social benefit exceeds the marginal social cost is known as the:

(Figure: Market 3) Use the graph to answer the question. The graph shpws the marginal social cost, demand, and supply curves in the salad dressing market. In this market, the socially optimal output is _____, and the market-determined output is _____.

Marginal social cost equals marginal _____ cost plus marginal _____ cost.

When a quota is used to control an externality, the government must determine both _____ and _____.

Why would the government allow companies to buy and sell permits that allow companies to emit specified amounts of pollutants?

(Figure: Market 5) Use the graph to answer the question. The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market. Market forces would yield a quantity of _____, whereas the socially optimal quantity is _____.

The Core Principles of Economics

Demand: Thinking Like a Buyer

Supply: Thinking Like a Seller

Equilibrium: Where Supply Meets Demand

Elasticity: Measuring Responsiveness

When Governments Intervene in Markets

Welfare and Efficiency

Gains From Trade

International Trade

Labor Demand and Supply

Wages, Workers, and Management

Inequality, Social Insurance, and Redistribution

Market Structure and Market Power

Entry, Exit, and Long-Run Profitability

Business Strategy

Sophisticated Pricing Strategies

Game Theory and Strategic Choices

Decisions Involving Uncertainty

Decisions With Private Information

Sizing up the Economy Using Gdp

Economic Growth

Unemployment

Inflation and Money

Consumption and Saving

Investment

The Financial Sector

International Finance and the Exchange Rate

Business Cycles

IS-MP Analysis: Interest Rates and Output

Phillips Curve

The Fed Model: Linking Interest Rates, Output, and Inflation

Aggregate Demand and Aggregate Supply

Monetary Policy

Government Spending, Taxes, and Fiscal Policy

Appendix: Aggregate Expenditure and the Multiplier

Filters

(Figure: Market 3) Use the graph to answer the question. The graph shpws the marginal social cost, demand, and supply curves in the salad dressing market. In this market, the socially optimal output is _, and the market-determined output is _.

Marginal social cost equals marginal _ cost plus marginal _ cost.

When a quota is used to control an externality, the government must determine both _ and _.

(Figure: Market 5) Use the graph to answer the question. The graph shows the marginal social benefit, demand, and supply curves in the toothbrush market. Market forces would yield a quantity of _, whereas the socially optimal quantity is _.