Deck 17: Externalities and Public Goods

Question 1

Suppose that at the current level of pollution the marginal abatement cost is $30,000 and the marginal cost of pollution is $80,000. This economy is producing:

A) an efficient level of pollution if the total cost of pollution is $50,000.
B) too little pollution and should increase its pollution level.
C) too much pollution and should reduce its pollution level.
D) an efficient level of pollution if the marginal cost of pollution is $110,000.

Answer 1

C

Question 2

Use the following to answer question:
Figure 17.4
(Figure 17.4) The output level under perfect competition is _____, while the socially optimal output level is _____.

A) 4; 3
B) 4; 5
C) 2; 4
D) 4; 6

Answer 2

B

Question 3

If consuming a good with a positive externality, a person will likely consider only the _____ marginal benefits of consumption, which causes _____ consumption than is socially optimal.

A) external; more
B) private, not the external; more
C) private, not the external; less
D) external; less

Answer 3

C

Question 4

Which of the following statements is (are) TRUE?

A) I and III
B) I, II, and III
C) III
D) II

Question 5

Use the following to answer question:
Figure 17.1
(Figure 17.1) The external marginal cost is:

A) $4.
B) $3.
C) $6.
D) $1.

Question 6

The market for flu shots is given by the following inverse demand and supply equations: P = 40 - 0.40Q
P = 0.40Q
Where P is the price per flu shot and Q measures the daily quantity of flu shots. The external marginal benefit of a flu shot is $8. The socially optimal number of daily flu shots is:

A)60.
B)50.
C)140.
D) 35.

Question 7

The market for toilet paper is characterized by the following inverse demand and supply equations: P = 100 - Q
P = MC = 2Q - 197.3
Where P is the price per roll of toilet paper and Q measures millions of rolls of toilet paper. The external marginal cost is 30 cents for each roll of toilet paper produced. The socially optimal price of toilet paper is _____ cents higher than the price under perfect competition.

A) 40
B) 30
C) 20
D) 10

Question 8

The market for wheat is characterized by the following inverse demand and supply equations: P = 540 - 1.5Q
P = MC = 3Q
Where P is the price per metric ton of wheat and Q measures the daily quantity of wheat in metric tons. Because of fertilizer runoff, the external marginal cost is constant at $90 per metric ton of wheat. What is the socially optimal quantity of wheat?

A) 80 metric tons
B) 360 metric tons
C) 100 metric tons
D) 240 metric tons

Question 9

Use the following to answer question:
Figure 17.2
(Figure 17.2) Suppose the external marginal cost is constant at $5 per unit. Price (demand) equals social marginal cost at output level:

A)3)
B)7)
C)6)
D) 4.

Question 10

There are no externalities in the market for brim hats; therefore, the:

A) external marginal cost equals the marginal cost.
B) social marginal cost equals the private marginal cost.
C) social benefit equals the external marginal benefit.
D) equilibrium level of output will be too low.

Question 11

In the case of producing a good with a negative externality, a firm will likely consider only the _____ marginal costs of production, leading to production of _____.

A) external; more output than is socially optimal
B) private; more output than is socially optimal
C) private; less output than is socially optimal
D) external; less output than is socially optimal

Question 12

Use the following to answer question:
Table 17.1
(Table 17.1) According to the table, what is the socially optimal output level?

A) 0
B) 3
C) 4
D) 7

Question 13

Competitive markets _____ goods with negative externalities and _____ provide goods with positive externalities.

A) overprovide; underprovide
B) underprovide; overprovide
C) overprovide; overprovide
D) underprovide; underprovide

Question 14

What is the nature of the positive externality associated with research and development (R&D)?

A) Firms that engage in R&D may develop more profitable products.
B) Firms that engage in R&D may be able to lower their production costs.
C) R&D may lead to discoveries that make other firms more innovative.
D) Firms that engage in R&D tend to pay higher stock dividends.

Question 15

Use the following to answer question:
Figure 17.5
(Figure 17.5) Which of the following statements is (are) TRUE?

A) III
B) II, III, and IV
C) I, II, and III
D) IV

Question 16

Suppose the demand curve for steel is Q = 100 - P, where P is the price per unit of steel and Q measures millions of units of steel. The private marginal cost of producing steel is MC = 5Q + 40, while the external marginal cost of producing steel is $12. In a perfectly competitive steel industry, the deadweight loss is:

A) $12 million.
B) $2 million.
C) $750,000.
D) $200,000.

Question 17

Use the following to answer question:
Figure 17.3
(Figure 17.3) Which of the following statements is (are) TRUE?

