Question 1

The story in your book about Austria and the nuclear power plants is a clear case of which of the following?

Accepted Answer

A) When externalities exist it is easy to negotiate an agreement between the offender and the offended party. 
B) Political differences can sometimes override rationality, raising negotiation costs and making solutions difficult or impossible. 
C) The story supports the claim of the Coase Theorem that the liability for actions should be placed on the side that has the lowest cost of correcting the problem. 
D) When coal powered plants become offensive countries will switch to nuclear power in order to maintain political stability in a region. 
A) When externalities exist it is easy to negotiate an agreement between the offender and the offended party. 
B) Political differences can sometimes override rationality, raising negotiation costs and making solutions difficult or impossible. 
C) The story supports the claim of the Coase Theorem that the liability for actions should be placed on the side that has the lowest cost of correcting the problem. 
D) When coal powered plants become offensive countries will switch to nuclear power in order to maintain political stability in a region. B

Question 2

Some time ago an executive of a Broadcasting company argued before a congressional committee that they should make a law rating TV shows for violence content. He said that children are damaged and violence must be curbed. He indicated that his own network shows too much violence and that he would welcome a law himself so that Turner Broadcasting would show less violence. Explain why someone who shows violence on his TV channels is arguing for government regulation of himself.

Accepted Answer

The executive knows that the public likes violence and so his ratings will fall if he alone reduces it. If everyone reduces the violence, no one broadcaster will be hurt relative to the others. In other words, he is arguing the case based on positional externalities that are apparent in this case.

Question 3

An example of a negative externality is

Accepted Answer

A) pollution. 
B) an apple orchard increasing the number of trees next to a bee farm. 
C) the Clean Air Act. 
D) a consumer paying too much for an item. 
A) pollution. 
B) an apple orchard increasing the number of trees next to a bee farm. 
C) the Clean Air Act. 
D) a consumer paying too much for an item. A

Question 4

Negative externality occurs when

Accepted Answer

A) the production of a good harms third parties. 
B) the production of a good helps third parties. 
C) a buyer is sold inferior and damaged merchandise. 
D) the consumption of a good helps third parties. 
A) the production of a good harms third parties. 
B) the production of a good helps third parties. 
C) a buyer is sold inferior and damaged merchandise. 
D) the consumption of a good helps third parties.

Question 5

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table:

$\begin{array}{|l|r|r|}
\text { \# of cell phone calls}&\text { Marginal
Costs to Peter}  &\text { Marginal
Benefits to
John}\
\hline 0 & \$ 0 & \$ 0 \
\hline 1 & \$ 2 & \$ 10 \
\hline 2 & \$ 6 & \$ 8 \
\hline 3 & \$ 10 & \$ 6 \
\hline
\end{array}$ If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if Peter had the rights to stop any cell phone calls from taking place at the coffee shop?

Accepted Answer

A) 2 
B) 0 
C) 1 
D) 3 
A) 2 
B) 0 
C) 1 
D) 3

Question 6

Suppose fishermen go fishing at a fishery that has no property rights (meaning any fishermen could fish as she liked). The marginal cost of a fishing boat is constant at $100, and the price for each pound of fish sells at $1. Further, assume the relation between the number of vessels and the total catch is given by the following table: Each boat that goes out get an equal share of all the fish caught and there are 8 boats possible. $$\begin{array} { l l } 
\begin{array} { l } 
\text { Number } \
\text { of } \
\text { Vessels }
\end{array} & \begin{array} { l } 
\text { Total } \
\text { Catch } \
\text { (lb) }
\end{array} \
\hline 1 & 400 \
2 & 800 \
3 & 1100 \
4 & 1300 \
5 & 1401 \
6 & 1400 \
7 & 1300 \
8 & 1300 \
\hline
\end{array}$$ If the fishery was own collectively by all the fishermen, how many boats would be sent out fishing?

Accepted Answer

A) 0 
B) 6 
C) 7 
D) 8 
A) 0 
B) 6 
C) 7 
D) 8

Question 7

According to the text, if diamonds represent a form of conspicuous consumption, then

Accepted Answer

A) they should be taxed. 
B) they should be outlawed. 
C) they should be subsidized. 
D) they should be given for free. 
A) they should be taxed. 
B) they should be outlawed. 
C) they should be subsidized. 
D) they should be given for free.

