Question 1

-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?

Accepted Answer

The answer of 
-The above figure shows the marginal benefit...

Question 2

-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?

Accepted Answer

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

Question 3

If a market is subject to a positive externality,

Accepted Answer

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 4

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

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) Al has the right to leave trash and Bert can pay him to limit his dumping. 
D) Bert moves.

Question 5

-The above figure shows the market for steel ingots. If the market is competitive, then the private producer surplus is

Accepted Answer

A) $2,500. 
B) $5,000. 
C) $2,000. 
D) $3,000.

Question 6

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.

Accepted Answer

The answer of A firm operates and produces pollution that...

Question 7

-The above figure shows the market for steel ingots. If the market is competitive, then the competitive market level of output is

Accepted Answer

A) 100 units. 
B) 150 units. 
C) 50 units. 
D) 300 units.

Question 8

-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?

Accepted Answer

The answer of 
-Suppose that the market for steel is...

Question 9

The productivity of the employees of a bakery is reduced because of the excessive noise coming from a next door car repair shop. This is an example of

Accepted Answer

A) synergy. 
B) a positive externality. 
C) a negative externality. 
D) happy coexistence.

Question 10

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

Accepted Answer

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

Question 11

-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

Accepted Answer

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 12

-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?

Accepted Answer

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 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

Students who talk loudly with each other in class

Accepted Answer

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 16

Positive externalities are created when

Accepted Answer

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

What is one reason drunk driving is held in such disrepute?

Accepted Answer

A) Drunk driving imposes high potential costs on non-drunk drivers. 
B) Drunk driving destroys cars and telephone poles, causing disruption in essential services. 
C) Only drunk drivers cause automobile fatalities. 
D) Drunk drivers impose high potential costs on other drunk drivers.

Question 18

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 is the total external harm at the competitive market level of output?

Accepted Answer

A) 1350.5 
B) 2025 
C) 672.5 
D) 1012.5

Question 19

Suppose a city has 20 citizens. The first 10 citizens each derive marginal benefit from traffic lights according to the function MB = 10 - Q, and the remaining 10 citizens each derive marginal benefit from traffic lights according to the function MB = 20 - Q. If traffic lights cost $20 each to produce, what is the efficient quantity of traffic lights?

Accepted Answer

A) 14 traffic lights 
B) 16 traffic lights 
C) 12 traffic lights 
D) 9 traffic lights

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 18: Externalities, Open-Access, and Public Goods