A) I, II, and III
B) I
C) I and II
D) II and III

Question 18

Suppose that dry-cleaning 100 blouses carries a social marginal cost of $900 and an external marginal cost of $300. What is the private marginal cost of dry-cleaning 100 blouses?

A) $1,200
B) $600
C) $3,000
D) $30

Question 19

Which of the following statements is (are) TRUE?

A) I and II
B) I, II, and III
C) III
D) I and III

Question 20

Use the following to answer question:
Figure 17.6
(Figure 17.6) Under perfect competition, the deadweight loss is given by area:

A) A + B.
B) C + E.
C) A + B + C.
D) E.

Question 21

Suppose the market for dry cleaning has an inverse demand of P = 10 - 0.15Q and an inverse supply curve (MC) of P = 0.05Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

A) $3; $2
B) $4.75; $5.75
C) $5; $4
D) $3.25; $2.25

Question 22

Sweet Steel and Molten Metal produce sulfur dioxide emissions during production. The total abatement cost (TAC) and marginal abatement cost (MAC) for each company: Sweet Steel: TAC_S = 100,000 + 1e_S²; MAC_S = 2e_S
Molten Metal: TAC_M = 100,000 + 1.5e_M²; MAC_M = 3e_M
Where e_S and e_M represent tons of sulfur dioxide emissions eliminated by each company. Suppose the government wants to eliminate 1,000 tons of sulfur dioxide emissions by issuing tradable pollution permits to each firm. What is the total cost (TAC_S + TAC_M) of reducing emissions by 1,000 tons?

A) $800,000
B) $430,000
C) $280,000
D) $625,500

Question 23

Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr. Fudd from hunting, the socially optimal outcome is for:

A) Mr. Fudd to stop hunting.
B) Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting.
C) Mr. Leghorn to pay $500 or less to get Mr. Fudd to stop hunting.
D) Mr. Fudd to pay Mr. Leghorn less than $500 to continue hunting.

Question 24

Which of the following factors could mitigate the tragedy of the commons?

A) II
B) I and II
C) III
D) I, II, and III

Question 25

Use the following to answer question:
Figure 17.9
(Figure 17.9) Suppose that eating asparagus reduces the incidence of contagious disease. The external marginal benefit of asparagus is $3. To achieve the socially optimal quantity of asparagus, the government should:

A) subsidize the production of asparagus by $6 per pound, increasing output to 6,000 pounds.
B) tax the production of asparagus by $6 per pound, decreasing output to 6,000 pounds.
C) subsidize the production of asparagus by $3 per pound, increasing output to 4,000 pounds.
D) tax the production of asparagus by $3 per pound, decreasing output to 4,000 pounds.

Question 26

A tradable permit system:

A) requires that each firm reduce its pollution by the same amount.
B) is difficult to implement because regulators do not know the marginal abatement costs of every company.
C) achieves a given amount of pollution reduction at the least cost because firms with lowest marginal abatement costs do most of the reduction.
D) increases pollution because the government gives firms permits that grant them the right to pollute.

Question 27

Use the following to answer question:
Table 17.2
(Table 17.2) In an unregulated market, the quantity produced is _____, and a subsidy of _____ per unit will achieve the socially optimal quantity of _____.

A) 1; $150; 5
B) 3; $75; 6
C) 3; $150; 5
D) 2; $100; 3

Question 28

Sweet Steel and Molten Metal produce sulfur dioxide emissions during production. The total abatement cost (TAC) and marginal abatement cost (MAC) for each company: Sweet Steel: TAC_S = 100,000 + 1e_S²; MAC_S = 2e_S
Molten Metal: TAC_M = 100,000 + 1.5e_M²; MAC_M = 3e_M
Where e_S and e_M represent tons of sulfur dioxide emissions eliminated by each company. Suppose the government wants to eliminate 1,000 tons of sulfur dioxide emissions, so it mandates that each firm cut its emissions by 500 tons. What is the total cost (TAC_S + TAC_M) of reducing emissions by 1,000 tons?

A) $304,000
B) $670,550
C) $233,333
D) $825,000

Question 29

Which of the following statements is (are) TRUE?

A) II
B) I and III
C) I, II, and III
D) II and III

Question 30

Manny Metal produces 300 tons of sulfur dioxide emissions, and Silk Steel produces 550 tons. The marginal abatement cost (MAC) of reducing sulfur dioxide: Manny Metal: MAC_M = 10 + 3e_M
Silk Steel: MAC_S = 50 + e_S
Government regulators want to reduce total sulfur dioxide emissions to 650 tons, a 200-ton reduction. If the government gives each firm 325 tradable pollution permits, Manny Metal emits _____ tons and Silk Steel emits _____ tons.

