Question 1

Consider two goods-one that generates external benefits and another that generates external costs.A competitive market economy would tend to produce:

Accepted Answer

A)  too much of both goods, relative to the social optimum. 
B)  too little of both goods, relative to the social optimum. 
C)  too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs. 
D)  too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs. 
A)  too much of both goods, relative to the social optimum. 
B)  too little of both goods, relative to the social optimum. 
C)  too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs. 
D)  too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

Question 2

As an additional consumer obtains the benefits of a public good such as national defense,the benefits to existing consumers:

Accepted Answer

A)  decline. 
B)  increase. 
C)  increase in the short run, but decrease in the long run. 
D)  do not change. 
A)  decline. 
B)  increase. 
C)  increase in the short run, but decrease in the long run. 
D)  do not change.

Question 3

Suppose a product produces substantial spillover costs.If the government adopts a policy that forces producers to bear those costs:

Accepted Answer

A)  the equilibrium quantity of the product exchanged will fall. 
B)  the initial misallocation of resources will be corrected. 
C)  the equilibrium price of the product will rise. 
D)  all of the above will be true. 
A)  the equilibrium quantity of the product exchanged will fall. 
B)  the initial misallocation of resources will be corrected. 
C)  the equilibrium price of the product will rise. 
D)  all of the above will be true.

Question 4

Which of the following observations concerning pollution rights is incorrect?

Accepted Answer

A)  It would not allow firms to move into an area that is already as polluted as allowed by EPA standards. 
B)  It allows the greatest value to be generated with a given amount of pollution. 
C)  The rights are private property and can be sold. 
D)  Each polluter is motivated to discover and use the cheapest way to reduce pollution. 
A)  It would not allow firms to move into an area that is already as polluted as allowed by EPA standards. 
B)  It allows the greatest value to be generated with a given amount of pollution. 
C)  The rights are private property and can be sold. 
D)  Each polluter is motivated to discover and use the cheapest way to reduce pollution.

Question 5

The imposition of a per-unit tax on polluting firms will result in the socially efficient level of production only if the tax equals:

Accepted Answer

A)  the marginal social cost plus the marginal private cost. 
B)  the marginal social cost plus the marginal external cost. 
C)  the marginal social cost minus the marginal private cost. 
D)  the average total cost minus the average variable cost. 
A)  the marginal social cost plus the marginal private cost. 
B)  the marginal social cost plus the marginal external cost. 
C)  the marginal social cost minus the marginal private cost. 
D)  the average total cost minus the average variable cost.

Question 6

The free-rider problem arises when:

Accepted Answer

A)  goods cease to be scarce. 
B)  goods are produced by the government. 
C)  goods can't be provided exclusively to paying customers. 
D)  the marginal benefit to a private individual outweighs the marginal cost of producing a good. 
A)  goods cease to be scarce. 
B)  goods are produced by the government. 
C)  goods can't be provided exclusively to paying customers. 
D)  the marginal benefit to a private individual outweighs the marginal cost of producing a good.

Question 7

If quality-detection costs are very low,

Accepted Answer

A)  low quality products will tend to be withdrawn from the market, and the average quality will rise. 
B)  low quality products will tend to be withdrawn from the market, but the average quality will fall. 
C)  high quality products will tend to be withdrawn from the market, and the average quality will rise. 
D)  high quality products will tend to be withdrawn from the market, and the average quality will fall. 
A)  low quality products will tend to be withdrawn from the market, and the average quality will rise. 
B)  low quality products will tend to be withdrawn from the market, but the average quality will fall. 
C)  high quality products will tend to be withdrawn from the market, and the average quality will rise. 
D)  high quality products will tend to be withdrawn from the market, and the average quality will fall.

Question 8

The reason why national defense is commonly provided by the government,while food is not,is that food:

Accepted Answer

A)  is too essential to survival to be provided by a bureaucratic organization. 
B)  manufacturers have successfully lobbied the government to stay out of the food industry. 
C)  can easily be withheld from those who refuse to pay for it. 
D)  provision is subject to a free-rider problem. 
A)  is too essential to survival to be provided by a bureaucratic organization. 
B)  manufacturers have successfully lobbied the government to stay out of the food industry. 
C)  can easily be withheld from those who refuse to pay for it. 
D)  provision is subject to a free-rider problem.

Question 9

Information supplied to consumers by the government rarely ever helps in making better decisions.

Accepted Answer

A) True 
 B)False

Question 10

Positive externalities include benefits received the seller but not benefits received by the buyer.

Accepted Answer

A) True 
 B)False

Question 11

The theory that private negotiations have the potential to make some people better off without making anyone worse off when negative externalities are present is known as:

Accepted Answer

A)  the Negative Externality Theorem. 
B)  the Sexton Theorem. 
C)  the Coase Theorem. 
D)  the Abatement Theorem. 
A)  the Negative Externality Theorem. 
B)  the Sexton Theorem. 
C)  the Coase Theorem. 
D)  the Abatement Theorem.

Question 12

A warranty offered by a seller is one way to overcome:

Accepted Answer

A)  a positive externality problem. 
B)  a negative externality problem. 
C)  an adverse selection problem. 
D)  a free-rider problem. 
A)  a positive externality problem. 
B)  a negative externality problem. 
C)  an adverse selection problem. 
D)  a free-rider problem.

Question 13

Which of the following activities,if any,represents an external benefit?

