Question 1

What is the Coase Theorem? What are transaction costs?

Accepted Answer

The Coase Theorem asserts that if the benefits are greater than the costs for some course of action, there must be potential transactions that can make some people better off without making anyone worse off. For this to result property rights must be well-defined and transaction costs must be low. Transaction costs are the costs of negotiating and executing an exchange, excluding the cost of the good or service bought.​​

Question 2

Someone who does not contribute toward covering the cost of a good he desires, yet cannot be excluded from receiving the good, is called a free rider.​

Accepted Answer

A) True 
 B)False  True

Question 3

If there are important spillover benefits from consumption of a good,

Accepted Answer

A) ​government should prohibit its production. 
B) ​taxes should be imposed on producers of the product. 
C) ​the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production. 
D) ​the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production. 
A) ​government should prohibit its production. 
B) ​taxes should be imposed on producers of the product. 
C) ​the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production. 
D) ​the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production. C

Question 4

Pollution abatement is likely to be most costly under:

Accepted Answer

A) ​a compliance standard. 
B) ​a per-unit pollution tax system. 
C) ​a system of transferable pollution rights. 
D) ​Costs are the same under all three pollution control policies. 
A) ​a compliance standard. 
B) ​a per-unit pollution tax system. 
C) ​a system of transferable pollution rights. 
D) ​Costs are the same under all three pollution control policies.

Question 5

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

Accepted Answer

A) ​A flu shot is less expensive than the cost of treatment when you get the flu. 
B) ​The income of doctors increases when you get a flu shot. 
C) ​A flu shot reduces the likelihood that others will catch the flu from you. 
D) ​A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income. 
A) ​A flu shot is less expensive than the cost of treatment when you get the flu. 
B) ​The income of doctors increases when you get a flu shot. 
C) ​A flu shot reduces the likelihood that others will catch the flu from you. 
D) ​A flu shot reduces the likelihood that you will miss work as a result of sickness, and, therefore, you will earn more income.

Question 6

The Coase theorem holds well in situations where information and transaction costs are substantial.

Accepted Answer

A) True 
 B)False

Question 7

When the production or consumption of a good involves an externality:

Accepted Answer

A) ​resources are necessarily overallocated to the good. 
B) ​resources are necessarily underallocated to the good. 
C) ​someone not involved in buying or selling the good is affected. 
D) ​the market will efficiently allocate resources to its production. 
A) ​resources are necessarily overallocated to the good. 
B) ​resources are necessarily underallocated to the good. 
C) ​someone not involved in buying or selling the good is affected. 
D) ​the market will efficiently allocate resources to its production.

Question 8

Which of these statements is not true of both external cost and external benefit situations?

Accepted Answer

A) ​They both can lead to market failure. 
B) ​They both cause welfare costs. 
C) ​They both make it possible for government intervention to lead to more efficient results. 
D) ​All of the above are true. 
A) ​They both can lead to market failure. 
B) ​They both cause welfare costs. 
C) ​They both make it possible for government intervention to lead to more efficient results. 
D) ​All of the above are true.

Question 9

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

Accepted Answer

A) ​The reduction in the incidence of chicken pox when children are inoculated against the disease. 
B) ​The damage to a person's health from secondhand smoke. 
C) ​The increase in local property values when the city creates a neighborhood park. 
D) ​The price you pay for the prime rib that you consume at a local restaurant. 
A) ​The reduction in the incidence of chicken pox when children are inoculated against the disease. 
B) ​The damage to a person's health from secondhand smoke. 
C) ​The increase in local property values when the city creates a neighborhood park. 
D) ​The price you pay for the prime rib that you consume at a local restaurant.

Question 10

When a good is nonrivalrous in consumption, then:

Accepted Answer

A) ​consumption by an additional individual will significantly reduce the benefits derived by others from a public good. 
B) ​individuals who refuse to pay for a public good cannot be excluded from benefiting from it. 
C) ​consumption by an additional individual does not prevent others from benefiting from a public good. 
D) ​individuals who refuse to pay for a public good can be excluded from benefiting from it. 
A) ​consumption by an additional individual will significantly reduce the benefits derived by others from a public good. 
B) ​individuals who refuse to pay for a public good cannot be excluded from benefiting from it. 
C) ​consumption by an additional individual does not prevent others from benefiting from a public good. 
D) ​individuals who refuse to pay for a public good can be excluded from benefiting from it.

