ECON 202 Exam 2 Review

according to public choice theory, policymakers

are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest.

In order to be binding, a price ceiling

must be below the free market equilibrium price

To affect the market outcome, a price ceiling

must be set below the equilibrium price

In order to be binding, a price ceiling

must lie below the free market equilibrium price

The Coase Theorem states that ______

negotiation between economic agents leads to an efficient allocation of resources

The case theorem states that

negotiation between economic agents leads to an efficient allocation of resources; if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities

the case theorem relies on initernalizing externalities through

negotiations between the parties involed

The Coase theorem relies on internalizing externalities through

negotiations between the parties involved

tragedy of the commons occurs because some goods are ______ in consumption

non excludable but rival

a green pasture has turned barren due to overgrazing. this has happened because the pasture was

non excludable but rival.

A green pasture has turned barren due to overgrazing. This happened because the pasture was

non-excludable but rival

a proportional tax is a tax for which people with lower incomes

pay the same percentage of their incomes in tax as do people with higher incomes

if, as your taxable income decreases, you pay a smaller percentage of your taxable income in taxes, then the tax is

progressive

In the united States, the federal income tax is an example of a

progressive tax (tax increases as income increases)

A ___________ system is one in which households pay the same percentage of their incomes in taxes regardless of their income level.

proportional

if the sellers of a good are taxed for each unit sold

a smaller quantity of the good is sold

Arthur buys a new cell phone for $150. He receives consumer surplus of $150 from the purchase. How much does Arthur value his cell phone?

$300

https://tamu.blackboard.com/courses/1/ECON.202.599.1811/ppg/quiz%204.70908161159/f1q14g1.jpg What is the total amount that Arnold is willing to pay for 3 burritos?

(2.5 + 2 + 1.5) = $6

the marginal social benefit from the production of the last unit of a good is 4,8000. if the willingness to pay for that unit is 3,900, what is the external benefit from its production?

900

The market demand for a public good can be determined by

Adding up how much each consumer is willing to pay for each unit of the public good.

T or F? If there is pollution in producing a product, then the market equilibrium price is too high and equilibrium quantity is too low

FALSE

________ are highly excludable but non-rival in consumption

Club/Quasi-public goods

Which of the following activities create a negative externality

Keeping a junked car parked on your front lawn

In the town of Freedonia, the govt. declares that all street parking must be free: there can be no parking meters. In almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes.) Where will it be easier to find parking?

Meterville

"Free riding" is a characteristic of which type of good?

Public good

Demand Supply P = 80 - QD P = 50 + 1/2 QS QD = 80 - P QS = 2P - 100 What are the equilibrium price and quantity (in thousands) for Chef Ernie's sushi?

Qd = Qs 80-p = 2p-100 180 = 3p 60 = P Qd = 80 - 60 = 20 so P = 60 and Q = 20

Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vineyard. What will be the likely effect on the market for sparkling wine in Vineyard?

Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.

Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods?

Retired people

Producer surplus is the difference between the lowest price a firm is willing to accept for a product and the price it actually receives for the product.

TRUE

T/F the social benefit of a given level of a public good is the vertical sum of all private benefits for that level

TRUE

if the government wants to minimize the welfare loss of a tax, it should tax goods with more inelastic demands or supplies

TRUE

marginal cost is the additional cost to a firm of producing one more unit of a good or service

TRUE

Suppose an excise tax of $1 is imposed on every case of beer sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph?

The supply curve for cases of beer would shift to the left by $1

Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?

There was no price control on gasoline at the time

At equilibrium price of $15 consumers are willing to buy 80 pounds of tiger shrimp. Is this an economically efficient quantity?

Yes, because $15 is the price where the marginal benefit is equal to the marginal cost

consider the following methods of pollution reduction a. the govt. sets a target for maximum emissions b. the govt. mandates the installation of specific pollution abatement c. the govt. imposes a per unit tax on the good that creates pollution d. the govt. gives firms a tax rebate for every unit of pollution abated which of the above is an example of a command and control approach to reducing pollution?

a and b only

an externality is

a benefit or cost experienced by someone who is not a producer or a consumer of a god or service

if the social cost of producing a good or service exceeds the private cost

a negative externality exists

which term refers to a legally established minimum price that firms may charge?

a price floor

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

a radio broadcast

the market demand for a public good can be determined by

adding up how much each consumer is willing to pay for each unit of the public good

when the govt. taxes a good or service, it

affects the market equilibrium for that good or service

suppose a negative externality exists in a market. if transactions costs are low and parties are willing to bargain then, according to the coase theorem,

an efficient solution can be reached regardless of the initial assignment of property rights

fo-profit producers will produce only private goods because

buyers will be willing to pay for the goods since the benefits are exludable

policies that mandate the installation of specific pollution control devices are called

command and control policies

when the federal govt. orders firms to use particular methods to reduce pollution, it is said to be using

command and control policies

Suppose the govt. forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?