A) 240; 410
B) 280; 370
C) 200; 450
D) 320; 330

Question 31

Use the following to answer question:
Figure 17.8
(Figure 17.8) If the socially optimal quantity of the good is 200 pounds, there is a _____ externality, so the government should enact a _____ per pound to increase market efficiency.

A) negative; $6 tax
B) negative; $1 tax
C) positive; $6 subsidy
D) positive; $1 subsidy

Question 32

Use the following to answer question:
Figure 17.10
(Figure 17.10) The socially optimal output level could be achieved by a government quota of:

A) approximately 212 units of electricity.
B) 175 units of electricity.
C) 100 units of electricity.
D) 250 units of electricity.

Question 33

Bumper-to-bumper traffic on free public roads, a(n) _____ good, is an example of the _____.

A) nonexcludable; free-rider problem
B) excludable; free-rider problem
C) excludable; tragedy of the commons
D) nonexcludable; tragedy of the commons

Question 34

The notion that market participants can negotiate an efficient market outcome, assuming negotiating is costless, is known as the:

A) Coase theorem.
B) blanket theorem.
C) acceptance principle.
D) Dranove principle.

Question 35

Use the following to answer question:
Figure 17.7
(Figure 17.7) Which of the following statements is TRUE?

A) The efficient quantity of pollution occurs at or below 6,000 units.
B) At 2,000 units of pollution, the marginal benefit is less than the marginal cost, so there should be less pollution.
C) At 2,000 units of pollution, the marginal benefit exceeds the marginal cost, so there should be more pollution.
D) At 2,000 units of pollution, the marginal benefit exceeds the marginal cost, so there should be less pollution.

Question 36

The marginal abatement costs (MAC) for Stark and York Paper are MAC_s = 0.2e_s and MAC_Y = 0.25e_Y, where e_s and e_Y represent the amount of emissions cut by each company. The lowest-cost approach to reducing 90 units of emission is for Stark to reduce its emissions by _____ units and York to reduce its emissions by _____ units.

A) 45; 45
B) 50; 40
C) 30; 60
D) 60; 30

Question 37

Suppose the market for dry cleaning has an inverse demand of P = 12 - 0.10Q and an inverse supply curve (MC) of P = 0.10Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is 80 cents. To correct the market inefficiency, the government could set a quota on the number of laundered pieces of clothing equal to:

A)102.
B)88.
C)56.
D) 22.

Question 38

Use the following to answer question:
Figure 17.11
(Figure 17.11) The government wants to set the socially optimal level of nitrogen runoff, and government regulators believe that the actual marginal benefit of pollution (MBP) is given by the estimated MBP curve. The deadweight loss associated with a quota is _____, while the deadweight loss from a Pigouvian tax is _____.

A) $2; $18
B) $12; $18
C) $6; $4
D) $8; $2

Question 39

The tragedy of the commons stems from a common resource that people can _____ acquire whose value to people _____ as more people use it.

A) freely; decreases
B) pay to; increases
C) freely; increases
D) pay to; decreases

Question 40

Government regulators want to limit pesticide runoff to its efficient level. Unfortunately, government regulators are uncertain how marginal abatement costs behave with changes in runoff, but fortunately, they do know that marginal abatement costs are less sensitive to changes in runoff than marginal costs of pollution. In this situation, the use of a _____ leads to a smaller deadweight loss than a _____.

A) quota; Pigouvian tax
B) quota; quantity restriction
C) Pigouvian tax; quantity restriction
D) Pigouvian subsidy; Pigouvian tax

Question 41

Use the following to answer question:
Table 17.3
(Table 17.3) What is the efficient quantity of the public good?

A) 8 units
B) 3 units
C) 4 units
D) 5 units

Question 42

Which of the following statements is (are) TRUE?

A) I and III
B) II and III
C) I
D) I, II, and III

Question 43

A good is rival if:

A) it is produced by more than one firm.
B) consuming an item means that no one else can consume that same exact item.
C) consumption of it causes negative externalities.
D) consumers can be restricted from buying it.

Question 44

In the age before free agency, the labor of Major League Baseball (MLB) players was the property of their team owners. The owners had complete control of whether to trade their players away or keep them on the roster. In the period of free agency, players have the right to sell their services to the highest-bidding team. The Coase theorem predicted that:

A) free agency would reduce the salaries of talented players.
B) free agency would allow a select group of teams to purchase all the talented players.
C) the distribution of players' talent in MLB would not be affected by free agency because talent would flow to where it was most valued.
D) the salaries of players would not be affected by free agency.

Question 45

The _____ problem occurs when consumers want to freely consume a public good that others have provided.

