Question 1

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. Suppose that there are 140 houses that are vacant and the town council makes it illegal to use plywood to board them up, leaving only polycarbonate panels as an alternative. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.
 
-Refer to the scenario above.The council's action is an example of ________.

Accepted Answer

A)  a command-and-control policy 
B)  a market-based policy 
C)  a corrective tax 
D)  a corrective subsidy

Question 2

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.
 
-Refer to the scenario above.If the property rights to the river belong to the firm,what is the minimum transfer between the two party necessary to make the firm produce the socially optimal quantity?

Accepted Answer

A)  A payment of ((a c) f) ((b d) e) from the firm to Bob 
B)  A payment of ((a c) f) ((b d) e) from Bob to the firm 
C)  A payment of (a c) (f e)/2 from the firm to Bob 
D)  A payment of (b d) (f e)/2 from Bob to the firm

Question 3

The solution to the "tragedy of the commons" in street traffic congestions in London was ________.

Accepted Answer

A)  to run an advertise campaign to persuade drivers to use other routes 
B)  to let the market solve the problem by itself 
C)  to build a new highways 
D)  to levy a toll on the highway use

Question 4

A retired athlete built a gym near her house that could be used for free by all the residents in the neighborhood.However,the overuse of the facilities soon led to irreparable damages.This is an example of the ________.

Accepted Answer

A)  tragedy of the commons 
B)  pecuniary externality 
C)  paradox of thrift 
D)  prisoners' dilemma

Question 5

The following figure shows the market supply and demand of a good whose consumption entails a $2 positive external benefit per unit.
 
-Refer to the figure above.The socially optimal price for this good should be ________.

Accepted Answer

A)  $6 
B)  $4 
C)  $8 
D)  $7

Question 6

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. Suppose that there are 140 houses that are vacant and the town council makes it illegal to use plywood to board them up, leaving only polycarbonate panels as an alternative. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.
 
-Refer to the scenario above.What is the deadweight loss associated with the council's action relative to the socially efficient outcome?

Accepted Answer

A)  $400 
B)  $900 
C)  $1,200 
D)  $1,600

Question 7

Suppose you live in a housing co-op with eleven other college students.The kitchen is constantly a mess; virtually nobody in the house cleans up,and the sink is overflowing with dirty dishes.This is an example of ________.

Accepted Answer

A)  a private good 
B)  a private provision 
C)  a club good 
D)  the tragedy of the commons

Question 8

Pay-As-You-Throw programs that charge people a small price for each bag of trash they throw out are likely to ________.

Accepted Answer

A)  increase waste creation 
B)  increase recycling and reuse 
C)  increase the social cost of waste disposal 
D)  reduce social surplus

Question 9

Which of the following is an example of a public good?

Accepted Answer

A)  A house in a tourist destination 
B)  A training program for a company's employees 
C)  A radio broadcast 
D)  A magazine subscription

Question 10

Five players are given $10 each and asked to contribute a portion of it to the sports development fund.They are told that the total collection will be doubled and distributed equally among each of them.In this case,the players are likely to contribute ________.

Accepted Answer

A)  $5 each 
B)  $10 each 
C)  $1 each 
D)  nothing

Question 11

The Trump administration proposes to de-fund the Energy Star program.If the program is discontinued,we would expect ________.

Accepted Answer

A)  the deadweight loss from greenhouse gas emissions to increase 
B)  an end to negative externalities in the consumption of consumer electronics 
C)  producers to raise the price of consumer electronics 
D)  private parties to achieve the efficient outcome through bargaining

Question 12

Scenario: Currently, major corn-growing states, such as Iowa, use large amounts of nitrogen-based fertilizers. Many of Iowa's corn-growing regions are characterized by karst topography (water erodes the limestone bedrock and forms sinkholes, caves, and underground streams). In karst landscapes, runoff from corn fields contains high levels of nitrogen in the form of nitrates, which can pollute private and municipal water wells. Suppose the demand and supply for corn are:
Corn Demand: Qᴰ = 70 - 5p,
Corn Supply: Qˢ = 10p - 5,
where quantity is millions of bushels of corn and price is dollars per bushel. The marginal private benefit of corn and the marginal private cost of corn production can be derived by rewriting demand and supply with price as a function of quantity:
Inverse Demand: p = 14 - 0.2Q
Marginal Private Benefit: MPB = 14 - 0.2Q
Inverse Supply: p = 0.1Q + 0.5
Marginal Private Cost: MPC = 0.1Q + 0.5
Suppose the marginal external cost (MEC) of nitrogen fertilizer use in corn growing is a constant $1.50 per bushel, so MEC = 1.5. The marginal social cost (MSC) is:
MSC = MPC + MEC = 0.1Q + 0.5 + 1.5
MSC = 0.1Q + 2
The figure below shows these marginal benefits and marginal costs.
 
