Deck 11: Regulation, Public Goods, and Benefit-Cost Analysis

Question 1

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D].

Refer to Figure 11-1.What is the external cost of producing the good?

A)$5
B)$7
C)$8
D)$12
E)$2

Answer 1

E

Question 2

Which of the following statements is true regarding the efficiency of using pollution fees or quantity standards to regulate pollution?

A)Quantity standards are more efficient than pollution fees because they can be used even in the presence of incomplete information.
B)Pollution fees are more efficient than quantity standards because the cost of abatement of pollution is equal across firms.
C)Quantity standards are more efficient than pollution fees because they allow for more flexibility and adjustment.
D)Pollution fees are more efficient than quantity standards because they reduce the cost of abatement of pollution.
E)Pollution fees are more efficient than quantity standards because they reduce the total amount of pollution in the environment.

Answer 2

B

Question 3

Which of the following is true of a monopoly market as compared to a perfectly competitive one?

A)In a monopoly market,prices are lower than in a perfectly competitive market.
B)In a monopoly market,the total output produced is higher but the price is the same as in a perfectly competitive market.
C)The total consumer surplus in a monopoly market is lower than a perfectly competitive market.
D)The deadweight loss is smaller in a monopoly market than a perfectly competitive market.
E)The equilibrium output is greater in a monopoly market than a perfectly competitive market.

Answer 3

C

Question 4

What is meant by a pure public good?

A)A pure public good is a good that is provided by private firms for the benefit of the public.
B)A pure public good is a good which reduces in quantity as increasing amounts are consumed.
C)A pure public good is a good which is nonrival and nonexclusive.
D)A pure public good is a good that gives the same level of utility to each consumer.
E)A pure public good is a good for which consumption is restricted to paying consumers.

Question 5

Which of the following correctly states the Coase theorem?

A)The outcome of a negotiation to resolve an externality will depend on the initial assignment of property rights.
B)Parties that are affected by an externality will bargain to reach an efficient outcome,even in the presence of positive transaction costs.
C)When two parties are affected by an externality,the party that caused the externality will pay the affected party the entire cost of the externality.
D)In the absence of property rights assigned to parties that are affected by an externality,the efficient outcome will need to be negotiated by the government.
E)Bargaining between the parties affected by an externality will result in an efficient outcome,regardless of the property-rights assignment.

Question 6

Market efficiency is typically achieved by:

A)a small number of dominant firms whose large size ensures low cost.
B)large firms that practice corporate social responsibility.
C)competitive firms that maximize benefits for consumers.
D)command-and-control type regulation of the market.
E)firms that make positive economic profit.

Question 7

Which of the following is an example of a negative externality?

A)Due to heavy rains,the coffee crop in Brazil was damaged.
B)Ruth could not sleep because her neighbors were bursting firecrackers on the 4^th of July.
C)Meg had to miss a movie with her friends because she had to study for an exam.
D)Jim was late to work because the train ran late.
E)Sara missed her favorite TV show due to the power outage following a storm.

Question 8

Which of the following is a source of market failure?

A)Unexpected shifts in demand and supply
B)Monopoly power
C)Diseconomies of scale
D)Destructive price wars between firms
E)Perfect information in markets

Question 9

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D].

When a chemical firm is required to internalize the external cost of pollution from producing chemicals:

A)the price of the chemical produced will increase.
B)both the quantity produced of the chemical and its price will fall.
C)the quantity produced of the chemical will increase.
D)the price will remain the same but producer profits will increase.
E)the quantity produced of the chemical will remain the same but the price will increase.

Question 10

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D].

Refer to Figure 11-1.In the presence of externalities,what is the efficient price and quantity combination in the market?

A)$5 and 10 units
B)$7 and 10 units
C)$7 and 15 units
D)$5 and 15 units
E)$8 and 8 units

Question 11

Which of the following will increase the competitive efficiency of a market?

A)Setting prices below cost such that smaller firms are driven out of the market
B)Selling products such that the consumer cannot buy one good without buying the other
C)Selling the same product at different prices to different consumers
D)Mergers between firms such that cost of production in the market is lower but price is higher.
E)Removal of prohibitive barriers to entry in the market

Question 12

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D].

Refer to Figure 11-1.In the absence of externalities,what is the quantity produced of the good?

