Question 1

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

Accepted Answer

A) banned. 
B) subsidized. 
C) taxed. 
D) provided by the government. 
A) banned. 
B) subsidized. 
C) taxed. 
D) provided by the government.

Question 2

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

Accepted Answer

A) a positive; a negative 
B) a negative; a positive 
C) a positive, no 
D) no; a negative 
A) a positive; a negative 
B) a negative; a positive 
C) a positive, no 
D) no; a negative

Question 3

If the consumption of good generates an external benefit, then the market equilibrium quantity:

Accepted Answer

A) will be socially optimal. 
B) will be less than the socially optimal quantity. 
C) will be greater than the socially optimal quantity. 
D) could be either less than or greater than the socially optimal quantity. 
A) will be socially optimal. 
B) will be less than the socially optimal quantity. 
C) will be greater than the socially optimal quantity. 
D) could be either less than or greater than the socially optimal quantity.

Question 4

Refer to the figure below. At the market equilibrium quantity, the social marginal cost of the last ton of paper produced is ______ the marginal benefit of the last ton of paper produced.

Accepted Answer

A) less than or equal to 
B) equal to 
C) less than 
D) greater than 
A) less than or equal to 
B) equal to 
C) less than 
D) greater than

Question 5

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } 
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ When Erie Textiles operates without a filter, the total gain (in thousands of dollars) to all three parties is ______.

Accepted Answer

A) $985 
B) $325 
C) $510 
D) $475 
A) $985 
B) $325 
C) $510 
D) $475

Question 6

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______.

Accepted Answer

A) small; perfectly elastic 
B) large; perfectly inelastic 
C) small; relatively inelastic 
D) large; relatively inelastic 
A) small; perfectly elastic 
B) large; perfectly inelastic 
C) small; relatively inelastic 
D) large; relatively inelastic

Question 7

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine.   At the private market equilibrium, the price of each dose is:

Accepted Answer

A) $50. 
B) $60. 
C) $70. 
D) $80. 
A) $50. 
B) $60. 
C) $70. 
D) $80.

Question 8

Suppose Erie Textiles can dispose of its waste "for free" by dumping it into a nearby river. While the firm benefits from dumping waste into the river, the waste reduces fish and bird reproduction. This causes damage to local fishermen and bird watchers. At a cost, Erie Textiles can filter out the toxins, in which case local fishermen and bird watchers will not suffer any damage. The relevant gains and losses (in thousands of dollars) for the three parties are listed below. $$\begin{array} { | l | c | c | } 
\hline & \text { With Filter } & \text { Without Filter } \
\hline \text { Gains to Erie } & \$ 200 & \$ 400 \
\hline \text { Fisherman } & \$ 180 & \$ 50 \
\hline \text { Bird Watchers } & \$ 130 & \$ 25 \
\hline
\end{array}$$ If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter?

Accepted Answer

A) No, because it makes $200 less in profit with the filter. 
B) Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. 
C) No, because use of a filter would result in smaller total economic surplus. 
D) Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter. 
A) No, because it makes $200 less in profit with the filter. 
B) Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. 
C) No, because use of a filter would result in smaller total economic surplus. 
D) Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

Question 9

The essential cause of the tragedy of the commons is the fact that:

Accepted Answer

A) marginal costs are increasing. 
B) one person's use of a commonly held resource imposes an external cost on others. 
C) people do not always specialize according to their comparative advantage. 
D) governments may choose not to tax activities that generate negative externalities. 
A) marginal costs are increasing. 
B) one person's use of a commonly held resource imposes an external cost on others. 
C) people do not always specialize according to their comparative advantage. 
D) governments may choose not to tax activities that generate negative externalities.

Question 10

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope.   A state initiative requiring towns to spend at least $20 per day on litter removal would be ______ because ______.

Accepted Answer

A) efficient; reducing litter is socially optimal 
B) inefficient; the marginal cost of litter removal would exceed the marginal benefit 
C) inefficient; $20 is insufficient to remove all of the litter 
D) efficient; it solves the inefficiency created by the negative externality 
A) efficient; reducing litter is socially optimal 
B) inefficient; the marginal cost of litter removal would exceed the marginal benefit 
C) inefficient; $20 is insufficient to remove all of the litter 
D) efficient; it solves the inefficiency created by the negative externality

Question 11

Total economic surplus will be ______ in nations with well-defined property rights than in nations with poorly-defined property rights.

Accepted Answer

A) less predictable 
B) no different 
C) higher 
D) lower 
A) less predictable 
B) no different 
C) higher 
D) lower

Question 12

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar; nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. Declaring the card room a non-smoking area with no opportunity to negotiate would:

Accepted Answer

A) decrease total economic surplus. 
B) increase total economic surplus. 
C) leave total economic surplus unchanged, but redistribute benefits. 
D) efficiently solve the externality problem. 
A) decrease total economic surplus. 
B) increase total economic surplus. 
C) leave total economic surplus unchanged, but redistribute benefits. 
D) efficiently solve the externality problem.

Question 13

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. Curly and Moe have both taken an economics course and so are willing to apply the Coase theorem and negotiate. Who will compensate the other?

Accepted Answer

A) Neither Moe nor Curly has the initial property right, and so neither will compensate the other. 
B) Moe must compensate Curly because Moe is the one who is snoring. 
C) Curly must compensate Moe because Curly is the one who is bothered by the snoring. 
D) Either Moe will compensate Curly or Curly will compensate Moe because the alternative, renting separate apartments, leaves each worse off. 
A) Neither Moe nor Curly has the initial property right, and so neither will compensate the other. 
B) Moe must compensate Curly because Moe is the one who is snoring. 
C) Curly must compensate Moe because Curly is the one who is bothered by the snoring. 
D) Either Moe will compensate Curly or Curly will compensate Moe because the alternative, renting separate apartments, leaves each worse off.