Question 8

An example of a positive externality is

Accepted Answer

A) pollution. 
B) an apple orchard increasing the number of trees next to a bee farm. 
C) the Clean Air Act. 
D) smoking in a crowded place. 
A) pollution. 
B) an apple orchard increasing the number of trees next to a bee farm. 
C) the Clean Air Act. 
D) smoking in a crowded place.

Question 9

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall.   If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played?

Accepted Answer

A) 0 
B) 3 
C) 4 
D) 6 
A) 0 
B) 3 
C) 4 
D) 6

Question 10

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall.   If she has the property rights with negotiation impossible, then what will the outcome be?

Accepted Answer

A) You will shut your stereo off. 
B) You will play to 3 and insulate so that the noise does not reach her. 
C) You will play to 6 and she will insulate her walls. 
D) You will play to 4 and she will absorb the noise even though she dislikes it. 
A) You will shut your stereo off. 
B) You will play to 3 and insulate so that the noise does not reach her. 
C) You will play to 6 and she will insulate her walls. 
D) You will play to 4 and she will absorb the noise even though she dislikes it.

Question 11

My city has rules about things that might be better worked out by neighbors. We are not allowed to keep junk cars in our driveways. Yet if my neighbor has one, there is a price that I would accept that would allow the car to stay. Is this law a good one or should it be repealed?

Accepted Answer

The law should be repealed if I am the o

Question 12

According to Pigou, the best way to deal with a negative externality is to

Accepted Answer

A) allow both parties to negotiate. 
B) assign liability to the party with the highest cost of prevention. 
C) assign liability to the party with the lowest cost of prevention. 
D) tax it. 
A) allow both parties to negotiate. 
B) assign liability to the party with the highest cost of prevention. 
C) assign liability to the party with the lowest cost of prevention. 
D) tax it.

Question 13

Each citizen in a small town suffers 5 units of irritation for each bushel of leaves burned in the town. The charge for hauling a bushel of leaves to the land fill is a fee equal to 20 units of irritation. There are 25 people in the town, each of whom minimizes personal irritation and has 10 bushels of leaves. Propose two solutions for the town that will lead to efficiency.

Accepted Answer

If a law prohibiting burning w

Question 14

If transactions costs are very high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?

Accepted Answer

A) Allow the parties to negotiate 
B) Tax pollution 
C) Require all polluters to limit their pollution to a certain level with regulation 
D) Give subsidies to reduce pollution 
A) Allow the parties to negotiate 
B) Tax pollution 
C) Require all polluters to limit their pollution to a certain level with regulation 
D) Give subsidies to reduce pollution

Question 15

Suppose fishermen go fishing at a fishery that has no property rights (meaning any fishermen could fish as she liked). The marginal cost of a fishing boat is constant at $100, and the price for each pound of fish sells at $1. Further, assume the relation between the number of vessels and the total catch is given by the following table: Each boat that goes out get an equal share of all the fish caught and there are 8 boats possible. $$\begin{array} { l l } 
\begin{array} { l } 
\text { Number } \
\text { of } \
\text { Vessels }
\end{array} & \begin{array} { l } 
\text { Total } \
\text { Catch } \
\text { (lb) }
\end{array} \
\hline 1 & 400 \
2 & 800 \
3 & 1100 \
4 & 1300 \
5 & 1401 \
6 & 1400 \
7 & 1300 \
8 & 1300 \
\hline
\end{array}$$ If there were no controls over fishing, how many vessels would be sent out fishing?

Accepted Answer

A) 0 
B) 6 
C) 7 
D) 8 
A) 0 
B) 6 
C) 7 
D) 8

Question 16

The laws relating to trespass, the use of airspace and unobstructed view tell us what about property rights definition in the United States?

Accepted Answer

A) The laws are not absolute in protecting a property owner from intrusion. 
B) The laws rely on cost-benefit analysis to arrive at efficient outcomes. 
C) The laws vary depending on information costs and enforcement costs. 
D) Property laws involve all of these considerations. 
A) The laws are not absolute in protecting a property owner from intrusion. 
B) The laws rely on cost-benefit analysis to arrive at efficient outcomes. 
C) The laws vary depending on information costs and enforcement costs. 
D) Property laws involve all of these considerations.