A) pull-your-own
B) rival-good
C) Coase
D) free-rider

Question 46

The production of toilet paper in a perfectly competitive market is characterized by the inverse supply curve (marginal cost curve) P = 4Q, where Q is measured in millions of 4-roll packs per month. The inverse demand for toilet paper is P = 10 - 6Q.

Question 47

Which of the following statements is (are) TRUE?

A) I and II
B) II, III, and IV
C) II
D) II and IV

Question 48

Many livestock farmers give antibiotics to their herds. The antibiotics help breed drug-resistant bacteria, making them less effective. This harms future users of antibiotics, who will be using less-effective drugs.

Question 49

Inverse demand for a product is given by P = 1,500 - 0.5Q_d while inverse supply is given by P = 300 - Q. The product is generating external marginal benefits equal to $1,000 at every price level. Graph this information. Based on the information, does this product generate a negative or positive externality? Identify any deadweight loss.

Question 50

There are three consumers of a public good; their marginal benefits are given by: Consumer 1: MB = 400 - Q
Consumer 2: MB = 200 - 2Q
Consumer 3: MB = 600 - Q
Where Q is the quantity of the public good. The marginal cost of the public good is MC = 600 + 296Q. What is the socially optimal quantity?

A) 6
B) 2
C) 3
D) 1

Question 51

The demand curve and supply curve for a good are given by Q^D = 100 - 5P and Q^S = 1.25P - 2.5. Suppose the production of this good creates a negative externality, where the external marginal cost is constant at $2.

Question 52

Assume the social marginal benefit of remote-control drone flights is given by SMB = 200 - 2Q and the marginal cost is given by MC = 3Q + 50. In a perfectly competitive environment, the equilibrium price per flight would be _____ and the equilibrium number of flights would be _____.

Question 53

Consider the vaccine for human papillomavirus (HPV), a sexually transmitted disease that causes cervical cancer and genital warts.

Question 54

The demand curve and supply curve for a good are given by Q^D = 100 - 5P and Q^S = 1.25P - 2.5. Suppose the production of this good generates a negative externality, where the external marginal cost is constant at $2. To achieve the socially optimal output level, the government wants to implement a quota. What size should the quota be?

Question 55

The island nation of Maldives has 70,000 households. Each household receives a marginal benefit from Coast Guard security of MB = 60 - 0.30Q, where Q measures the number of patrolling Coast Guard ships. What is the total marginal benefit of the tenth patrolling ship?

A) $3.99 million
B) $1.5 million
C) $2.81 million
D) $775,000

Question 56

A small neighborhood is considering hiring a security firm to patrol the neighborhood. Ten families in the neighborhood would each get a marginal benefit of MB = 10 - h, where h is daily hours of patrol. The marginal cost of patrol is constant at $20 per hour. What is the socially optimal number of patrol hours?

A) 12
B) 16
C) 8
D) 20

Question 57

Use the following to answer question:
Table 17.4
(Table 17.4) Answer the following questions.

Question 58

The inverse demand for energy-efficient refrigerators is P = 2,000 - 10Q, where Q measures refrigerators per month. The inverse supply of energy-efficient refrigerators is P = 10Q.

Question 59

Suppose that Billy McGee owns the Internet domain www.ironmaiden.com. Iron Maiden, the legendary British heavy metal band, was given the rights to the name by the World Intellectual Property Organization. Iron Maiden values the domain name at $250,000 and Billy McGee values the domain name at $330,000. The Coase theorem suggests that:

A) Billy McGee will pay Iron Maiden between $250,000 and $330,000 to keep the domain name.
B) Billy McGee will pay Iron Maiden more than $330,000 to keep the domain name.
C) Iron Maiden will take the domain name.
D) Iron Maiden will buy the domain name from Billy McGee for less than $330,000.

Question 60

Use the following to answer question:
Figure 17.12
(Figure 17.12) Answer the following questions.

Question 61

Use the following to answer question:
Table 17.6
(Table 17.6) Tick off the appropriate categories for each good.

Question 62

Mushroom farms emit unpleasant odors that affect third parties. The marginal cost of the odors is MC = 4Q, where Q is the quantity of fumes emitted. Mushroom farmers can reduce odors by using various techniques and technologies; the marginal abatement cost is MAC = 1,200 - 36Q.

Question 63

Hamid and Lee are neighbors. Hamid has a barking dog that he keeps in his backyard for property protection; he values the dog at $600. Lee despises the constant barking, because it costs him $800 in lost sleep.