-Refer to the scenario above.The optimal corrective ________ is ________ per bushel.Explain your answer.

Accepted Answer

A)  subsidy; $1.50 
B)  tax; $1.50 
C)  tax; $4.50 
D)  tax; $6.00

Question 13

The local community in a town has arranged for a fireworks show in a park located in the center of town.The cost of the ticket to watch the show is $5.However,only 40 percent of the tickets are sold,as spectators can watch the show without entering the park.This is an example of ________.

Accepted Answer

A)  the free-rider problem 
B)  the paradox of thrift 
C)  the paradox of plenty 
D)  the tragedy of the commons

Question 14

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.
 
-Refer to the scenario above.What is the value of the negative externality imposed on Bob when the firm produces to maximize its private net benefits?

Accepted Answer

A)  (b d) e 
B)  (a c) f 
C)  d e 
D)  c f

Question 15

In 1973,economist Steven N.S.Cheung wrote an article demonstrating that private bargaining between beekeepers and agricultural producers achieved the efficient outcome in the market for pollination services in Washington state ("The Fable of the Bees: An Economic Investigation." Journal of Law and Economics 16,no.1 (1973): 11-33).Strong colonies of honeybees are necessary for pollinating some crops,and they also increase yields.Colonies that are co-located with good pollen sources produce more honey.Suppose the following facts describe the market for pollination services for seed alfalfa in Washington state: seed alfalfa growers harvest an additional $4,000 worth of alfalfa seed when honeybees are co-located with their crop; beekeepers realize an additional $1,500 worth of honey when their bee colonies are co-located with alfalfa; and the cost of moving to another alfalfa grower's field is $500.What amount of payment from the alfalfa grower to the beekeeper will result in a market for pollination services that achieves the efficient outcome? Explain your answer.

Accepted Answer

A)  $0 
B)  $500 
C)  $2,000 
D)  $5,000

Question 16

The presence of a positive externality in a market leads to a(n)________.

Accepted Answer

A)  underproduction of a good 
B)  overproduction of a good 
C)  gain in producer surplus 
D)  fall in consumer surplus

Question 17

Which of the following correctly completes the following table?

Accepted Answer

A)  x = Public Good; y = Private Good; z = Common Pool Resource; w = Club Good 
B)  x = Private Good; y = Public Good; z = Club Good; w = Common Pool Resource 
C)  x = Public Good; y = Common Pool Resource; z = Private Good; w = Club Good 
D)  x = Private Good; y = Common Pool Resource; z = Club Good; w = Public Good

Question 18

Scenario: In Brazil, more than 60 percent of sugar cane grown is harvested by hand. In São Paulo state, nearly 300,000 workers are employed in sugar cane harvesting. Manual harvesting requires burning the cane fields prior to harvest to remove the cane's sharp leaves and drive snakes from the fields. Burning the cane fields, however, gives off large quantities of ammonia and nitrogen oxide, which lead to ozone creation. In São Paulo state, a layer of ash covers cars, and nitrogen oxide levels double during the harvest period. The nitrogen oxide produced from burning the cane fields can lead to acid rain and changes in water quality.
-Refer to the scenario above.In the graph below,the socially optimal level of production occurs at which point?

Accepted Answer

A)  Q₀ 
B)  Q₁ 
C)  Q₂ 
D)  Q₃

Question 19

A street light is a ________.

Accepted Answer

A)  private good 
B)  public good 
C)  common pool resource good 
D)  club good

Question 20

Scenario: The following excerpt is from Michael A. McPherson and Michael L. Nieswiadomy, "African Elephants: The Effects of Property Rights and Political Stability," Contemporary Economic Policy 18, no. 1 (2007).
African elephant populations have declined by more than 50% over the past 20 years. International outrage over the slaughter led to a worldwide ban on ivory sales beginning in 1989, despite the objections of many economists and scientists, and of several southern African countries that have established systems of property rights over elephants. Far from declining, elephant populations in many of these countries have increased to levels at or above the carrying capacity of the ecosystem. This article estimates the determinants of changes in elephant populations in 35 African countries over several time periods. The authors find that, controlling for other factors, countries with property rights systems or community wildlife programs have more rapid elephant population growth rates than do those countries that do not. Political instability and the absence of representative governments significantly lower elephant growth rates.
-Refer to the scenario above.Which of the following is consistent with a solution to the elephant population decline described in the quote?

Accepted Answer

A)  Political instability is the main cause of decline in common pool resources. 
B)  Prohibition of trade of some resources is necessary even when property rights for them are well established. 
C)  Property rights could alleviate tragedy of commons problems in the absence of representative government. 
D)  Property rights without an authority to enforce it may be ineffective.

Exam 9: Externalities and Public Goods