A)17 units
B)15 units
C)8 units
D)0 units
E)10 units

Question 13

Which of the following is the best example of a pure public good?

A)Government-sponsored medical care
B)Textbooks
C)Used clothing
D)Municipal mosquito abatement programs
E)Social security benefits

Question 14

Which of the following will eliminate the inefficiency problems associated with negative externalities?

A)A subsidy is provided to consumers so as to decrease the effective price and increase output.
B)A tax is levied on consumers so as to increase the effective price and make production profitable.
C)A tax is levied on producers so as to internalize the marginal cost of the externality.
D)A subsidy is provided to producers in order to reduce their cost of production.
E)The government mandates the elimination of the externality using quantity standards.

Question 15

What is meant by rent-seeking?

A)It refers to the loss in consumer surplus due to monopoly power in a market.
B)It refers to the collusive practices undertaken by dominant firms in an oligopoly.
C)It refers to the excess profits that are associated with a monopoly.
D)It refers to activities that are directed towards securing a monopoly position.
E)It refers to the economic rent that is secured by monopoly firms.

Question 16

What is meant by predatory pricing?

A)It occurs when a large company sets price below cost to drive smaller firms out of business.
B)It is the practice of selling the same good at different prices to different consumers.
C)It is the practice of setting a very high price for a product to signal high product quality.
D)It occurs when firms in a market collude to set a high price for the product.
E)It occurs when a firm sets price equal to the marginal cost of the product.

Question 17

When consumers possess imperfect information or misinformation:

A)there is a role for the government to intervene and mandate better outcomes.
B)firms have an incentive to reduce the information asymmetry in the market.
C)industry associations that have better information should regulate the market.
D)competitive efficiency is achieved as long as the market is unregulated.
E)less-efficient products will be driven out of the market.

Question 18

In the absence of regulation,which of the following is true of a good or service that generates a positive externality?

A)The supply of the good will be less than the socially optimal level of output.
B)The producer will be able to capture the benefit from the positive externality in the form of increased profits.
C)The market price of the good will be equal to its marginal external cost [MEC].
D)The market price of the good will be lower than the socially optimal price.
E)The producer will produce the good at the point where marginal total cost [MTC] equals price.

Question 19

The production of a good with positive externalities will increase when:

A)the government provides a subsidy for the good.
B)the marginal internal cost of the good is higher than the marginal total cost.
C)there is a price ceiling of zero in the market.
D)the producer sells the good for a very high price-marginal cost markup.
E)there are a large number of buyers and sellers in the market.

Question 20

Figure 11-1 shows the marginal internal cost [C₁],the marginal total cost [C₂] of producing a good,and the demand curve for the good [D].

Refer to Figure 11-1.If the external cost of producing the good is not taken into account,what is the deadweight loss in the market?

A)$2
B)$4
C)$5
D)$10
E)$15

Question 21

The following table gives the estimated costs and benefits of a proposed public convention center.
Table 11-1

Two mutually exclusive projects,expected to last indefinitely,are being compared.Program A has annual profits and consumer surplus of $10 million and a one-time capital expenditure of $50 million.Program B has consumer surplus of $15 million and a one-time capital expenditure of $100 million.Using net present value as a criterion,which alternative should be selected?

A)If the discount rate is 12%,Program B should be selected.
B)If the discount rate is less than 10%,Program B should be selected.
C)If the discount rate is 22%,neither program should be selected.
D)The programs have the same net present value regardless of the discount rate used.
E)Answers b and c are both correct.

Question 22

A port authority is in the process of deciding the optimal depth (in feet)of a harbor dredging project.Both commercial shippers and pleasure boaters use the harbor.The total cost of dredging the harbor (in hundreds of thousand dollars)is C = 2F + 0.25F2,where F is harbor depth in feet.The total benefits to commercial shippers and pleasure boaters are: BCS = 18F - 0.5F2 and BPB = 8F - 0.25F2,respectively.
(a)Determine the optimal harbor depth.

Question 23

How does decision making under profit-maximization compare with benefit-cost analysis?