Question 14

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for:

Accepted Answer

A) Curly to endure Moe's snoring. 
B) both to live alone. 
C) Moe to eliminate his snoring. 
D) Moe to pay Curly for his discomfort. 
A) Curly to endure Moe's snoring. 
B) both to live alone. 
C) Moe to eliminate his snoring. 
D) Moe to pay Curly for his discomfort.

Question 15

The following payoff matrix shows the outcomes for the Unites States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die.   The Nash equilibrium outcome of this game is for:

Accepted Answer

A) both countries to have conventional weapons. 
B) both countries to have atomic weapons. 
C) Russia to have atomic weapons and the US to have conventional weapons. 
D) the US to have atomic weapons and Russia to have conventional weapons. 
A) both countries to have conventional weapons. 
B) both countries to have atomic weapons. 
C) Russia to have atomic weapons and the US to have conventional weapons. 
D) the US to have atomic weapons and Russia to have conventional weapons.

Question 16

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Number of goats } \
\text { on the commons }
\end{array} & \begin{array} { c } 
\text { Price per 2-year } \
\text { old goat (\$) }
\end{array} & \begin{array} { c } 
\text { Income per goat } \
\text { (\$/year) }
\end{array} \
\hline 1 & 80 & 30 \
\hline 2 & 75 & 25 \
\hline 3 & 70 & 20 \
\hline 4 & 65 & 15 \
\hline 5 & 55 & 5 \
\hline
\end{array}$$ What will be the total village income if each villager decides how to invest based on his or her individual self-interest?

Accepted Answer

A) $5 
B) $125 
C) $75 
D) $25 
A) $5 
B) $125 
C) $75 
D) $25

Question 17

Which of the following would be most vulnerable to the tragedy of the commons?

Accepted Answer

A) Restrooms in a restaurant 
B) Timber on public land 
C) Cattle on a ranch 
D) Apples in Phoebe's apple orchard 
A) Restrooms in a restaurant 
B) Timber on public land 
C) Cattle on a ranch 
D) Apples in Phoebe's apple orchard

Question 18

The following payoff matrix shows the outcomes for the Unites States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die.   For the US, the dominant strategy is to have _______, and for Russia, the dominant strategy is to have ______.

Accepted Answer

A) atomic weapons; conventional weapons 
B) conventional weapons; atomic weapons 
C) conventional weapons; conventional weapons 
D) atomic weapons; atomic weapons 
A) atomic weapons; conventional weapons 
B) conventional weapons; atomic weapons 
C) conventional weapons; conventional weapons 
D) atomic weapons; atomic weapons

Question 19

According to the textbook, social norms:

Accepted Answer

A) are usually ignored. 
B) are a type of positional externality. 
C) can help curtail positional arms races. 
D) are never effective at limiting positional arms races. 
A) are usually ignored. 
B) are a type of positional externality. 
C) can help curtail positional arms races. 
D) are never effective at limiting positional arms races.

Question 20

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine.   The government could increase total economic surplus by:

Accepted Answer

A) taxing production of the vaccine. 
B) encouraging people to pay each other to get the vaccine. 
C) subsidizing production of the vaccine. 
D) providing 250 doses of the vaccine for free. 
A) taxing production of the vaccine. 
B) encouraging people to pay each other to get the vaccine. 
C) subsidizing production of the vaccine. 
D) providing 250 doses of the vaccine for free.

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates externality, and burning tires generates externality.

If the consumption of good generates an external benefit, then the market equilibrium quantity:

Refer to the figure below. At the market equilibrium quantity, the social marginal cost of the last ton of paper produced is ______ the marginal benefit of the last ton of paper produced.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively reduction in driving if demand is .

The essential cause of the tragedy of the commons is the fact that:

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. A state initiative requiring towns to spend at least $20 per day on litter removal would be because .

Total economic surplus will be ______ in nations with well-defined property rights than in nations with poorly-defined property rights.

Which of the following would be most vulnerable to the tragedy of the commons?

According to the textbook, social norms:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

The Economics of Information

Labor Markets, Poverty, and Income Distribution

The Environment, Health, and Safety

Public Goods and Tax Policy

Filters

Exam 10: Externalities and Property Rights

In order to achieve a socially optimal level of output, goods that entail negative externalities should be:

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality.

If the consumption of good generates an external benefit, then the market equilibrium quantity:

Refer to the figure below. At the market equilibrium quantity, the social marginal cost of the last ton of paper produced is ______ the marginal benefit of the last ton of paper produced.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively ______ reduction in driving if demand is ______.

The essential cause of the tragedy of the commons is the fact that:

Total economic surplus will be ______ in nations with well-defined property rights than in nations with poorly-defined property rights.

The following payoff matrix shows the outcomes for the Unites States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die. The Nash equilibrium outcome of this game is for:

Which of the following would be most vulnerable to the tragedy of the commons?

According to the textbook, social norms:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

The Economics of Information

Labor Markets, Poverty, and Income Distribution

The Environment, Health, and Safety

Public Goods and Tax Policy

Filters

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates externality, and burning tires generates externality.

A policy maker has argued for higher taxes on gasoline to reduce the negative externalities associated with driving. This policy will lead to a relatively reduction in driving if demand is .