Deck 20: Externalities and Public Goods

Question 1

An external cost is:

A) the cost of a warehouse.
B) a cost of production in some other market.
C) the economic harm that a positive externality imposes on others.
D) the economic harm that a negative externality imposes on others.

Answer 1

the economic harm that a negative externality imposes on others.

Question 2

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.Which of the following gives the function for the marginal social cost?

A) MSC = 1,200 - 4Q
B) MSC = 800 + 4Q
C) MSC = 1,200 + 4Q
D) MSC = 800 - 4Q

Answer 2

MSC = 1,200 + 4Q

Question 3

The marginal social cost of production is:

A) the sum of the total cost to the producer and the total external cost.
B) the sum of the marginal cost to the producer and the total external cost.
C) the sum of the total cost to the producer and the marginal external cost.
D) the sum of the marginal cost to the producer and the marginal external cost.

Answer 3

the sum of the marginal cost to the producer and the marginal external cost.

Question 4

Limitations of bargaining include:

A) contracts may not need enforcing.
B) the assignment of property rights may be ambiguous.
C) if the parties have too much information, bargaining may be unnecessary.
D) All of the responses are correct.

Question 5

A positive externality is created if:

A) an action harms someone not involved in the market transaction.
B) an action benefits someone not involved in the market transaction.
C) neither helps nor hurts someone not involved in the market transaction.
D) an action harms or benefits someone not involved in the market transaction.

Question 6

A negative externality is created if:

A) an action harms someone not involved in the market transaction.
B) an action benefits someone not involved in the market transaction.
C) neither helps nor hurts someone not involved in the market transaction.
D) an action harms or benefits someone not involved in the market transaction.

Question 7

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.What is the efficient price?

A) $1,400
B) $1657.14
C) $685.71
D) $1,200

Question 8

The Coase Theorem states that:

A) if bargaining is difficult, then regardless of how property rights are assigned, voluntary agreements between parties will remedy the market failures associated with externalities and restore economic efficiency.
B) if bargaining is frictionless, then the initial assignment of property rights determines the market failures associated by externalities and voluntary agreements between private parties are useless.
C) if bargaining is frictionless, then regardless of how property rights are assigned, voluntary agreements between private parties will remedy the market failures associated with externalities and restore economic efficiency.
D) if bargaining is frictionless, market failures must be remedied by government intervention.

Question 9

An action creates an externality if it:

A) does not affect someone with whom the decision-maker has not engaged in a related market transaction.
B) affects someone with whom the decision-maker has not engaged in a related market transaction.
C) affects only those individuals engaged in the market transaction.
D) affects someone with whom the decision-maker has not engaged in a related market transaction and affects only those individuals engaged in the market transaction.

Question 10

The economic gain that a positive externality provides to others is called:

A) an internal benefit.
B) an external benefit.
C) an external cost.
D) an internal cost.

Question 11

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.Which of the following gives the market supply curve?

A) Q^s = 200,000 - 100P
B) Q^s = 0.5P - 500
C) Q^s = 150P - 150,000
D) Q^s = 150P - 30,000

Question 12

Limitations of bargaining include:

A) its impracticality.
B) property rights might be assigned in the wrong way.
C) if the parties have too much information, bargaining may be unnecessary.
D) All of the responses are correct.

Question 13

The economist who won the Nobel Prize in Economics for his path-breaking analysis of the ways in which property rights,transaction costs and institutions affect the allocation of economic resources is:

A) John Nash.
B) Arthur Cecil Pigou.
C) Ronald Coase.
D) Theodore Groves.

Question 14

When a firm ignores external costs:

A) it fails to maximize its profits.
B) it is willing to produce too little of the good at the given price.
C) the good is priced too cheaply in equilibrium.
D) it also ignores external benefits.

Question 15

Limitations of bargaining include:

A) contracts may not need enforcing.
B) property rights might be assigned in the wrong way.
C) if the parties have too much information, bargaining may be unnecessary.
D) None of these is correct.