Question 11

What are the external costs and external benefits associated with cell phone usage in automobiles?

Accepted Answer

The external costs associated with cellu

Question 12

Technology spillovers are examples of negative externalities.

Accepted Answer

A) True 
 B)False

Question 13

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 14

Forms of free riding behavior

Accepted Answer

A) ​Always leads to underproduction 
B) ​Occur in both external cost and public goods cases 
C) ​Does not occur with common property resources, unlike public goods cases 
D) ​Occurs with private goods, public goods and common property resources 
A) ​Always leads to underproduction 
B) ​Occur in both external cost and public goods cases 
C) ​Does not occur with common property resources, unlike public goods cases 
D) ​Occurs with private goods, public goods and common property resources

Question 15

A positive externality is present whenever:

Accepted Answer

A) ​the social marginal benefit of an activity exceeds the private marginal benefit. 
B) ​the private marginal benefit of an activity exceeds the private marginal cost. 
C) ​the social marginal cost of an activity exceeds the private marginal cost. 
D) ​none of the above. 
A) ​the social marginal benefit of an activity exceeds the private marginal benefit. 
B) ​the private marginal benefit of an activity exceeds the private marginal cost. 
C) ​the social marginal cost of an activity exceeds the private marginal cost. 
D) ​none of the above.

Question 16

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 17

When a price fails to reflect all the costs of a product, too much of it is produced and/or consumed.

Accepted Answer

A) True 
 B)False

Question 18

Where a free-rider problem exists, goods tend to be:

Accepted Answer

A) ​underproduced. 
B) ​overproduced. 
C) ​high-priced and available only to the rich. 
D) ​low priced and available only to the poor. 
A) ​underproduced. 
B) ​overproduced. 
C) ​high-priced and available only to the rich. 
D) ​low priced and available only to the poor.

Question 19

Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?

Accepted Answer

A) ​They are equal. 
B) ​The market equilibrium output level is greater than the efficient equilibrium output level. 
C) ​The market equilibrium output level is less than the efficient equilibrium output level. 
D) ​None of the above. 
A) ​They are equal. 
B) ​The market equilibrium output level is greater than the efficient equilibrium output level. 
C) ​The market equilibrium output level is less than the efficient equilibrium output level. 
D) ​None of the above.

Question 20

Signaling is important because:

Accepted Answer

A) ​it increases social benefits associated with public goods. 
B) ​it decreases external costs associated with externalities. 
C) ​it reduces information costs associated with asymmetric information. 
D) ​all of the above 
A) ​it increases social benefits associated with public goods. 
B) ​it decreases external costs associated with externalities. 
C) ​it reduces information costs associated with asymmetric information. 
D) ​all of the above

Exam 8: Market Failure

What is the Coase Theorem? What are transaction costs?

Someone who does not contribute toward covering the cost of a good he desires, yet cannot be excluded from receiving the good, is called a free rider.​

If there are important spillover benefits from consumption of a good,

Pollution abatement is likely to be most costly under:

Which of the following describes an external benefit resulting from an individual's purchase of a winter flu shot?

The Coase theorem holds well in situations where information and transaction costs are substantial.

When the production or consumption of a good involves an externality:

Which of these statements is not true of both external cost and external benefit situations?

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

When a good is nonrivalrous in consumption, then:

What are the external costs and external benefits associated with cell phone usage in automobiles?

Technology spillovers are examples of negative externalities.

Which of the following observations concerning pollution rights is incorrect?

Forms of free riding behavior

A positive externality is present whenever:

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

When a price fails to reflect all the costs of a product, too much of it is produced and/or consumed.

Where a free-rider problem exists, goods tend to be:

Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?

Signaling is important because:

The Role and Method of Economics

Eight Powerful Ideas

Scarcity, Trade-Offs, and Production Possibilities

Demand, Supply, and Market Equilibrium

Market 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

Filters

Someone who does not contribute toward covering the cost of a good he desires, yet cannot be excluded from receiving the good, is called a free rider.