consumer surplus decreases

a price floor set above the equilibrium price leads to

excess supply of goods in the market

when the demand for a product is more elastic than the supply

firms pay the majority of the tax on the product

Which of the following is an example of a product that is non excludable and rivalrous?

free concert (with limited seating) in a park

you bought a subscription for an online magazine and share you log in details with a friend. your friend is a

free-rider

a positive externality

gives rise to external benefits

when there is an externality in a market

government intervention may increase economic efficiency

a pigouvian tax is a tax designed to

induce producers generating negative externalities to reduce production

When there is a negative externality, the private cost of production ___________ the social cost of production

is less than

for certain public projects such as building a dam on a river or a bridge to an island, what procedure is a govt. likely to use to determine what quantity of a public good should be supplied?

it evaluates the costs and benefits of producing the good

an advantage of imposing a tax on the producer that generates pollution is that

it forces the polluting producer to internalize the external cost of the pollution

A price floor is the

lower limits on the price of a good

a carbon tax which is designed to reduce pollution is an example of a

market based policy

A carbon tax which is designed to reduce pollution is an example of a

market-based policy.

The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community. This is an example of a _______

positive externality

a market demand curve reflects the

private benefits of consuming a product

the cost borne by a producer in the production of a good or service is called

private cost

There are 4 households in a locality. the annual income of the first household is $20k, the second is $47k, the third is $50k, and the fourth is $71k. IF each family pays 12% of its income as tax every year, the local government follows a ________ tax system

proportional

A street light is a _______

public good

a free rider is a person who

receives the benefit of a good without paying for it

In a ___________ tax system, the marginal tax rate declines with income

regressive

a tragedy of the commons occurs when a resource is

rival and nonexcludable

Governments can increase the consumption of a product that creates positive externalities by

subsidizing the production of the product so that the supply is increased and market price is reduced

a _______ curve shows the marginal cost of producing one more unit of a good or service

supply

the actual division of the burden of a tax between buyers and sellers in a market is called

tax incidence

the term tax incidence refers to

the actual division of the border of a tax between buyers and sellers in a market

the tax incidence on sellers is higher if

the buyers are more sensitive to price changes than the sellers

conceptually, the efficient level of carbon emissions is the level for which

the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions

If a tax is imposed on each unit of a good purchased

the demand curve shifts to the left

the deadweight loss of taxation on a good is higher if

the demand or the supply of the good is relatively price elastic

The tax incidence on buyers is higher if

the elasticity of the market supply curve is higher than the elasticity of the market demand curve

the tax incidence on BUYERS is higher if

the elasticity of the market supply curve is higher than the elasticity of the market demand curve

Which of the following describes how a negative externality affects a competitive market?

the externality causes a difference between the private cost of production and the social cost

The government has frequently used a "command-and-control" approach in dealing with pollution. Which of the following describes this approach?

the government imposes quantitative limits on the amount of pollution firms are allowed to generate.

in reference to the federal income tax system, a tax bracket is

the income range within which a tax rate applies

the production of steel in a factory generates a negative externality. a per-unit tax on the factory that equals ________ of still production will internalize the externality entirely.

the marginal external cost

what occurs on the graph if the production of a good gives rise to positive externalities?

the marginal social benefit curve lies to the right of the demand curve

a positive externality causes

the marginal social benefit to exceed the marginal private cost of the last unit produced

if the production of a good involves positive externalities

the market price of the good is lower than its optimal price

If the production of a good involves negative externalities ___________

the optimal price of the good is higher than the price charged in the market.

which of the following will lead to an efficient private solution if negative externalities are present in a market?

the parties involved negotiate with each other and reach an agreement.

if negative externalities are present in a market, ______

the quantity supplied in the market is larger than the socially optimal level

the production of an industrial good in a plant emits harmful gases that cause breathing difficulty. Which of the following will happen if the government imposes a Pigouvian tax on the plant?

the quantity supplied of the good will decrease

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

the sum of consumer surplus and producer surplus is at a maximum

which of the following must be present to reach a private solution to an externality problem?

the transaction costs to negotiate a solution must be relatively low

with an increase in the demand for a good, if prices are not allowed to increase:

there will be no incentive for firms to increase the quantity supplied of the good

the average tax rate faced by an individual is the

total tax paid by her divided by the total income earned.

A retired athlete built a gym near his 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 ____________

tragedy of the commons

overfishing leading to rapid depletion of the stock of fish is an example of

tragedy of the commons

private solutions to the problem of externalities are most likely when

transactions costs are low and the number of bargaining parties is small

common resources differ from public goods in that

unike public goods, common resources are rivalrous in consumption