Question 16

Activities that create water pollution are best associated with:

A) inferior goods.
B) positive externalities.
C) negative externalities.
D) normal goods.

Question 17

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.What is the efficient quantity?

A) 34,286
B) 131,429
C) 1,200
D) 90,000

Question 18

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.What is the competitive market quantity?

A) 108,000
B) 60,000
C) 500
D) 0

Question 19

Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q_mill + (Q_mill)²,where Q_mill indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q_mill.Finally,annual market demand (in thousands of tons)is given by the formula Q^d = 200,000 - 100P.What is the competitive price?

A) $1,400
B) $920
C) $7,000
D) $1995

Question 20

A beautiful garden that increases the value of the homes in the neighborhood is considered:

A) an inferior good.
B) a positive externality.
C) a negative externality.
D) a normal good.

Question 21

Your neighbor likes to blast 1970's rock music and the louder the better.The loud music imposes a cost on you because it disrupts your study of economics.Let D stand for the volume of his music in decibels,B for his benefits and C for your costs,where B and C are measured in dollars.For any given volume,D,your neighbor's benefit is B = 0.63D - 0.002D² and your cost is C = 0.06D + 0.001D².With an efficient Pigouvian tax,how much will your neighbor pay in noise taxes?

A) $22.50
B) $23.75
C) $28.75
D) $71.25

Question 22

Pigouvian subsidization:

A) involves the use of taxes or fees to remedy negative externalities.
B) involves the use of subsidies to remedy negative externalities.
C) is a legal principle requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses.
D) requires that victims of an externality pay a tax to the producers of the externality.

Question 23

The economist that originated the idea that government can correct externalities through taxes and subsidization is:

A) John Nash.
B) Arthur Cecil Pigou.
C) Ronald Coase.
D) Theodore Groves.

Question 24

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $120,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean,and $300,000 if it's polluted.Suppose there is no law preventing the firm from polluting the river.Which of the following describes an efficient outcome in this case?

A) The owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
B) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
C) The owner of the mill pays the farmer $110,000 for his permission to pollute the river.
D) The farmer pays the owner of the mill $90,000 to stop polluting.

Question 25

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.Which of the following expressions gives the combined profit of both firms with abatement?

A) $(1,300,000 - A)
B) $(1,400,000 - A)
C) $(700,000 + A)
D) $(1,700,000 - A)

Question 26

Your neighbor likes to blast 1970's rock music and the louder the better.The loud music imposes a cost on you because it disrupts your study of economics.Let D stand for the volume of his music in decibels,B for his benefits and C for your costs,where B and C are measured in dollars.For any given volume,D,your neighbor's benefit is B = 0.63D - 0.002D² and your cost is C = 0.06D + 0.001D².What is the efficient volume,D?

A) 90
B) 95
C) 115
D) 345

Question 27

Your neighbor likes to blast 1970's rock music and the louder the better.The loud music imposes a cost on you because it disrupts your study of economics.Let D stand for the volume of his music in decibels,B for his benefits and C for your costs,where B and C are measured in dollars.For any given volume,D,your neighbor's benefit is B = 0.63D - 0.002D² and your cost is C = 0.06D + 0.001D².With an efficient Pigouvian tax,what noise level will your neighbor choose?

A) 90 decibels
B) 95 decibels
C) 115 decibels
D) 345 decibels

Question 28

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $120,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean,and $300,000 if it's polluted.Suppose the law guarantees the farmer access to clean water from the river.Which of the following describes an efficient outcome in this case?

A) The owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
B) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
C) The owner of the mill pays the farmer $110,000 for his permission to pollute the river.
D) The farmer pays the owner of the mill $90,000 to stop polluting.

Question 29

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $75,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.Suppose the law guarantees the farmer access to clean water from the river.Which of the following describes an efficient outcome in this case?

A) The owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
B) The owner of the mill pays the farmer $87,500 for his permission to pollute the river.
C) The owner of the mill pays the farmer $112,500 for his permission to pollute the river.
D) The farmer pays the owner of the mill $87,500 to stop polluting.

