Question 1

-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

Accepted Answer

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 2

A public good in which exclusion is possible is called

Accepted Answer

A) an exclusive good. 
B) a common good. 
C) an impure good. 
D) a club good.

Question 3

-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

Accepted Answer

A) the beach shuts down and the chemical firm produces 1 ton of pollution. 
B) the beach shuts down and the chemical firm produces 2 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 2 tons of pollution.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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 7

Monopolizing the sale of liquor

Accepted Answer

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

Question 8

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

Accepted Answer

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 9

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

Accepted Answer

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 10

The total demand for a public good is found by

Accepted Answer

A) horizontally summing all individual demands. 
B) vertically summing all individual demands. 
C) finding the demand from the median voter. 
D) dividing the marginal cost of the good by the number of voters.

Question 11

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

Accepted Answer

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 12

Explain why the social demand curve for a public good is the vertical sum of the demand curves of each individual.

Accepted Answer

The answer of Explain why the social demand curve for...

Question 13

If a product provides a positive externality, a duopoly

Accepted Answer

A) will provide more social welfare than a monopoly. 
B) will provide less social welfare than a monopoly. 
C) will provide the same social welfare as a monopoly. 
D) introduces an interesting and untested twist to the externality story.

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

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.

Question 16

Which of the following goods has the property of rivalry?

Accepted Answer

A) national defense 
B) a highway 
C) air to breath 
D) an outdoor movie screening

Question 17

Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality?

Accepted Answer

A) No, the airport was there first. 
B) No, if the original property values reflect the costs imposed by the airport. 
C) No, airports are government entities and therefore don't impose costs on individuals. 
D) Yes, the airport's noise should be curtailed for the well-being of the homeowners.

Question 18

The existence of externalities is due mainly to the fact that

Accepted Answer

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 19

Which of the following is an example of internalizing an externality?

Accepted Answer

A) a paper mill that spends money removing the pollution it generated 
B) a neighbor leaving lots of trash in his front yard 
C) a student receives $15 for each bright question asked during lecture 
D) Both A and C.

Question 20

Over-fishing of common fishing grounds happens because fishing grounds are a common property and social and private incentive are the same.

Accepted Answer