Deck 17: Property Rights, externalities, rivalry, and Exclusion

Question 1

Which of the following statements about externality is INCORRECT?

A) Pollution of a chemical plant will create negative externalities to the residents living in the neighborhood.
B) Trees planted in the backyard of a house could create positive externalities to the pedestrians passing under.
C) Extra output sold by a firm that lowers the market price creates negative externalities to its rivals.
D) A single action may confer positive externalities on some people, but negative externalities on others.

Answer 1

C

Question 2

If a production process creates positive externalities,a competitive market produces too few positive externalities because the producer

A) does not pay all the costs of the externalities.
B) does not receive compensation for the externalities.
C) Both A and B.
D) None of the above.

Answer 2

B

Question 3

If a production process generates pollution,then a competitive market will produce more of the good than is socially optimal because

A) firms take all costs into consideration.
B) firms incur all costs of production but ignore some of them.
C) firms ignore the costs of production that they do not incur.
D) firms set price equal to social marginal cost.

Answer 3

C

Question 4

If a production process generates pollution,then a competitive market will

A) produce more of the good than is socially optimal.
B) produce less of the good than is socially optimal.
C) produce the socially optimal quantity of that good.
D) produce zero output.

Question 5

The above figure shows the market for steel ingots.If the market is competitive,then

A) the socially optimal quantity of steel is zero.
B) the socially optimal quantity of steel of 50 units is produced.
C) the socially optimal quantity of steel of 100 units is produced.
D) more than the socially optimal quantity of 50 units of steel is produced.

Question 6

In general,an externality is created when

A) people are affected (other than by price) by a transaction which they were not part of.
B) firms produce a product of low quality and consumers don't like it.
C) firms have to pay for pollution the environment.
D) the government subsidizes education.

Question 7

Which of the following statements about private and social costs is TRUE?

A) Social costs include externalities.
B) Private cost do not include externalities.
C) Social costs are never smaller than private costs.
D) All of the above.

Question 8

Which of the following statements about private and social costs is TRUE in the presence of negative externalities created by pollution?

A) Competitive market produces excessive pollution.
B) The optimal amount of pollution is zero.
C) Social costs exclude externalities.
D) Social producer surplus exceeds private producer surplus.

Question 9

Negative externalities are created when

A) an increase in the price of butterfat drives up the price of ice cream.
B) a driver leaves his car in a parking space after the meter expires and receives a ticket.
C) a driver drives recklessly on a busy highway.
D) a driver pulls over to help a stranded motorist fix a flat tire.

Question 10

If a production process creates pollution,a competitive market produces excessive pollution because

A) the firms do not include the social cost of the pollution in their profit-maximizing decisions.
B) the firms place too high a price on society's cost of inflation.
C) people are not injured by the pollution.
D) zero pollution is optimal.

Question 11

The price of pie increases.Some people who purchased pie before the price increase no longer purchase pie.This is

A) a positive externality.
B) a negative externality.
C) a positive externality for some consumers and a negative externality for others.
D) not an externality.

Question 12

If a production process creates pollution,a competitive market produces excessive pollution because

A) private marginal cost of pollution exceeds its social marginal cost.
B) social marginal cost of pollution exceeds its private marginal cost.
C) the marginal benefit of pollution to the firm is zero.
D) zero pollution is optimal.

Question 13

If children go to school and become productive members of society,

A) a negative externality is created by the schools.
B) a positive externality is created by the schools.
C) no externality is created by the schools.
D) an externality is created that may be positive or negative.

Question 14

You are having a party and one of your guests lights up a cigar without asking.Explain why this creates an externality.

Question 15

In the presence of pollution,social welfare is maximized by

A) reducing output and pollution until marginal benefit of less pollution is equal to the marginal cost of less output.
B) reducing output and pollution until the benefit curve (of less pollution) and cost curve (of less output) intersect.
C) reducing output and pollution until the benefits of pollution reduction just cover the costs of output reduction.
D) None of the above.

Question 16

Positive externalities are created when

A) other consumers reduce their demand for coffee and price thereby declines.
B) farmers spray pesticide in their fields and it washes into the local river after the first rainstorm.
C) your neighbor plants beautiful trees and flowers in her yard.
D) you purchase the "Mona Lisa" and lock it in a vault.

