Question 1

An example of a negative externality is the:

Accepted Answer

A)  decrease in your real income that results when photographic equipment you purchase increases in price because of increased demand by others for these items. 
B)  cost you bear when your neighbor has a noisy party and does not compensate you for your discomfort. 
C)  benefit you receive without paying when your neighbor installs a smoke detector. 
D)  decrease in income to farmers that results from a drought. 
A)  decrease in your real income that results when photographic equipment you purchase increases in price because of increased demand by others for these items. 
B)  cost you bear when your neighbor has a noisy party and does not compensate you for your discomfort. 
C)  benefit you receive without paying when your neighbor installs a smoke detector. 
D)  decrease in income to farmers that results from a drought.

Question 2

A policy in which the marginal costs of undertaking the policy equal the marginal benefits of that policy is best called an:

Accepted Answer

A)  equality policy. 
B)  incentive policy. 
C)  optimal policy. 
D)  opportunity policy. 
A)  equality policy. 
B)  incentive policy. 
C)  optimal policy. 
D)  opportunity policy.

Question 3

If a positive externality exists in the provision of education when education is provided in a perfectly competitive market without government intervention, at the market equilibrium level of education:

Accepted Answer

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

Question 4

If a positive externality is associated with the purchase of smoke detectors:

Accepted Answer

A)  the marginal social benefit of smoke detectors exceeds their price. 
B)  the marginal social benefit of smoke detectors is zero. 
C)  the marginal social benefit of smoke detectors equals their price. 
D)  more than the efficient quantity of smoke detectors will be sold. 
A)  the marginal social benefit of smoke detectors exceeds their price. 
B)  the marginal social benefit of smoke detectors is zero. 
C)  the marginal social benefit of smoke detectors equals their price. 
D)  more than the efficient quantity of smoke detectors will be sold.

Question 5

A firm with a highly inelastic demand for coal will:

Accepted Answer

A)  cut consumption more than a firm with a highly elastic demand when price goes up. 
B)  cut consumption less than a firm with a highly elastic demand when price goes up. 
C)  refuse to cut consumption for any reason. 
D)  stop using coal entirely if a tax is imposed. 
A)  cut consumption more than a firm with a highly elastic demand when price goes up. 
B)  cut consumption less than a firm with a highly elastic demand when price goes up. 
C)  refuse to cut consumption for any reason. 
D)  stop using coal entirely if a tax is imposed.

Question 6

To address the problems created by negative externalities, economists prefer programs that:

Accepted Answer

A)  require government to conserve, using general tax revenues to pay for the program. 
B)  require all people to reduce consumption equally. 
C)  make people who have the lowest benefit of reducing consumption choose to undertake the most reduction. 
D)  make people who have the lowest cost of reducing consumption choose to undertake the most reduction. 
A)  require government to conserve, using general tax revenues to pay for the program. 
B)  require all people to reduce consumption equally. 
C)  make people who have the lowest benefit of reducing consumption choose to undertake the most reduction. 
D)  make people who have the lowest cost of reducing consumption choose to undertake the most reduction.

Question 7

Alex is playing his music at full volume in his dorm room. The other people living on his floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of a:

Accepted Answer

A)  negative externality. 
B)  positive externality. 
C)  normative externality. 
D)  Pareto externality. 
A)  negative externality. 
B)  positive externality. 
C)  normative externality. 
D)  Pareto externality.

Question 8

The following table shows four firms, the amount each pollutes, the marginal cost for each firm to clean up pollution, and the total cost to each firm of eliminating all pollution. $\begin{array}{|c|c|c|c|}
\hline \text { Firm } & \begin{array}{c}
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array}{c}
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per ton) }
\end{array} & \begin{array}{c}
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$
 The total discharge of these four companies is 300 tons. Assume there is no one else who pollutes and these firms want to maximize profits. If the government wishes to cut discharge by 50 percent, it could do so by establishing an effluent fee of:

Accepted Answer

A)  $3.00 per ton. 
B)  $4.50 per ton. 
C)  $5.50 per ton. 
D)  $10.00 per ton. 
A)  $3.00 per ton. 
B)  $4.50 per ton. 
C)  $5.50 per ton. 
D)  $10.00 per ton.

Question 9

In the case of a public good, a demand curve that shows the marginal benefit of the good is:

Accepted Answer

A)  nonexistent. 
B)  the horizontal sum of individual demand curves. 
C)  the vertical sum of individual demand curves. 
D)  perfectly inelastic. 
A)  nonexistent. 
B)  the horizontal sum of individual demand curves. 
C)  the vertical sum of individual demand curves. 
D)  perfectly inelastic.

Question 10

The free rider problem:

Accepted Answer

A)  can never prevent pure public goods from being supplied. 
B)  results because people act unselfishly. 
C)  results because people behave irrationally. 
D)  prevents voluntary cost sharing from achieving the efficient output of a public good. 
A)  can never prevent pure public goods from being supplied. 
B)  results because people act unselfishly. 
C)  results because people behave irrationally. 
D)  prevents voluntary cost sharing from achieving the efficient output of a public good.

Question 11

If a negative externality is to be internalized to the decision maker, the:

Accepted Answer

A)  producers' marginal costs should be increased by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
B)  producers' marginal costs should be reduced by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
C)  consumer of the good should receive a subsidy equal to the marginal cost to those outside the trade that results from production of the good. 
D)  consumer of the good should pay a tax equal to the marginal benefit to those outside the trade that results from consuming the good. 
A)  producers' marginal costs should be increased by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
B)  producers' marginal costs should be reduced by an amount equal to the marginal cost to those outside the trade that results from production of the good. 
C)  consumer of the good should receive a subsidy equal to the marginal cost to those outside the trade that results from production of the good. 
D)  consumer of the good should pay a tax equal to the marginal benefit to those outside the trade that results from consuming the good.

