Question 1

Refer to the graph below.  Assuming a marginal external cost equal to the tax shown in the above graph,the per -unit tax necessary to induce consumers to purchase the socially optimal quantity each year is

Accepted Answer

A)  $1. 
B)  $2. 
C)  $3. 
D)  $4. 
E)  $6.

Question 2

The motivation for private solutions to externalities is that

Accepted Answer

A)  resources are misallocated and thus economic surplus can be increased. 
B)  individuals are more concerned about pollution now. 
C)  of profit maximization. 
D)  of utility maximization. 
E)  individuals mistrust governmental solutions.

Question 3

Cigarettes are known to cause negative externalities.Which one of the following will help to reduce the consumption of cigarettes?

Accepted Answer

A)  A subsidy paid to cigarette producers. 
B)  Compensation paid to the smokers who end up with lung cancer. 
C)  A special tax allowance for cigarette consumers. 
D)  A special tax imposed on the production of cigarettes. 
E)  Compensation paid to cigarette producers for the articles written about their product.

Question 4

Suppose that four land owners,A,B,C,and D,own adjacent lots.Recently,a pool of oil was discovered that is under all four lots but does not extend beyond the four lots.Below is information on the relationship between number of oil wells,output per well and revenue per well. 
-Refer to the information above.If the marginal cost of drilling a well is $94,then each land owner will drill __________ wells for a total of __________ wells.

Accepted Answer

A)  2;8 
B)  between 1 and 8;between 4 and 32 
C)  4;6 
D)  between 4 and 8;between 16 and 32 
E)  8;32

Question 5

Which of the following programs would most likely NOT be acceptable to an economist to reduce pollution caused by newspaper production?

Accepted Answer

A)  Issuing certificates to all publishers to reduce the volume of paper but allowing firms to buy and sell the certificates. 
B)  Taxing the consumers of newspaper who buy subscriptions. 
C)  Limiting the number of newspaper subscriptions to one per household. 
D)  Ensuring that the social cost of buying a newspaper is reflected in its price. 
E)  Ensuring that the social benefit of buying a newspaper is reflected in its price.

Question 6

Adam and Jon are the only players playing in a local golf tournament.They can either practice for 5 hours or not practice at all.Practice has both direct monetary costs and opportunity costs.Their scores for an 18-hole round of golf with and without practice are shown in the table.Total prize money is $12,000.Two possible reward structures exist.In Plan A,the low score wins $10,000,second place wins $2000,and a tie results in $6000 each.Plan B requires a player to score 71,or less,for first place,72 to 80 is considered second place.The $10,000 will be split between those with a 71 or lower score,with a guaranteed minimum of $2000.The $2000 for second will be split between those with a score between 72 and 80. 
-Refer to the information above.Under the reward structure of Plan B,

Accepted Answer

A)  a positional arms race will develop. 
B)  a positional externality exist. 
C)  the prisoner's dilemma is eliminated. 
D)  a positional arms race might develop. 
E)  the quality of play,as measured by scores,is improved.

Question 7

Dustin owns a very powerful stereo system.Dustin's private property rights allow him to do all of the following except to

Accepted Answer

A)  sell it for a price he finds reasonable. 
B)  choose not to play it. 
C)  play whatever type of music he likes. 
D)  open his windows at 3:00 am and turn the volume to its maximum. 
E)  give it to a friend.

Question 8

For the sake of argument,assume that Conservative voters are both wealthier and more likely to make campaign contributions than Liberal voters.One could then predict that

Accepted Answer

A)  Conservatives will favour campaign spending limits more than Liberals. 
B)  Conservatives and Liberals will favour campaign spending limits equally because it is the right thing to do. 
C)  Liberals will be more likely to favour campaign spending limits. 
D)  both Conservatives and Liberals will oppose campaign spending limits. 
E)  Liberals will be more aligned with the interests of their party.

Question 9

A positional externality

Accepted Answer

A)  can only occur in sports. 
B)  arises in situations where absolute performance is judged. 
C)  results in under-investment in performance enhancement. 
D)  occurs when an increase is one player's performance reduces the expected reward of the other players. 
E)  is when the queue one is in moves slowly.

Question 10

The following data show the relationship between the number of drivers who leave for work at 8:00 a.m. ,their average commute times,and their marginal benefit associated with the commute times. 
-Refer to the data above.If the highway is viewed as having a zero price,one can predict that __________ drivers will leave for downtown at 8:00 a.m.