Question 17

Changing the price of a good will usually result in a negative externality.

Question 18

In the presence of no externalities,

A) social marginal cost exceeds private marginal cost.
B) social marginal cost is less than private marginal cost.
C) social marginal cost equals private marginal cost.
D) social marginal cost and private marginal cost cannot be compared.

Question 19

Students who talk loudly with each other in class

A) create an externality because other students cannot follow the lecture as well.
B) disturb nobody.
C) benefit the other students in class because they engage in conversation.
D) only create an externality if they talk about something unrelated to class.

Question 20

The above figure shows the market for steel ingots.An externality can be seen because

A) the social marginal cost exceeds the private marginal cost.
B) the private marginal cost exceeds the social marginal cost.
C) the optimal quantity of steel is zero.
D) not enough steel gets produced by the competitive market.

Question 21

To maximize welfare in a competitive market that has a negative externality in production,government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.

Question 22

In a competitive market,a negative externality creates a deadweight loss because

A) the cost of the externality is double counted.
B) a harm is generated.
C) price equals social marginal cost.
D) price equals private marginal cost.

Question 23

In the presence of an negative externality,a specific tax can achieve the social optimum because

A) output is reduced to zero as a result.
B) it internalizes the external cost.
C) it directly charges the producer for polluting.
D) the price of the good rises by the full amount of the tax.

Question 24

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MCᵖ = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MCᵉ = Q.What specific tax would result in a competitive market producing the socially optimal quantity of paper?

Question 25

In the presence of a negative externality generated by producing a good,a competitive market will produce more of that good than is socially optimal.

Question 26

The above figure shows the market for steel ingots.If the market is competitive,and the government institutes a $100 specific tax on steel,then

A) less than the socially optimal quantity of steel is produced.
B) the socially optimal quantity of steel of 50 units is produced.
C) the socially optimal quantity of steel of 100 units is produced.
D) more than the socially optimal quantity of steel is produced.

Question 27

The above figure shows the market for steel ingots.The optimal quantity of pollution

A) is 0 units.
B) is 50 units.
C) is 100 units.
D) cannot be determined from the information provided.

Question 28

The above figure shows the market for steel ingots.What is the total surplus under social optimum?

A) $2500
B) $5000
C) $6500
D) Not enough information.

Question 29

The above figure shows the market for steel ingots.If the market is competitive,then to achieve the socially optimal level of pollution,the government can

A) outlaw the production of steel.
B) institute an ad valorem tax of 33.3%.
C) institute an ad valorem tax of 50%.
D) institute an ad valorem tax of 66.7%.

Question 30

If a market is subject to a positive externality,

A) the demand curve reflecting social benefit will be to the right of the demand curve representing private benefit.
B) there is only one demand curve.
C) the demand curve reflecting social benefit will be to the left of the demand curve representing private benefit.
D) private benefit will exceed social benefit.

Question 31

The above figure shows the market for steel ingots.At the social optimum,the private producer surplus is

A) $1250.
B) $1875.
C) $2500.
D) $3100.

Question 32

The above figure shows the market for steel ingots.If the market is competitive,then to achieve the socially optimal level of pollution,the government can

A) outlaw the production of steel.
B) institute a specific tax of $25.
C) institute a specific tax of $50.
D) institute a specific tax equal to area b.

Question 33

The above figure shows the market for steel ingots.What is the change in consumer surplus if the market switches from competitive equilibrium to social optimum?

A) $625
B) $1250
C) $1875
D) $2500

Question 34

Explain why the optimal amount of pollution is often not zero.

Question 35

Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MCP = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MCᵉ = Q.Is social welfare greater under monopoly or under competition?

Question 36

The above figure shows the market for steel ingots.What is the change in externality cost if the market switches from competitive equilibrium to social optimum?

A) a + b
B) b + c
C) c
D) a + b + c

Question 37

Which of the following belongs to the government regulation to control pollution?

A) emissions standard
B) emissions fee
C) effluent charge
D) All of the above

Question 38

In terms of cost-benefit analysis,explain why a competitive market with an externality produces too much pollution.

Question 39

The above figure shows the market for steel ingots.If the market is competitive,then the deadweight loss to society is

A) a.
B) b.
C) c.
D) zero.