Question 64

The following companies all manufacture widgets and dump tons of glop into the air. The government wants to halve total pollution but does not know how much it will cost each company. Determine the total cost of the cleanup if the government employs a tradable permit scheme in which it gives the same amount of permits to each manufacturer at no cost.

Question 65

The following companies all manufacture widgets and dump tons of glop into the air. The government wants to halve total pollution but does not know how much it will cost each company to clean it up. Determine the total cost of the cleanup if the government employs a uniform reduction scheme.

Question 66

Use the following to answer question:
Figure 17.15
(Figure 17.15) Suppose that the demand curves for two consumers of good X are presented in the graph. The marginal cost of producing good X is MC = $9.

Question 67

The following companies all manufacture widgets and dump tons of glop into the air. The government wants to halve total pollution but does not know how much it will cost each company. Determine the maximum permit price (whole dollar amount), the number of permits traded, and the revenue and costs of trading permits if the government employs a tradable permit scheme in which it gives the same amount of permits to each manufacturer at no cost.

Question 68

Use the following to answer question:
Table 17.5
(Table 17.5) Suppose that each firm is emitting 10 units of pollution, for a total of 20 units. The government would like to decrease total pollution to 10 units by giving each firm five tradable pollution permits.

Question 69

A supermarket chain, Whole Paycheck, is planning on opening a store near a residential neighborhood. The neighbors are opposed to the construction, since they believe increased traffic and other nuisances will decrease their home values. According to the Coase theorem, what is the optimal store size?

Question 70

Chia, Inc. has a marginal abatement cost curve of MAC_C = 115 - 5Q, where Q represents fertilizer runoff measured in parts per million (ppm) cleaned up; however, regulators incorrectly believe that it is actually MAC_E = 110 - 10Q. If the marginal cost of pollution is given by MCP = 15Q, illustrate the area of deadweight loss generated with a quantity restriction on pollution of 4.4 ppm based on regulators' incorrect estimation of abatement costs.

Question 71

Assume the social marginal benefit of remote-control drone flights is given by SMB = 200 - 2Q and the marginal cost is given by MC = 3Q + 50. The government wants to correct the negative externality associated with remote-control drone flights by taxing operators $20 per flight. What deadweight loss is associated with unrestricted remote-control drone flights if the proposed tax accurately reflects their marginal external costs?

Question 72

For the following situations, use the Coase theorem to explain how a socially efficient solution may arise.

Question 73

Consider three consumers of a public good with the following marginal benefit of consumption:
Consumer 1: MB₁ = 5 - 2Q
Consumer 2: MB₂ = 4 - Q
Consumer 3: MB₃ = 3 - Q

Question 74

Use the following to answer question:
Figure 17.14
(Figure 17.14) The graph shows the marginal benefit curves for two consumers of a public good.

Question 75

Rosa and Tomas are neighbors. Rosa loves to barbeque but Tomas is allergic to barbecue smoke. They have been neighbors for years and know each other well, often chatting across their picket fence. Tomas values clean air at $100. If Rosa has the right to barbecue, predict the outcome of the situation using the Coase theorem.

Question 76

The willingness to pay for a new neighborhood playground is shown in the table. The marginal cost of providing the playground is MC = 300 + 0.5Q, where Q is square feet. What is the efficient quantity of the good?

Question 77

Minnesota has two oil refineries that emit methane gas. The Bend refinery emits 300 units of methane, and the Park refinery emits 900 units. Government regulators would like to reduce total methane emissions from 1,200 to 900 units. Bend's total abatement and marginal abatement cost are TC_B = 400Q_B + 4Q_B² and MAC_B = 400 + 8Q_B, where Q is units of methane. Park's total abatement cost and marginal abatement cost are TC_P = 40Q_P + 2Q_P² and MAC_P = 10 + 4Q_P.

Question 78

Recreation centers offer a place for young people to play sports and do other activities at a marginal cost of MC = 0.25Q. The inverse demand curve for recreation centers is given by P = 10 - 0.25Q, where P is the price of entry and Q measures hundreds of entrants. Recreation centers generate positive externalities because they help get young people off the street and engaged in productive activities. The external marginal benefits are EMB = 1 + 0.06Q.

Question 79

The marginal cost of pollution is MC = 2Q, while the marginal abatement cost is MAC = 12 - Q. Government regulators incorrectly estimate the marginal abatement cost at MAC_E = 9 - Q. The level of pollution, measured in tons of glop, is Q.

Question 80

Use the following to answer question:
Figure 17.13
(Figure 17.13) According to the graph, MCP is the marginal cost of pollution, MAC is the marginal abatement cost, and the government's erroneous estimate of the marginal abatement cost is estimated MAC. Answer the following questions.