Question 17

If a company dumps pollution in the water and fishermen are hurt and if transactions costs are prohibitively high and efficiency is the most important criteria,

Accepted Answer

A) the company should be made liable for the damage. 
B) liability should be placed on the group that has the least cost of solving the problem. 
C) the company should be allowed to pollute because a river is not private property. 
D) the company should be taxed enough so the government can keep the river clean. 
A) the company should be made liable for the damage. 
B) liability should be placed on the group that has the least cost of solving the problem. 
C) the company should be allowed to pollute because a river is not private property. 
D) the company should be taxed enough so the government can keep the river clean.

Question 18

Each citizen in a small town suffers 5 units of irritation for each bushel of leaves burned in the town. The charge for hauling a bushel of leaves to the land fill is a fee equal to 20 units of irritation. There are 25 people in the town, each of whom minimizes personal irritation and has 10 bushels of leaves. If there are no restrictions of any kind on burning leaves and negotiation costs among citizens are prohibitive, what will happen to the leaves in the town?

Accepted Answer

All the leaves will be burned,

Question 19

If the costs of negotiation are small but not negligible,

Accepted Answer

A) the best available outcome results if the liability is placed on the party with the lowest cost of prevention. 
B) an efficient outcome results no matter how the law assigns responsibility. 
C) efficiency cannot be reached without government intervention. 
D) the best way to deal with the externality is to tax it. 
A) the best available outcome results if the liability is placed on the party with the lowest cost of prevention. 
B) an efficient outcome results no matter how the law assigns responsibility. 
C) efficiency cannot be reached without government intervention. 
D) the best way to deal with the externality is to tax it.

Question 20

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall.   If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? The answer to the questions are to the nearest whole dial number.

Accepted Answer

A) 3 
B) 4 
C) 6 
D) 10 
A) 3 
B) 4 
C) 6 
D) 10

The story in your book about Austria and the nuclear power plants is a clear case of which of the following?

An example of a negative externality is

Negative externality occurs when

According to the text, if diamonds represent a form of conspicuous consumption, then

An example of a positive externality is

My city has rules about things that might be better worked out by neighbors. We are not allowed to keep junk cars in our driveways. Yet if my neighbor has one, there is a price that I would accept that would allow the car to stay. Is this law a good one or should it be repealed?

According to Pigou, the best way to deal with a negative externality is to

If transactions costs are very high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?

The laws relating to trespass, the use of airspace and unobstructed view tell us what about property rights definition in the United States?

If a company dumps pollution in the water and fishermen are hurt and if transactions costs are prohibitively high and efficiency is the most important criteria,

If the costs of negotiation are small but not negligible,

Thinking Like an Economist

Supply and Demand

Rational Consumer Choice

Individual and Market Demand

Applications of Rational Choice and Demand Theories

The Economics of Information and Choice Under Uncertainty

Departures From Standard Rational Choice Models With and Without Regret

Production

Costs

Perfect Competition

Monopoly

A Game-Theoretic Approach to Strategic Behavior

Oligopoly and Monopolistic Competition

Labor

Capital

General Equilibrium and Market Efficiency

Government

Filters

Exam 16: Externalities, Property Rights, and the Coase Theorem

The story in your book about Austria and the nuclear power plants is a clear case of which of the following?

An example of a negative externality is

Negative externality occurs when

According to the text, if diamonds represent a form of conspicuous consumption, then

An example of a positive externality is

My city has rules about things that might be better worked out by neighbors. We are not allowed to keep junk cars in our driveways. Yet if my neighbor has one, there is a price that I would accept that would allow the car to stay. Is this law a good one or should it be repealed?

According to Pigou, the best way to deal with a negative externality is to

If transactions costs are very high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution?

The laws relating to trespass, the use of airspace and unobstructed view tell us what about property rights definition in the United States?

If a company dumps pollution in the water and fishermen are hurt and if transactions costs are prohibitively high and efficiency is the most important criteria,

If the costs of negotiation are small but not negligible,

Thinking Like an Economist

Supply and Demand

Rational Consumer Choice

Individual and Market Demand

Applications of Rational Choice and Demand Theories

The Economics of Information and Choice Under Uncertainty

Departures From Standard Rational Choice Models With and Without Regret

Production

Costs

Perfect Competition

Monopoly

A Game-Theoretic Approach to Strategic Behavior

Oligopoly and Monopolistic Competition

Labor

Capital

General Equilibrium and Market Efficiency

Government

Filters