EC 202 Practice Test 2

Which of the following are potential solutions to the problem of air pollution

all of the above

The gas-guzzler tax that is placed on new vehicles that get very poor mileage is an example of

an attempt to internalize a negative externality.

When wealthy alumni provide charitable contributions to their alma mater to reduce the tuition payments of current students, it is an example of

an attempt to internalize a positive externality.

Gross domestic product can be measured as the sum of

consumption, investment, government purchases, and net exports.

Which of the following is not considered a transaction cost incurred by parties in the process of contracting to eliminate a pollution externality

costs incurred to reduce the pollution

U.S. GDP would exclude which of the following?

cotton purchased by Lee Jeans

A negative externality (that has not been internalized) causes the

equilibrium quantity to exceed the optimal quantity.

If a person can be prevented from using a good, the good is said to be

excludable

A common resource is neither rival in consumption nor excludable

false

A new car produced in 2015, but first sold in 2016, should be counted in 2016 GDP because that is when it was first sold as a final good.

false

A public good is both rival in consumption and excludable.

false

Club goods are free to the consumer of the good

false

If nominal GDP in 2016 exceeds nominal GDP in 2015, real output must have risen

false

If the city government sells apples at a roadside stand, the apples are public goods because they are provided by the government.

false

If the lumberyard sells $1,000 of lumber to a carpenter and the carpenter uses the lumber to build a garage that he sells for $5,000, the contribution to GDP is $6,000.

false

In the United States, investment is the largest component of GDP.

false

National defense is a classic example of a common resource.

false

Net national product always exceeds a nation's GNP because of depreciation.

false

The government should continue to spend to improve the safety of our highways until there are no deaths from auto accidents.

false

The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.

false

The socially optimal price for a fishing license is zero.

false

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.

false

When the city of Chicago purchases a new school building, the investment component of GDP increases.

false

When the government uses cost-benefit analysis to decide whether to provide a public good, the potential benefit of the public good can easily be established by surveying the potential consumers of the public good

false

Gross domestic product is the sum of the market value of the

final goods and services.

If U.S. GDP exceeds U.S. GNP, then

foreigners are producing more in the United States than Americans are producing in foreign countries.

A club good is

not rival in consumption but excludable.

A positive externality (that has not been internalized) causes the

optimal quantity to exceed the equilibrium quantity.

To internalize a positive externality, an appropriate public policy response would be to

subsidize the good

If your grandparents buy a new retirement home, this transaction would affect

investment.

To internalize a negative externality, an appropriate public policy response would be to

tax the good.

When markets fail to allocate resources efficiently, the ultimate source of the problem is usually

that property rights have not been well established

U.S. gross domestic product (in contrast to gross national product) measures the production and income of

the domestic service sector only.

Public goods are difficult for a private market to provide due to

the free-rider problem

The most efficient pollution control system would ensure that

the polluters with the lowest cost of reducing pollution reduce their pollution the greatest amount

An externality is

the uncompensated impact of one person's actions on the well-being of a bystander

According to the Coase theorem, private parties can solve the problem of externalities if

there are no transaction costs

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

national defense

A public good is

neither rival in consumption nor excludable

If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500 worth of shoes to consumers, the contribution to GDP is

$500

Suppose that requiring motorcycle riders to wear helmets reduces the probability of a motorcycle fatality from 0.3 percent to 0.2 percent over the lifetime of a motorcycle rider and that the cost of a lifetime supply of helmets is $500. It is efficient for the government to require riders to wear helmets if human life is valued at

$500,000 or more

How is your purchase of a $40,000 BMW automobile that was produced entirely in Germany recorded in the U.S. GDP accounts?

Consumption increases by $40,000, and net exports decrease by $40,000.

Which of the following is true regarding tradable pollution permits and corrective taxes?

Corrective taxes and tradable pollution permits create an efficient market for pollution

A market that generates a negative externality that has not been internalized generates an equilibrium quantity that is less than the optimal quantity.

False

A positive externality is an external benefit that accrues to the buyers in a market while a negative externality is an external cost that accrues to the sellers in a market.

False

A tax always makes a market less efficient.

False

According to the Coase theorem, an externality always requires government intervention in order to internalize the externality.

False

If Bob values smoking in a restaurant at $10 and Sue values clean air while she eats at $15, according to the Coase theorem, Bob will not smoke in the restaurant only if Sue owns the right to clean air

False

The majority of economists do not like the idea of putting a price on polluting the environment

False

To reduce pollution by some targeted amount, it is most efficient if each firm that pollutes reduces its pollution by an equal amount

False

Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true

It is efficient for Bob to stop playing loud music regardless of who has the property right to the level of sound.

