Question 1

Which of the following is an example of screening?

Accepted Answer

A) Selling pollution permits to polluters to induce the lowest-cost pollution reducers to cut back on pollution 
B) Reducing pollution to the point at which the marginal cost of the pollution equals the marginal benefit 
C) A car buyer asking the seller if the car is a lemon 
D) An employer requiring job applicants to provide references

Question 2

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.

Question 3

Public television periodically runs pledge drives to raise money. Only a small percentage of the people who benefit from public television are willing to pay. What do economists call the people who do not pay?

Accepted Answer

A) Free riders 
B) The excludable 
C) Adverse selectors 
D) Thieves

Question 4

Give the definition of "externality" and indicate why externalities can result in a failure to achieve equality between social marginal cost and social marginal benefit.Demonstrate your answer graphically with a negative externality.

Accepted Answer

The answer of Give the definition of "externality" and indicate...

Question 5

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.

Question 6

Wearing a light long-sleeved sweater adds about 2 degrees of warmth to the wearer and allows such individuals to keep their homes at 2 degrees lower temperature.Such sweaters cost approximately $20,or three for $60.The 2-degree decrease in heat can save $200 a year in heating bills.
(a)Assuming that the government is committed to saving electricity,should it require people to wear such sweaters and keep their homes 2 degrees cooler?
(b)What are two alternatives to this regulation?
(c)If it is cheaper to keep warm with sweaters than with furnaces,why don't people voluntarily wear more sweaters?

Accepted Answer

The answer of Wearing a light long-sleeved sweater adds about...

Question 7

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.

Question 8

Direct regulation means that government sets specific limits on the use of scarce resources.

Accepted Answer

A) True 
 B)False

Question 9

A life insurance company is likely to require a health examination of a person applying for insurance. This helps reduce the informational problem through the process of:

Accepted Answer

A) signaling. 
B) screening. 
C) creating an externality. 
D) government regulation.

Question 10

Apple products are able to play digital music that have a special encoding which makes pirating music more difficult. In economic terms, this encoding is an attempt to:

Accepted Answer

A) make digital music more like a private good and less like a public good. 
B) reduce the negative externalities of digital music. 
C) reduce the adverse selection problem of digital music. 
D) increase the marginal social benefit of digital music.

Question 11

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.

Question 12

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. $$\begin{array} { | c | c | c | c | } 
\hline \text { Firm } & \begin{array} { c } 
\text { Total Discharge (in } \
\text { tons) }
\end{array} & \begin{array} { c } 
\text { Marginal Cost of } \
\text { Cleanup } \
\text { (per tan) }
\end{array} & \begin{array} { c } 
\text { Total Cost of } \
\text { Cleanup }
\end{array} \
\hline \text { A } & 60 & \$ 5.00 & \$ 300 \
\hline \text { B } & 70 & \$ 8.00 & \$ 560 \
\hline \text { C } & 80 & \$ 7.50 & \$ 600 \
\hline \text { D } & 90 & \$ 4.00 & \$ 360 \
\hline
\end{array}$$ 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.

Question 13

A per-unit tax designed to internalize the costs of production imposed on third parties is called:

Accepted Answer

A) an excise tax. 
B) an effluent fee. 
C) a sin tax. 
D) a tariff.

Question 14

The diagram below illustrates a positive externality.D is the marginal private benefit and D₁ is the marginal social benefit. Referencing this diagram describe how a government can use direct regulation to eliminate the problem caused by the positive externality.What is a potential problem with this approach?

Accepted Answer

The answer of The diagram below illustrates a positive externality.D...

Question 15

All of the following are considered sources of market failure except:

Accepted Answer

A) public goods. 
B) imperfect information. 
C) profit-maximizing behavior. 
D) externalities.

Question 16

If a negative externality is associated with burning firewood:

Accepted Answer

A) the marginal social cost of burning firewood falls short of its price. 
B) the marginal social cost of burning firewood is exactly equal to its price. 
C) less than the efficient amount of firewood for burning will be used each year. 
D) the marginal social cost of burning firewood exceeds the price of burning firewood.

Question 17

Information problems may be a problem of the lack of a market.Explain.

Accepted Answer

The answer of Information problems may be a problem of...

Question 18

The Environment Ministry in Japan proposed a new carbon tax to meet Japan's obligations to reduce carbon dioxide emissions under the Kyoto Treaty. The tax would be levied on producers and importers of fossil fuels and raise the cost of using fossil fuels. How do most economists view a tax such as this?

Accepted Answer

A) They prefer direct regulation to taxes because taxes create deadweight loss. 
B) They prefer voluntary programs to taxes because they reduce the role of compulsion. 
C) They do not believe any government intervention is necessary because the invisible hand of the market will correct the problem. 
D) They support taxes on pollution as a way of prompting decision makers to consider all costs.

Question 19

The following table shows the marginal private cost (MPC)and the marginal social cost (MSC)of a chemical factory.
 $$\begin{array}{l}
\text { Tons af }\
\begin{array} { l l l } 
\text { Chenicals } & \text { MPC } & \text { MSC } \
\hline 1 & 100 & 120 \
2 & 110 & 130 \
3 & 120 & 140 \
4 & 130 & 150 \
5 & 140 & 160
\end{array}
\end{array}$$ Answer the following questions:
(1)What is the marginal cost of the factory's externality? Is it constant at all quantities?
(2)If the factory is a perfectly competitive firm and is not required by the government to internalize its external cost,how many tons should the factory produce,given that the market price of a ton of chemicals is $130?
(3)If the factory is a perfectly competitive firm and is required by the government to internalize its external cost,how many tons should the factory produce,given that the market price of a ton of chemicals is $130?
(4)Draw a graph illustrating your answers.

Accepted Answer

The answer of The following table shows the marginal private...

Question 20

Proposals in Flint Hills, Kansas, to build wind turbines to generate electricity have pitted environmentalist against environmentalist. Members of the Kansas Sierra Club support the turbines as a way to reduce use of fossil fuel, but local chapters of the Nature Conservancy say they will befoul the landscape. The Nature Conservancy is arguing that that wind turbines:

Accepted Answer

A) are a source of negative externalities. 
B) are a source of positive externalities. 
C) create a free rider problem. 
D) are a way of solving a free rider problem.

Exam 8: Market Failure Versus Government Failure