Question 30

A common property resource is:

A) a resource that only one person can use.
B) a resource that anyone can use for a fixed fee.
C) a resource that more than one person is free to use without payment.
D) a resource that only one person can use free of charge.

Question 31

The use of common property resources:

A) reduces positive externalities in many cases.
B) reduces negative externalities in many cases.
C) leads to positive externalities in many cases.
D) leads to negative externalities in many cases.

Question 32

Your neighbor likes to blast 1970's rock music and the louder the better.The loud music imposes a cost on you because it disrupts your study of economics.Let D stand for the volume of his music in decibels,B for his benefits and C for your costs,where B and C are measured in dollars.For any given volume,D,your neighbor's benefit is B = 0.63D - 0.002D² and your cost is C = 0.06D + 0.001D².What is the marginal cost to you at the socially efficient noise level?

A) $0.75
B) $0.29
C) $0.24
D) $0.25

Question 33

Common property resources include:

A) movies.
B) fast food.
C) oceans.
D) professional baseball games.

Question 34

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $75,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.Suppose there is no law preventing the firm from polluting the river.Which of the following describes an efficient outcome in this case?

A) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
B) The owner of the mill pays the farmer $87,500 in compensation for its pollution.
C) The farmer pays the owner of the mill $112,500 to stop polluting.
D) The farmer pays the owner of the mill $87,500 to stop polluting.

Question 35

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.What is the combined profit of both firms without abatement?

A) $1,300,000
B) $900,000
C) $700,000
D) $1,400,000

Question 36

A liability rule:

A) involves the use of taxes or fees to remedy negative externalities.
B) involves the use of subsidies to remedy negative externalities.
C) is a legal principle requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses.
D) requires that victims of an externality pay a tax to the producers of the externality.

Question 37

Pigouvian taxation:

A) involves the use of taxes or fees to remedy negative externalities.
B) involves the use of subsidies to remedy negative externalities.
C) is a legal principle requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses.
D) requires that victims of an externality pay a tax to the producers of the externality.

Question 38

Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.If _______,then abatement would be efficient.

A) A < 300,000
B) A > 100,000
C) A < 100,000
D) A < 400,000

Question 39

Your neighbor likes to blast 1970's rock music and the louder the better.The loud music imposes a cost on you because it disrupts your study of economics.Let D stand for the volume of his music in decibels,B for his benefits and C for your costs,where B and C are measured in dollars.For any given volume,D,your neighbor's benefit is B = 0.63D - 0.002D² and your cost is C = 0.06D + 0.001D².What is the efficient Pigouvian tax?

A) $0.75 per decibel
B) $0.29 per decibel
C) $0.24 per decibel
D) $0.25 per decibel

Question 40

A tradable emissions permit:

A) entitles a firm to generate a specified amount of a given pollutant.
B) is transferable.
C) can be used to promote least-cost abatement.
D) All of the responses are correct.

Question 41

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200 - 2S.Patrols cost $20 per hour.What is the socially efficient level of security?

A) 90 person-hours of patrols per week
B) 100 person-hours of patrols per week
C) 92.5 person-hours of patrols per week
D) 97.5 person-hours of patrols per week

Question 42

A private good:

A) is a good for which consumption involves perfect rivalry.
B) is completely nonexcludable.
C) is often provided by the government.
D) imposes a negative externality when it is consumed by any one individual.

Question 43

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200 - 2S.Patrols cost $20 per hour.Which of the following gives the marginal social benefit function?

A) MSB = 50 - 0.5S
B) MSB = 800 - 8S
C) MSB = 800 - 2S
D) MSB = 196 - 2S

Question 44

The median voter theorem states that:

A) if voters have multi-peaked preferences, all of them prefer the median ideal policy.
B) if voters have single-peaked preferences, none of them prefer the median ideal policy.
C) if voters have single-peaked preferences, a majority of them prefer the median ideal policy to all other policies.
D) if voters have multi-peaked preferences, a majority of them prefer the median of those preferences.