Question 12

The best example of a positive externality is:

Accepted Answer

A)  roller coaster rides. 
B)  pollution. 
C)  alcoholic beverages. 
D)  education. 
A)  roller coaster rides. 
B)  pollution. 
C)  alcoholic beverages. 
D)  education.

Question 13

Suppose there are only two firms that pollute, A and B, and each emits 10 tons of waste into the air. Firm A can reduce its pollution at a cost of $100 per ton, and Firm B can reduce its pollution at a cost of $500 per ton. Each has been given an emission credit that allows it to pollute 6 tons. If firms maximize profits, what will happen?

Accepted Answer

A)  Each firm will clean up 4 tons and pollute 6 tons. 
B)  Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons. 
C)  Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons. 
D)  Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5 tons. 
A)  Each firm will clean up 4 tons and pollute 6 tons. 
B)  Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons. 
C)  Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons. 
D)  Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5 tons.

Question 14

Refer to the graph shown. Assuming a $0.10-per-gallon marginal cost external to the trade that is associated with gasoline, the market price of gasoline necessary to induce consumers to purchase the efficient quantity each year is:

Accepted Answer

A)  $0.95. 
B)  $1.00. 
C)  $1.05. 
D)  $1.10. 
A)  $0.95. 
B)  $1.00. 
C)  $1.05. 
D)  $1.10.

Question 15

Suppose that a negative externality creates $1 billion worth of costs to third parties. The government attacks the problem with regulations that cut the cost of the externality to $500 million but cost business and consumers $1.5 billion. This situation illustrates the idea that:

Accepted Answer

A)  regulations are an effective way to curb externalities. 
B)  externalities can never be corrected. 
C)  correcting market failure can result in government failure. 
D)  getting rid of externalities requires a great deal of necessary sacrifice for all of us. 
A)  regulations are an effective way to curb externalities. 
B)  externalities can never be corrected. 
C)  correcting market failure can result in government failure. 
D)  getting rid of externalities requires a great deal of necessary sacrifice for all of us.

Question 16

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on the good will:

Accepted Answer

A)  reduce the number of firms producing that good in the long run. 
B)  increase the number of firms producing that good in the long run. 
C)  reduce the number of firms producing that good in the short run. 
D)  increase the number of firms producing that good in the short run. 
A)  reduce the number of firms producing that good in the long run. 
B)  increase the number of firms producing that good in the long run. 
C)  reduce the number of firms producing that good in the short run. 
D)  increase the number of firms producing that good in the short run.

Question 17

An optimal policy is one in which the marginal cost of undertaking a policy is less than the marginal benefit of that policy.

Accepted Answer

A) True 
 B)False

Question 18

Refer to the following graph.   Assuming a marginal cost external to the trade equals the tax shown in the graph, the market price necessary to induce consumers to purchase the efficient quantity each year is:

Accepted Answer

A)  P1. 
B)  P2. 
C)  P3. 
D)  P4. 
A)  P1. 
B)  P2. 
C)  P3. 
D)  P4.

Question 19

In economic terminology, a free rider is someone who:

Accepted Answer

A)  does not pay for his or her own consumption of a public good. 
B)  chooses not to consume a public good. 
C)  is earning economic profit. 
D)  raises his or her prices because all other prices are rising. 
A)  does not pay for his or her own consumption of a public good. 
B)  chooses not to consume a public good. 
C)  is earning economic profit. 
D)  raises his or her prices because all other prices are rising.

Question 20

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on that good will:

Accepted Answer

A)  increase both the price of that good and pollution. 
B)  reduce the price of that good and increase pollution. 
C)  reduce both the price of that good and pollution. 
D)  increase the price of that good and reduce pollution. 
A)  increase both the price of that good and pollution. 
B)  reduce the price of that good and increase pollution. 
C)  reduce both the price of that good and pollution. 
D)  increase the price of that good and reduce pollution.

Exam 8: Market Failure Versus Government Failure

An example of a negative externality is the:

A policy in which the marginal costs of undertaking the policy equal the marginal benefits of that policy is best called an:

If a positive externality exists in the provision of education when education is provided in a perfectly competitive market without government intervention, at the market equilibrium level of education:

If a positive externality is associated with the purchase of smoke detectors:

A firm with a highly inelastic demand for coal will:

To address the problems created by negative externalities, economists prefer programs that:

Alex is playing his music at full volume in his dorm room. The other people living on his floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of a:

In the case of a public good, a demand curve that shows the marginal benefit of the good is:

The free rider problem:

If a negative externality is to be internalized to the decision maker, the:

The best example of a positive externality is:

Refer to the graph shown. Assuming a $0.10-per-gallon marginal cost external to the trade that is associated with gasoline, the market price of gasoline necessary to induce consumers to purchase the efficient quantity each year is:

Suppose that a negative externality creates $1 billion worth of costs to third parties. The government attacks the problem with regulations that cut the cost of the externality to $500 million but cost business and consumers $1.5 billion. This situation illustrates the idea that:

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on the good will:

An optimal policy is one in which the marginal cost of undertaking a policy is less than the marginal benefit of that policy.

Refer to the following graph. Assuming a marginal cost external to the trade equals the tax shown in the graph, the market price necessary to induce consumers to purchase the efficient quantity each year is:

In economic terminology, a free rider is someone who:

If markets are perfectly competitive and production of a good results in water pollution, the imposition of a tax on that good will:

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

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