A)Benefit-cost analysis is more comprehensive than profit-maximization since it includes the value of consumer surplus.
B)Even in the presence of externalities,profit-maximization leads to efficient outcomes,while benefit-cost analysis does not.
C)Profit maximization internalizes the cost of externalities unlike benefit-cost analysis.
D)A public program should be implemented on the basis of profit-maximization principles and not benefit-cost analysis.
E)With profit-maximization the benefits and costs from a program are usually overstated.

Question 24

Suppose the yearly interest rate is given by r and the benefit flow [B] from a project is expected to continue indefinitely.Its present value is _____.

A)B/r
B)B/(1+r)
C)(1+r)/B
D)B × r
E)B/(1+r)²

Question 25

Suppose the government plans to build a dam at one of several locations in the country.The government should build the dam in the location where:

A)it can get the highest revenue from levying taxes on the dam.
B)the cost of building the dam is the lowest irrespective of the revenue generated.
C)the marginal external cost of building the dam is the highest.
D)the net benefit of building the dam is the highest.
E)the marginal benefit from the dam just covers the marginal internal cost.

Question 26

Explain why a private golf club might charge (1)an initiation fee, (2)an annual membership fee, (3)rental fees for carts on the golf course,and (4)dining fees for eating a required number of meals in the club's restaurant.(Hint: Use the concepts of an individual's downward-sloping demand curve and consumer surplus)

Question 27

Which of the following is true of benefit-cost analysis?

A)Benefit-cost analysis will typically eliminate projects whose costs and benefits stretch over an indefinite period of time.
B)The main focus of benefit-cost analysis is the equal distribution of costs and benefits across society.
C)Since benefit-cost analysis does not include the use of market prices,the results are not efficient.
D)Benefit-cost analysis is a method used by the government to maximize its profit from public projects.
E)For a given project,benefit-cost analysis identifies all impacts on all affected members of a society.

Question 28

What is meant by rent-seeking by a monopoly firm?

Question 29

The following table gives the estimated costs and benefits of a proposed public convention center.
Table 11-1

Refer to Table 11-1.What is the annual net benefit from building the convention center?

A)$140,000
B)$220,000
C)$240,000
D)$290,000
E)$350,000

Question 30

When deciding among mutually exclusive projects,a public manager should choose:

A)all the projects that have a benefit-cost ratio which is greater than one.
B)all the projects that have positive benefit-cost ratios.
C)the project with the greatest benefit-cost ratio.
D)the project with the greatest positive net benefit.
E)the project with the lowest total cost irrespective of the total benefit.

Question 31

Suppose that a public project (for example,a golf course)is funded out of general tax revenues.The proportion of the population benefiting from the project is split into a high-income group and a low-income group,and 75% of the benefits go to the high-income group.How does this information affect a benefit-cost analysis?

Question 32

Brown City Pet Food Co.produces a complete line of dry pet foods.During the past year they have been test marketing a meat-based dog food.The firm's plant is located in an industrial park adjacent to the Brown River.The city's water system as well as much of its tourism industry is tied to the river.Recent tests show that a higher-than-normal bacteria count in the river stems from the effluent dumped into the river by the company.Experts are certain that the bacteria are generated from production of the new meat-based dog food.The firm's long-run cost of production is: LAC = LMC = $10 per case,where LAC is long-run average cost and LMC is long-run marginal cost.
(a)The company faces a number of competitors but still has some degree of market power.In particular,the firm's long-run price elasticity is E_P = -3.Determine its optimal price and resulting profit margin.

Question 33

Use economic reasoning to comment on the following statement: In a market where products appear to be similar but significant quality and performance differences exist,lack of information about product quality by some proportion of customers justifies government intervention.

Question 34

The Federal Communications Commission (FCC)is trying to decide how to allocate an unused part of the radio spectrum for personal communication services (PCS)which are advanced cellular communication services.The monthly demand for the service in a major city is given by Q = 1000 - 10P where Q is the number of subscribers (in thousands)and P is the monthly service price (in $).A typical firm can provide PCS service at the cost: MC = AC = $20 per subscriber per month.
(a)The FCC is considering licensing the exclusive right to use the spectrum to a single firm.What price should the firm set,and what is the resulting total number of subscribers? Suppose the FCC charges the firm to license the spectrum.What is the maximum monetary amount that the FCC could expect to receive for exclusive spectrum rights?

Question 35

What is the economic reasoning behind granting a patent to a pharmaceutical firm?