Question 40

The above figure shows the market for steel ingots.The socially optimal quantity of steel is

A) 0 units.
B) 50 units.
C) 100 units.
D) produced if the market were competitive.

Question 41

The result that,under certain circumstances,no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called

A) a Nash equilibrium.
B) Coase Theorem.
C) Bargaining Theorem.
D) English Bargaining.

Question 42

Suppose that the market for steel is shown in the above figure.Is social welfare greater under monopoly or under competition?

Question 43

A specific tax in a monopoly market equal to the marginal harm of pollution

A) will increase welfare.
B) will decrease welfare.
C) will leave welfare unchanged.
D) All of the above are possible.

Question 44

Because a monopoly ignores external costs,it is possible that it will

A) produce the socially optimal quantity of a good.
B) produce more than the socially optimal quantity of a good.
C) produce less than the socially optimal quantity of a good.
D) All of the above.

Question 45

The existence of externalities is due mainly to the fact that

A) monopolies tend to produce too little of a good anyway.
B) the optimal level of pollution is zero.
C) pollution is not a serious problem.
D) property rights are poorly defined.

Question 46

In the presence of a negative externality in production,a monopoly will produce

A) more than the social optimum.
B) less than the social optimum.
C) the social optimum.
D) All of the above are possible.

Question 47

Suppose that the market for steel is shown in the above figure.What specific tax would result in a competitive market producing the socially optimal quantity of steel?

Question 48

Suppose the government wishes to regulate mercury emissions of factories in a specific industry by either setting an emissions standard or imposing an emissions fee (per ton of mercury).The government is uncertain as to the marginal abatement costs,which may be high (MC₁)or low (MC₂).
MC₁ = 15M + 500
MC₂ = 15M - 500
where M is the units of mercury abated.The government believes there is a 50% chance of each of the marginal abatement costs.The marginal benefit of abatement is known to be:
MB = 1500 - 10M
a.What is the optimal level of emissions for each of the cost curves above?
b.What is the expected marginal abatement cost (equation)?
c.What is the optimal emissions standard according to the expected abatement costs?
d.What is the optimal abatement fee according to the expected abatement costs?
e.Which regulation will result in a lower DWL in the presence of the uncertainty? Explicitly compute the expected DWL arising from each proposal.

Question 49

A monopoly might produce less than the socially optimal amount of pollution because

A) it likes to be a good citizen.
B) it sets price above marginal cost.
C) it earns economic profit.
D) it internalizes the external costs.

Question 50

A tax on a previously untaxed monopoly-produced good will necessarily lower total welfare if

A) the demand curve is relatively inelastic.
B) the demand curve is relatively elastic.
C) less than the socially optimum is produced before the tax.
D) more than the socially optimum is produced before the tax.

Question 51

If the social marginal cost of a good is very high relative to the private marginal cost,then a monopoly will most likely

A) produce more than the social optimum.
B) produce less than the social optimum.
C) produce the social optimum.
D) produce zero pollution.

Question 52

When negative externalities from production exist,the deadweight loss from a competitive market may be larger than with a monopoly.

Question 53

Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market.

Question 54

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's theorem,the optimal level of trash in the park can be achieved if

A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Al has the right to leave trash and Bert can pay him to limit his dumping.
D) Bert moves.

Question 55

Production of a good produces pollution that is very damaging with each additional unit.A monopoly facing a very elastic demand curve will most likely produce

A) less than the social optimum of the good.
B) more than the social optimum of the good.
C) the social optimum of the good.
D) no externality.

Question 56

The exclusive privilege to use an asset is called a(n)

A) property right.
B) exclusive use agreement.
C) property privilege.
D) right to work privilege.

Question 57

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's theorem,one necessary condition to alleviate the externality is that

A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Bert has the right to a clean park and Al cannot leave trash.
D) Either Al or Bert owns the park.

Question 58

Monopolizing the sale of liquor

A) can lead to an increase total welfare.
B) will decrease total welfare.
C) results in a deadweight loss.
D) is anti-competitive and thus lowers total welfare.

Question 59

Because a monopoly will produce less of a good than a competitive market will,welfare is always greater under monopoly than under competition in the presence of a negative externality.