Accepted Answer

A)  The benefit to a consumer from consuming a Caesar salad. 
B)  The damage to a person's health from secondhand smoke. 
C)  The reduction in tourist revenues at a beach resort caused by an oil spill. 
D)  None of the above 
A)  The benefit to a consumer from consuming a Caesar salad. 
B)  The damage to a person's health from secondhand smoke. 
C)  The reduction in tourist revenues at a beach resort caused by an oil spill. 
D)  None of the above

Question 14

Which of the following is most likely to be an example of the winner's curse?

Accepted Answer

A)  a college student purchasing a text book at the campus book store 
B)  a new parent subscribing to a parenting magazine 
C)  roommates joining an online fantasy football league 
D)  a baseball team offering the highest contract to a free agent player 
A)  a college student purchasing a text book at the campus book store 
B)  a new parent subscribing to a parenting magazine 
C)  roommates joining an online fantasy football league 
D)  a baseball team offering the highest contract to a free agent player

Question 15

A corrective tax equal to the external cost imposed on third parties levied on polluters will:

Accepted Answer

A)  eliminate all pollution. 
B)  increase the level of pollution. 
C)  force polluters to internalize the external cost resulting from their actions. 
D)  usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government. 
A)  eliminate all pollution. 
B)  increase the level of pollution. 
C)  force polluters to internalize the external cost resulting from their actions. 
D)  usually have no impact whatsoever on pollution levels, but will generate tax revenue for the government.

Question 16

If Don paints the outside of his house a horrendous color:

Accepted Answer

A)  he probably has lowered the value of his home, but not that of his neighbors' homes. 
B)  he probably has lowered the value of his home and the value of his neighbors' homes. 
C)  he probably has lowered the value of his neighbors' homes but not the value of his own home. 
D)  none of the above 
A)  he probably has lowered the value of his home, but not that of his neighbors' homes. 
B)  he probably has lowered the value of his home and the value of his neighbors' homes. 
C)  he probably has lowered the value of his neighbors' homes but not the value of his own home. 
D)  none of the above

Question 17

Suppose that firms in the chemical industry are allowed,free of charge,to dump harmful products into rivers.If this is the case in a competitive market,how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

Accepted Answer

A)  Price is too low; output is too large. 
B)  Price is too high; output is too large. 
C)  Price is too low; output is too small. 
D)  Price is too high; output is too small. 
A)  Price is too low; output is too large. 
B)  Price is too high; output is too large. 
C)  Price is too low; output is too small. 
D)  Price is too high; output is too small.

Question 18

Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?

Accepted Answer

A)  society's preference to drive large cars and SUVs 
B)  new stricter anti-litter laws 
C)  a general moral commitment against using sprinklers during a drought 
D)  tax credits for the purchase of hybrid autos 
A)  society's preference to drive large cars and SUVs 
B)  new stricter anti-litter laws 
C)  a general moral commitment against using sprinklers during a drought 
D)  tax credits for the purchase of hybrid autos

Question 19

A cost that spills over onto individuals not directly involved in an activity is called a positive externality.

Accepted Answer

A) True 
 B)False

Question 20

A tax on pollution would:

Accepted Answer

A)  increase the quantity of pollution generated by giving firms the right to pollute. 
B)  result in firms polluting the same amount as before the imposition of a tax. 
C)  decrease the quantity of pollution generated. 
D)  have an indeterminate impact on pollution levels. 
A)  increase the quantity of pollution generated by giving firms the right to pollute. 
B)  result in firms polluting the same amount as before the imposition of a tax. 
C)  decrease the quantity of pollution generated. 
D)  have an indeterminate impact on pollution levels.

Exam 8: Market Failure

Consider two goods-one that generates external benefits and another that generates external costs.A competitive market economy would tend to produce:

As an additional consumer obtains the benefits of a public good such as national defense,the benefits to existing consumers:

Suppose a product produces substantial spillover costs.If the government adopts a policy that forces producers to bear those costs:

Which of the following observations concerning pollution rights is incorrect?

The imposition of a per-unit tax on polluting firms will result in the socially efficient level of production only if the tax equals:

The free-rider problem arises when:

If quality-detection costs are very low,

The reason why national defense is commonly provided by the government,while food is not,is that food:

Information supplied to consumers by the government rarely ever helps in making better decisions.

Positive externalities include benefits received the seller but not benefits received by the buyer.

The theory that private negotiations have the potential to make some people better off without making anyone worse off when negative externalities are present is known as:

A warranty offered by a seller is one way to overcome:

Which of the following activities,if any,represents an external benefit?

Which of the following is most likely to be an example of the winner's curse?

A corrective tax equal to the external cost imposed on third parties levied on polluters will:

If Don paints the outside of his house a horrendous color:

Suppose that firms in the chemical industry are allowed,free of charge,to dump harmful products into rivers.If this is the case in a competitive market,how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?

A cost that spills over onto individuals not directly involved in an activity is called a positive externality.

A tax on pollution would:

The Role and Method of Economics

Economics: Eight Powerful Ideas

Scarcity, Trade-Offs, and Production Possibilities

Demand, Supply, and Market Equilibrium

Markets in Motion and Price Controls

Elasticities

Market Efficiency and Welfare

Public Finance and Public Choice

Consumer Choice Theory

The Firm: Production and Costs

Firms in Perfectly Competitive Markets

Monopoly and Antitrust

Monopolistic Competition and Product Differentiation

Oligopoly and Strategic Behavior

The Markets for Labor, Capital, and Land

Income, Poverty, and Health Care

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Measuring Economic Performance

Economic Growth in the Global Economy

Financial Markets, Saving, and Investment

Aggregate Demand and Aggregate Supply

The Aggregate Expenditure Model

Monetary Institutions

The Federal Reserve System and Monetary Policy

Issues in Macroeconomic Theory and Policy

International Trade

International Finance

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