Question 1

When a negative externality creates a market failure, that failure can be corrected by

Accepted Answer

A)  setting price equal to private cost 
B)  setting price equal to social cost 
C)  setting price equal to the externality cost 
D)  creating a positive externality of comparable value 
E)  setting private cost equal to social cost 
A)  setting price equal to private cost 
B)  setting price equal to social cost 
C)  setting price equal to the externality cost 
D)  creating a positive externality of comparable value 
E)  setting private cost equal to social cost

Question 2

The socially optimal quantity of a public good is reached when the

Accepted Answer

A)  total positive externality is maximized 
B)  total negative externality equals total positive externality 
C)  total negative externality equals the tax revenue 
D)  total negative externality is minimized 
E)  total tax revenue is minimized 
A)  total positive externality is maximized 
B)  total negative externality equals total positive externality 
C)  total negative externality equals the tax revenue 
D)  total negative externality is minimized 
E)  total tax revenue is minimized

Question 3

When positive externalities exist, the government must _________ the production of the good generating the externalities in order to achieve ___________.

Accepted Answer

A)  allow the market to dictate; a socially optimal allocation of resources 
B)  tax; a socially optimal allocation of resources 
C)  subsidize; a socially optimal allocation of resources 
D)  subsidize; market equilibrium 
E)  tax; market equilibrium 
A)  allow the market to dictate; a socially optimal allocation of resources 
B)  tax; a socially optimal allocation of resources 
C)  subsidize; a socially optimal allocation of resources 
D)  subsidize; market equilibrium 
E)  tax; market equilibrium

Question 4

The automobile emission standards in the United States are established by

Accepted Answer

A)  automobile producers 
B)  efficient free markets 
C)  the Environmental Protection Agency (EP
A)  
D)  automobile owners because they are free to buy whatever gasoline they want 
E)  international standards designed by the United Nations 
A)  automobile producers 
B)  efficient free markets 
C)  the Environmental Protection Agency (EP
A)  
D)  automobile owners because they are free to buy whatever gasoline they want 
E)  international standards designed by the United Nations

Question 5

-Exhibit N-5 depicts a market in which the achievement of the socially optimal price and quantity requires the government to

Accepted Answer

A)  impose a tax of $3 per unit produced 
B)  impose a tax of $4 per unit produced 
C)  grant a subsidy of $3 per unit consumed 
D)  grant a subsidy of $4 per unit consumed 
E)  grant a subsidy of $8 per unit consumed 
A)  impose a tax of $3 per unit produced 
B)  impose a tax of $4 per unit produced 
C)  grant a subsidy of $3 per unit consumed 
D)  grant a subsidy of $4 per unit consumed 
E)  grant a subsidy of $8 per unit consumed

Question 6

In cases where negative externalities are present, the equilibrium price in the market is higher than it should be to achieve the optimal allocation of resources.

Accepted Answer

A) True 
 B)False

Question 7

A principal idea associated with public choice theory is that

Accepted Answer

A)  special interests dictate what government does 
B)  the public chooses, but the government does what it wants 
C)  government failure is less than market failure 
D)  market failure is less than government failure 
E)  people's choices dictate what government does 
A)  special interests dictate what government does 
B)  the public chooses, but the government does what it wants 
C)  government failure is less than market failure 
D)  market failure is less than government failure 
E)  people's choices dictate what government does

Question 8

Equating society's marginal benefits with marginal costs will ensure that the economically efficient level of either private or public goods is attained.

Accepted Answer

A) True 
 B)False

Question 9

During rush hours, long lines of traffic clog the only bridge to town. This bridge is anexample of

Accepted Answer

A)  market inefficiency 
B)  obligatory controls 
C)  a decreasing externality cost 
D)  a pure public good 
E)  a near public good 
A)  market inefficiency 
B)  obligatory controls 
C)  a decreasing externality cost 
D)  a pure public good 
E)  a near public good

Question 10

Which of the following would generate positive externalities?

Accepted Answer

A)  flu vaccinations 
B)  pesticides used to create greater yields per bushel 
C)  cigarette smoking in elevators 
D)  litter left at the beach 
E)  an unkempt front yard 
A)  flu vaccinations 
B)  pesticides used to create greater yields per bushel 
C)  cigarette smoking in elevators 
D)  litter left at the beach 
E)  an unkempt front yard

Question 11

When property rights are poorly defined,

Accepted Answer

A)  positive or negative externalities may result 
B)  the market cannot generate an equilibrium price 
C)  the market price becomes highly unstable 
D)  the market must be relied upon to generate efficient allocation of resources 
E)  no externalities can exist 
A)  positive or negative externalities may result 
B)  the market cannot generate an equilibrium price 
C)  the market price becomes highly unstable 
D)  the market must be relied upon to generate efficient allocation of resources 
E)  no externalities can exist

Question 12

-In Exhibit N-4, if the government uses a pollution tax to correct the externality problem, how much tax revenue will the government receive?

