module 3

Each of the following explains why cost-benefit analysis is difficult except

government projects rarely have sufficient funding to complete them on time.

Producer surplus directly measures

the well-being of sellers.

In many cases the Coase theorem does not work well because

transaction costs are too high.

Because there are positive externalities from higher education,

private markets will under-supply college classes.

Markets do not ensure that the air we breathe is clean because

property rights are not well established for clean air.

The free-rider problem explains why many local governments supply

public goods.

The idea of requiring motorists to pay to use the busiest streets in a city

reflects the fact that a congested road is a common resource.

In Singapore, littering fines are strictly enforced. This is an example of a policy that

relies on incentives to reduce the pollution externality.

Which of the following is not an effective method to reduce negative externalities?

relying on voluntary compliance

T/F Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower cost.

True

T/F Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.

True

A corrective tax is also known as:

a Pigovian tax.

Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in mind a maximum amount that he will bid. This maximum is called

willingness to pay.

The difference between specific knowledge and general knowledge is that

specific knowledge is excludable, while general knowledge is not excludable.

If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to

$4.

Michael values a stainless steel refrigerator for his new house at $3,500, but he succeeds in buying one for $3,000. Michael's consumer surplus is

$500.

Bill created a new software program he is willing to sell for $300. He sells his first copy and enjoys a producer surplus of $250. What is the price paid for the software?

$550.

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii) Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

(ii) only

Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22?

All three buyers experience the same loss of consumer surplus.

If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets?

Consumer surplus decreases.

Coffee and tea are substitutes. Good weather that sharply increases the coffee bean harvest would

increase consumer surplus in the market for coffee and decrease producer surplus in the market for tea.

T/F A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but would refuse to buy a product at a price less than his willingness to pay.

False

T/F A free rider is a person who pays for a good but does not receive the benefit of it.

False

T/F Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay

False

T/F Government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education.

False

T/F Suppose a certain good conveys either an external cost or an external benefit. If the private cost of the last unit of the good that was produced is equal to the private value of that unit, then the sum of producer and consumer surplus is maximized.

False

T/F When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.

False

Which city currently charges drivers a "congestion toll" to drive into the heart of the city's financial, legal, and entertainment district?

London

Suppose that electricity producers create a negative externality equal to $6 per unit. Further suppose that the government imposes a $8 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

The after-tax equilibrium quantity is less than the socially optimal quantity.

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the student in the form of higher wages. If the government offers subsidies for MBAs, then which of the following statements is correct?

The equilibrium quantity of MBAs will be greater than the socially optimal quantity of MBAs.

T/F A good that is excludable is one that someone can be prevented from using if she did not pay for it.

True

T/F Government should tax goods with negative externalities and subsidize goods with positive externalities.

True

T/F If the social value of producing robots is greater than the private value of producing robots, the private market produces too few robots.

True

T/F Tax on gasoline discourages driving on noncongested roads, even though there is no congestion externality for these roads.

True

T/F Ticket scalping can increase total surplus in the market for tickets to sporting events.

True

National defense is a classic example of a public good because

it is difficult to exclude people from receiving the benefits from national defense once it is provided.

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

a transaction cost.

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

auction off a limited number of sheep-grazing permits.

Total surplus is represented by the area

between the demand and supply curves up to the point of equilibrium.

Government should tax goods with ______ and subsidize goods with _______.

negative externalities; positive externalities.

At present, the maximum legal price for a human kidney is $0. The price of $0 maximizes

neither consumer nor producer surplus.

Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

consumer and producer surplus

Inefficiency exists in an economy when a good is

not being consumed by buyers who value it most highly.

Inefficiency exists in an economy when a good is

not being produced by the lowest-cost producers.

The Coase theorem asserts that, if externalities are present and if private parties can bargain over the allocation of resources at no cost, then

the private market will reach an equilibrium in which resources are allocated efficiently.