Question 45

A public recreation area that has become unpleasantly crowded is exhibiting a negative externality that is frequently associated with:

A) bargaining.
B) Pigouvian policies.
C) public goods.
D) common property resources.

Question 46

A voter's preferences are single-peaked if:

A) her net benefit from an activity increases with the activity's level until her ideal is reached and declines thereafter.
B) her total benefit from an activity increases with the activity's level until her ideal is reached and declines thereafter.
C) her net benefit from an activity decreases with the activity's level until her ideal is reached and declines thereafter.
D) her total benefit from an activity decreases with the activity's level until her ideal is reached and declines thereafter.

Question 47

A public good:

A) is a good that is nonrival.
B) is a good that is excludable.
C) is any good provided by the government.
D) All of these are true about public goods.

Question 48

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200/(1 + S).Patrols cost $25 per hour.What is the socially efficient level of security?

A) 31 person-hours of patrols per week
B) 15 person-hours of patrols per week
C) 25 person-hours of patrols per week
D) 32 person-hours of patrols per week

Question 49

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200 - 2S.Patrols cost $20 per hour.If each store provided security independently,how much would each store provide?

A) 90 person-hours of patrols per week
B) 100 person-hours of patrols per week
C) 92.5 person-hours of patrols per week
D) 97.5 person-hours of patrols per week

Question 50

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200/(1 + S).Patrols cost $25 per hour.Which of the following gives the marginal social benefit function?

A) MSB = 50/(1 + S)
B) MSB = 4 + [200/(1 + S)]
C) MSB = 800/(1 + S)
D) MSB = [200/(1 + S)] - 4

Question 51

A good is nonexcludable if:

A) there is no way to prevent a person from consuming or using it.
B) more than one person can consume it at the same time without affecting its value to others.
C) consumption of it involves perfect rivalry.
D) consumption is completely excludable.

Question 52

A private good:

A) is a good for which consumption involves perfect rivalry.
B) is nonexcludable.
C) is often provided by the government.
D) is a good for which consumption involves perfect rivalry and is nonexcludable.

Question 53

A Groves mechanism is a procedure for setting the level of a public good that:

A) induces everyone to report their preferences correctly.
B) induces everyone to overstate the benefit they receive from a public good.
C) induces everyone to understate the benefit they receive from a public good.
D) only works if the public good in question is free of externalities.

Question 54

A good is nonrival if:

A) there is no way to prevent a person from consuming or using it.
B) more than one person can consume it at the same time without affecting its value to others.
C) consumption of it involves perfect rivalry.
D) consumption is completely excludable.

Question 55

The field of political economy:

A) examines the economic consequences of free markets.
B) examines the economic consequences of public sector decision making.
C) examines the economic consequences of private sector decision making.
D) examines the labor market.

Question 56

The median voter is:

A) the voter who has the median income policy among all voters.
B) the voter who has the median policy among all voters.
C) the voter who has the average policy among all voters.
D) the voter who has the mean policy among all voters.

Question 57

If voters have single-peaked preferences:

A) a majority of them prefer a policy other than the median policy.
B) majority rule always leads to the selection of the median ideal policy.
C) majority rule never leads to the selection of the median ideal policy.
D) their net benefits from an activity decrease with the activity's level up to some point and then it increases.

Question 58

The economist that devised a method for setting the level of a public good efficiently is:

A) John Nash.
B) Arthur Cecil Pigou.
C) Ronald Coase.
D) Theodore Groves.

Question 59

Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200/(1 + S).Patrols cost $25 per hour.If each store provided security independently,how much would each store purchase?

A) 15 person-hours of patrols per week
B) 7 person-hours of patrols per week
C) 8 person-hours of patrols per week
D) 16 person-hours of patrols per week

Question 60

A free rider:

A) contributes little or nothing to a public good while benefiting from others' contributions.
B) prevents a market failure.
C) contributes little or nothing to a public good, but also does not benefit from others' contributions.
D) creates both positive and negative externalities.

Question 61

Why might bargaining break down when parties negotiate to remedy a market failure and its associated externality?

Question 62

Explain ways in which the government can remedy an externality.