Accepted Answer

A)  500 
B)  400 
C)  300 
D)  200 
E)  100

Question 11

If a positive externality exists in the provision of a good that is provided in a perfectly competitive market without government intervention,then,at the market equilibrium level of output,

Accepted Answer

A)  additional net gains to society are possible by reducing output. 
B)  additional net gains to society are possible by raising output. 
C)  the marginal social benefit equals the marginal social cost. 
D)  additional net gains to society are not possible by either increasing or decreasing output. 
E)  output is at the socially optimal level of output.

Question 12

Compared to a fixed-percentage reduction regulation,a tax on pollution encourages

Accepted Answer

A)  all firms to reduce pollution by the same percentage. 
B)  all firms to use the same technology to reduce pollution. 
C)  firms that can most cheaply reduce pollution to make sizeable reductions. 
D)  firms that find pollution reduction expensive to pollute even more. 
E)  economic inefficiency.

Question 13

A resource that has private property rights is

Accepted Answer

A)  owned by everyone. 
B)  one that benefits no one. 
C)  used efficiently. 
D)  overutilized. 
E)  underutilized.

Question 14

This diagram shows the costs incurred by firm A and firm B as they reduce the pollution from their factories.MACA represents the marginal abatement cost for firm A and MACB represents the marginal abatement cost for firm B.
-Refer to the diagram above.Suppose that the government imposes a tax of $200 per tonne of pollution per day.As a result,firm A will reduce pollution by _______ tonne(s)per day and firm B will reduce pollution by _________ tonne(s)per day.

Accepted Answer

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

Question 15

Refer to the graph below.  The tax illustrated in the above graph,that makes the marginal private cost equal to the marginal social cost,is appropriate for correcting

Accepted Answer

A)  a positive externality. 
B)  a negative externality. 
C)  a monopoly. 
D)  a competitive equilibrium. 
E)  asymmetric information.

Question 16

Which of the following would NOT be a consequence of switching entirely from fixed-percentage pollution reduction regulations to either a pollution tax or pollution permits?

Accepted Answer

A)  The total cost of achieving a given reduction in pollution would fall. 
B)  The distribution of pollution reduction effort among firms would change. 
C)  Government revenue would rise. 
D)  The total amount of pollution emitted would,necessarily,rise. 
E)  The largest reductions in pollution emissions would come from those firms best able to reduce pollution.

Question 17

Steve and Don are neighbours who work at the same firm and hold the same title.Steve finds that when Don's consumption rises,he feels worse off.Don feels the same way towards Steve's consumption.
-Refer to the information above.Suppose that Don buys a new Lexus.It would not be surprising to then observe Steve

Accepted Answer

A)  buying a new luxury car. 
B)  washing his current car. 
C)  being left unaffected by Don's purchase. 
D)  scratching Don's new Lexus at night. 
E)  congratulating Don on his new car.

Question 18

If the external benefit of an activity is added to the private benefit,then the

Accepted Answer

A)  demand curve shifts left. 
B)  quantity demanded rises. 
C)  supply curve shifts right. 
D)  demand curve shifts right. 
E)  quantity demanded falls.

Question 19

Paul owns a home on the top of a hill and enjoys an unobstructed view of a large wooded area.The view was a large factor in his decision to buy the house and Paul values his view at $5,000 per month.Sid purchases the undeveloped wooded area with plans to build a retail shopping centre.Sid expects to earn $10,000 a month from the shopping centre,which is $3,000 more than his next best alternative.
-Refer to the information above.The difference between the value Paul receives from the view and his payment for the view is

Accepted Answer

A)  $0. 
B)  $3,000. 
C)  $5,000. 
D)  $10,000. 
E)  unknown,since there is insufficient information to calculate this.

Question 20

An environmental activist describes an Environment Canada requirement for a $700 air pollution control device for all cars as a policy that leads to the socially optimal reduction in pollution.In terms of the diagram above,for this to be true,it must be the case that the

Accepted Answer

A)  marginal cost is lower than MC. 
B)  marginal benefit is lower than MB. 
C)  true marginal cost is greater than MC. 
D)  true marginal benefit is greater than MB. 
E)  marginal benefit is the only issue to consider.

Exam 10: Externalities and Property Rights

Refer to the graph below. Assuming a marginal external cost equal to the tax shown in the above graph,the per -unit tax necessary to induce consumers to purchase the socially optimal quantity each year is