Accepted Answer

A)  $12.60 
B)  $10.50 
C)  $66.50 
D)  $63 
E)  $9 
A)  $12.60 
B)  $10.50 
C)  $66.50 
D)  $63 
E)  $9

Question 13

Asymmetric information describes a situation in which

Accepted Answer

A)  one side of the market - buyer or seller - has more information about the good than does the other side. 
B)  advertising dominates whatever information consumers have about the good 
C)  only the seller has information about the good 
D)  only the buyer has information about the good 
E)  price is unknown until market day 
A)  one side of the market - buyer or seller - has more information about the good than does the other side. 
B)  advertising dominates whatever information consumers have about the good 
C)  only the seller has information about the good 
D)  only the buyer has information about the good 
E)  price is unknown until market day

Question 14

Marginal social cost would be less than marginal private cost in the presence of negative externalities.

Accepted Answer

A) True 
 B)False

Question 15

One policy the government can use to remedy the effects of pollution caused by the production of a good is to

Accepted Answer

A)  lower the price of the good 
B)  create positive externalities to compensate for the negative ones 
C)  levy a tax on each unit of the good produced 
D)  create free riders 
E)  increase the production of the polluting good 
A)  lower the price of the good 
B)  create positive externalities to compensate for the negative ones 
C)  levy a tax on each unit of the good produced 
D)  create free riders 
E)  increase the production of the polluting good

Question 16

The Coase Theorem was significant in economics due to its recognition of the irrelevance of property rights in establishing the motivation for economic transactions in markets

Accepted Answer

A) True 
 B)False

Question 17

When negative externalities are present, the firm's internal costs always

Accepted Answer

A)  exceed the firm's external costs 
B)  are less than the firm's external costs 
C)  equal the firm's external costs 
D)  understate the actual cost of using society's resources producing the good 
E)  overstate the actual cost of using society's resources producing the good 
A)  exceed the firm's external costs 
B)  are less than the firm's external costs 
C)  equal the firm's external costs 
D)  understate the actual cost of using society's resources producing the good 
E)  overstate the actual cost of using society's resources producing the good

Question 18

When the Environmental Protection Agency (EPA) assigns one emission standard to aparticular group of plants, this is called

Accepted Answer

A)  monopoly 
B)  positive externalities 
C)  a pollution compensation tax 
D)  the bubble concept 
E)  a municipal ordinance 
A)  monopoly 
B)  positive externalities 
C)  a pollution compensation tax 
D)  the bubble concept 
E)  a municipal ordinance

Question 19

Production that generates positive externalities typically produces _______ than the socially optimum and this is because benefits to ________ are not taken into account by the market.

Accepted Answer

A)  more; free riders 
B)  less; free riders 
C)  less; government 
D)  more; government 
E)  more; antipolluters 
A)  more; free riders 
B)  less; free riders 
C)  less; government 
D)  more; government 
E)  more; antipolluters

Question 20

The theory of public choice assumes that individual behavior in the political arena is motivated primarily by

Accepted Answer

A)  the electorate 
B)  social welfare 
C)  public interest 
D)  altruism 
E)  self-interest 
A)  the electorate 
B)  social welfare 
C)  public interest 
D)  altruism 
E)  self-interest

Exam 14: Externalities, Market Failure, and Public Choice

When a negative externality creates a market failure, that failure can be corrected by

The socially optimal quantity of a public good is reached when the

When positive externalities exist, the government must _________ the production of the good generating the externalities in order to achieve ___________.

The automobile emission standards in the United States are established by

-Exhibit N-5 depicts a market in which the achievement of the socially optimal price and quantity requires the government to

In cases where negative externalities are present, the equilibrium price in the market is higher than it should be to achieve the optimal allocation of resources.

A principal idea associated with public choice theory is that

Equating society's marginal benefits with marginal costs will ensure that the economically efficient level of either private or public goods is attained.

During rush hours, long lines of traffic clog the only bridge to town. This bridge is anexample of

Which of the following would generate positive externalities?

When property rights are poorly defined,

-In Exhibit N-4, if the government uses a pollution tax to correct the externality problem, how much tax revenue will the government receive?

Asymmetric information describes a situation in which

Marginal social cost would be less than marginal private cost in the presence of negative externalities.

One policy the government can use to remedy the effects of pollution caused by the production of a good is to

The Coase Theorem was significant in economics due to its recognition of the irrelevance of property rights in establishing the motivation for economic transactions in markets

When negative externalities are present, the firm's internal costs always

When the Environmental Protection Agency (EPA) assigns one emission standard to aparticular group of plants, this is called

Production that generates positive externalities typically produces _______ than the socially optimum and this is because benefits to ________ are not taken into account by the market.

The theory of public choice assumes that individual behavior in the political arena is motivated primarily by

Introduction

Production Possibilities and Opportunity Costs

Demand and Supply

Elasticity

Happiness, Utility, and Consumer Choice

Price Ceilings and Price Floors

Entrepreneurship and Business Ownership

Costs of Production

Maximizing Profit

Identifying Markets and Market Structures

Price and Output in Monopoly, Monopolistic Competition, and Perfect Competition

Price and Output Determination Under Oligopoly

Antitrust and Regulation

Wage Rates in Competitive Labor Markets

Wages and Employment: Monopsony and Labor Unions

Interest, Rent, and Profit

Income Distribution and Poverty

International Trade

Exchange Rates, Balance of Payments, and International Debt

The Economic Problems of Less-Developed Economies

Filters

When positive externalities exist, the government must _ the production of the good generating the externalities in order to achieve ___.

Production that generates positive externalities typically produces _ than the socially optimum and this is because benefits to __ are not taken into account by the market.