Question 60

If both a monopoly and a competitive market with the same marginal cost would produce a quantity that is greater than the social optimum in a market because of externalities,then

A) welfare is greater under monopoly.
B) welfare is greater under competition.
C) welfare is the same for both market structures.
D) the social optimum must be zero.

Question 61

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.As long as someone owns the lake and the two parties can negotiate,then

A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces two tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces two tons of pollution.

Question 62

Firms that are most likely to buy marketable pollution rights are those that produce the most pollution per unit of output produced.

Question 63

The above figure shows the marginal benefit from pollution for two firms.If both firms receive a marketable permit to pollute 25 units of pollution each,how much will each firm pollute and how much will a permit for one unit of pollution be worth?

Question 64

According to the Coase approach,to achieve socially optimal outcome,two sides must bargain.The bargaining might not be successful because

A) transaction costs are ignorable.
B) firms engage in strategic bargaining.
C) both sides have perfect information.
D) None of the above.

Question 65

The above figure shows the marginal benefit from pollution for two firms.If each firm receives a marketable permit to produce 25 units of pollution,which one of the following is most likely to happen?

A) Firm B will sell some pollution rights to firm A.
B) Firm A will sell some pollution rights to firm B.
C) Firm A will produce all 50 units of pollution.
D) Both firms will produce 25 units of pollution.

Question 66

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.If the beach owner also owns the lake,and the chemical firm must pay $10 per ton to pollute,then

A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces two tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces two tons of pollution.

Question 67

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If the firm owns the river and there is just one neighbor affected by the pollution,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 68

A firm operates and produces pollution that only harms an individual,Bob.The firm and Bob both know the costs and benefits of reducing pollution.Neither the firm nor Bob acts strategically while bargaining,and there are no transaction costs associated with bargaining.Explain how the efficient level of pollution occurs no matter whether the firm or Bob owns the property right to pollution.

Question 69

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.Determine the Nash equilibrium without property rights.

Question 70

Suppose twenty neighbors share a park.One of the neighbors,Al,leaves trash in the park.This bothers the other neighbors.According to Coase's theorem,assigning the property rights to the park to Al

A) will achieve the socially optimal quantity of trash.
B) will result in zero trash being dumped in the park.
C) might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly.
D) is unfair.

Question 71

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.If nobody owns the lake,then

A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces two tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces two tons of pollution.

Question 72

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.If the chemical firm owns the lake,and the beach owner must pay $10 to keep the chemical firm at just one ton of pollution,then

A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces two tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces two tons of pollution.

Question 73

If the government wanted to efficiently limit the emission of Carbon Monoxide by all firms to exactly 4 Million tons it could

A) issue rights to pollute worth 4 Million tons and let the firms trade those rights in a market.
B) appeal to firms' environmental conscience to pollute less.
C) subsidize production.
D) rely on the Coase Theorem.

Question 74

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.If nobody owns the lake,then

A) joint profits are zero.
B) joint profits are maximized.
C) joint profits are not maximized.
D) the beach will not operate because of too much pollution.

Question 75

The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.Joint profits are maximized when

A) the beach shuts down and the chemical firm produces 1 ton of pollution.
B) the beach shuts down and the chemical firm produces two tons of pollution.
C) the beach operates and the chemical firm produces 1 ton of pollution.
D) the beach operates and the chemical firm produces two tons of pollution.

Question 76

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If the firm owns the river and there are thousands of surrounding neighbors,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 77

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.According to Coase's Theorem,which of the following scenarios is most likely to lead to the socially optimal level of pollution?

A) The firm owns the river and there are a thousand surrounding neighbors.
B) The firm owns the river and there is just one nearby neighbor.
C) The river is jointly owned by one thousand surrounding neighbors.
D) The firm owns the river, and therefore produces the social optimum no matter what.

Question 78

Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's theorem,the optimal level of trash in the park can be achieved if

A) someone is assigned property rights to the park.
B) government limits the use of the park.
C) nobody catches Al leaving the trash.
D) Bert moves.

Question 79

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If property rights are not defined,how much pollution will occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units

Question 80

The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the firm's neighbor.The marginal cost of production is zero for the firm.If there is just one neighbor who owns the river,how much pollution is likely to occur?

A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units.