Question 36

The city council of Anderson is evaluating several projects.A consensus has been reached to appropriate funds for the two projects with the highest net present value.The discount rate is 8% and the benefits from the projects are expected to continue indefinitely.Based on the information given in the table,which projects should be funded?

Question 37

How can the prices of nonmarketed goods and services be calculated?

Question 38

The criticism that benefit-cost analysis does not reflect distributional or equity considerations:

A)implies that the analysis is of little value when benefits are inequitably distributed.
B)is not valid as benefit-cost analysis is focused on equity and not efficiency.
C)is addressed by using the tax and redistribution systems to address economic inequities.
D)holds that equity is more important than efficiency in a market economy.
E)implies that benefit-cost analysis should not be used to analyze public programs.

Question 39

Janet's Silk Printing company is located in a small university town.The major portion of their business is custom printed sweatshirts for university bookstores.As a sideline they also retail printed sweatshirts locally.The local demand for sweatshirts is: Q = 200 - 5P.The average and marginal cost per printed sweatshirt is $8.
(a)Calculate output,price,and profit under the monopoly conditions they enjoy locally.

Question 40

How would national security be valued in benefit-cost analysis?

A)Public goods like national security are excluded from benefit-cost analysis because valuation of benefits from such goods is not possible.
B)Goods like national security are valued at $0 since national security is not provided through private markets.
C)Goods like national security are valued using surveys and indirect proxies based on market prices.
D)The value of a public good like national security is the difference between the taxes paid to the government and the salaries paid to army personnel.
E)The value of national security is equal to the difference between revenues and expenses in the government's defense budget.

Question 41

Define a public good.How are private and public goods different?

Question 42

A city is deliberating whether to undertake a major infrastructure investment to provide free,high-speed WIFI internet access within its city limits.Alternatively,the city could rely on the private sector to provide access.The city estimates internet demand to be P = 20 - 5Q,where Q denotes number of users (in millions)and P is price per month in dollars.The emerging private market for internet access is considered to be highly competitive,and the typical provider exhibits LAC = LMC = $5 per subscriber per month,where LAC is long-run average cost and LMC is long-run marginal cost.According to the city's estimates,the initial cost for constructing the high-speed network is $600 million and network maintenance costs are $80 million per year.Prepare a benefit-cost analysis to guide the city's decision.Assume that the public and private alternatives will last indefinitely,and that each will be held to a 5% discount rate.

Question 43

What is an externality? List the various types of externalities.Discuss why externalities justify government intervention.

Question 44

The following (incomplete)payoff table depicts the net benefits to the United States and the European Union (EU)of reducing carbon emissions.Carbon quantities are in billions of tons and monetary amounts are in billions of dollars.For the United States,the marginal benefit [MB] is $40 for each ton reduced;for the EU,MB = $50 per ton.Each side benefits regardless of who reduces the emissions.For instance,if the EU reduces emissions by 0.6 billion tons and the U.S.does nothing,the US enjoys a benefit of (40)(0.6)= $24 billion,as indicated in the table.For the U.S. ,the marginal cost [MC] of reducing emissions is $60 per ton;for the EU,MC = $70 per ton.
(a)Complete the missing entries in the table by computing each side's net benefit.(Net benefit is simply total benefit minus total cost and can be positive or negative).

Question 45

What are the possible actions that the government can take to reduce the concentration of market power in the hands of a few firms in the market?

Question 46

How does benefit-cost analysis handle the problem of valuing 'priceless' human life?

Question 47

Fisherburg is a growing industrial and tourism community with a population of 50,000 and a regional labor force pool of 40,000.A multinational corporation operates an aging paper producing plant in the community.The plant employs almost 1,500 workers and there is some concern that the current recession will force the plant to cut back production.There is even some risk that the plant will close permanently.
During the past year a group of resort owners,riverfront homeowners,and outdoor sports enthusiasts have formed a committee to address river pollution.Their petition for placing a 'clean river' amendment on the ballot in the upcoming local election will soon be considered by the city council.The council president is concerned about the impact of such a ballot issue,and has requested you,an economic consultant,to prepare an objective economic evaluation of potential problems the community faces.

Question 48

What are some of the major problems of benefit-cost analysis? How can they be minimized?

Question 49

Outline the major steps required to construct a benefit-cost analysis for a government project.