Suppose each of 20 neighbors on a street values street repairs at $3,000. The cost of the street repair is $40,000. Which of the following statements is true?

It is efficient for the government to tax the residents $2,000 each and repair the road.

Bob and Tom live in a university dorm. Bob values playing loud music at a value of $100. Tom values peace and quiet at a value of $150. Which of the following statements is true about an efficient solution to this externality problem if Bob has the right to play loud music and if there are no transaction costs?

Tom will pay Bob between $100 and $150, and Bob will stop playing loud music.

A corrective tax sets the price of pollution while tradable pollution permits set the quantity of pollution.

True

An advantage of using tradable pollution permits to reduce pollution is that the regulator need not know anything about the demand for pollution rights.

True

For any given demand curve for pollution, a regulator can achieve the same level of pollution with either a corrective tax or by allocating tradable pollution permits.

True

If a market generates a negative externality, a corrective tax will move the market toward a more efficient outcome.

True

If a market generates a negative externality, the social cost curve is above the supply curve (private cost curve).

True

If a market generates a positive externality, the social value curve is above the demand curve (private value curve).

True

If transaction costs exceed the potential gains from an agreement between affected parties to an externality, there will be no private solution to the externality.

True

When Smokey the Bear says, "Only you can prevent forest fires," society is attempting to use moral codes and social sanctions to internalize the externality associated with using fire while camping.

True

A negative externality affects market efficiency in a manner similar to

a common resource

A person who regularly watches public television but fails to contribute to public television's fundraising drives is known as

a free rider

Which of the following would be excluded from 2016 GDP? The sale of

a home built in 2015 and first sold in 2016.

Which of the following is an example of a common resource?

a national park

When an individual buys a car in a congested urban area, it generates

a negative externality.

A congested toll road is

a private good

A negative externality generates

a social cost curve that is above the supply curve (private cost curve) for a good.

A positive externality generates

a social value curve that is above the demand curve (private value curve) for a good.

The Tragedy of the Commons is a parable that illustrates why

common resources are overconsumed.

GDP would include which of the following

consulting services

Real GDP is measured in _____ prices while nominal GDP is measured in _____ prices.

base year ; current year

A private good is

both rival in consumption and excludable.

The value of plant and equipment worn out in the process of manufacturing goods and services is measured by

depreciation

A positive externality affects market efficiency in a manner similar to a

public good

free rider is a person who

receives the benefit of a good but avoids paying for it.

When governments employ cost-benefit analysis to help them decide whether to provide a public good, measuring benefits is difficult because

respondents to questionnaires have little incentive to tell the truth.

If nominal GDP in 2016 exceeds nominal GDP in 2015, then the production of output must have

risen or fallen because there is not enough information to determine what happened to real output.

If one person's consumption of a good diminishes other people's use of the good, the good is said to be

rival in consumption

A common resource is

rival in consumption but not excludable.

Tradable pollution permits

set the quantity of pollution.

A corrective tax on pollution

sets the price of pollution.

The government engages in an industrial policy

to internalize the positive externality associated with technology-enhancing industries.

Suppose an industry emits a negative externality such as pollution, and the possible methods to internalize the externality are command-and-control policies, corrective taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would likely rank them in the following order (from most favored to least favored):

tradable pollution permits, corrective taxes, command-and-control policies

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.

true

A fireworks display at a private amusement park is a good provided by a natural monopoly

true

A recession occurs when real GDP declines.

true

An apple sold in a grocery store is a private good

true

An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator.

true

Cigarettes should be valued in GDP at $5.50 per pack even though $1.00 of that price is tax because the buyers paid $5.50 per pack

true

Common resources are overused because common resources are free to the consumer

true

Common resources are related to negative externalities because consumers of common resources ignore the negative impact of their consumption on other consumers of the common resource

true

Depreciation is the value of the wear and tear on the economy's equipment and structures.

true

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.

true

If U.S. GDP exceeds U.S. GNP, then foreigners produce more in the United States than U.S. citizens produce in the rest of the world.

true

If someone owned the property rights to clean air, that person could charge for the use of the clean air in a market for clean air, and thus, air pollution could be reduced to the optimal level

true

Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output.

true

Private markets have difficulty providing public goods due to the free-rider problem.

true

Public goods are related to positive externalities because the potential buyers of public goods ignore the external benefits those goods provide to other consumers when they make their decision about whether to purchase public goods.

true

An example of a transfer payment is

unemployment benefits