Ch. 13 Practice Questions

For a product with external costs, the social cost curve lies above the market supply curve. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False

a

The efficient amount of production in a competitive market with external benefits is greater than the equilibrium market quantity. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False

a

Which of the following descriptions best characterizes public goods? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Public goods are those where it is hard to keep non-payers from using the good, but their use of the good does not negatively impact others' ability to use it. b Public goods are those where it is hard to keep non-payers from using the good, and their use of the good negatively impacts others' ability to use it. c Public goods are those without an external cost of production or an external benefit of production. d Public goods are those where individual consumers can be excluded from using the good, but the marginal cost is zero and so an infinite number of goods should be produced.

a

Consider a good produced in a competitive market, but one with external benefits. The market price will result in too ______________ of the good for economic efficiency. The market price will be ______________ than the price that would convince producers to produce the efficient amount. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a little; lower b little; higher c much; lower d much; higher

a A market with external benefits under-produces goods relative to the efficient amount. In order for producers to produce the efficient amount, the price will have to increase, and so the market price is too low.

Which of these is an economically efficient manner of producing basic medical research? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Subsidize production of basic medical research by private producers b Government production of basic medical research c Tax the production of basic medical research by private producers d Either (a) or (b) will work e Either (b) or (c) will work

a & b Basic medical research contains external benefits for society because it can be applied to multiple diseases and medical conditions. The private market, therefore, will under-produce the good relative to the efficient quantity and the government can either subsidize additional research or do the research on its own.

Can you think of other examples of goods with this quality? You might have some of the same goods on this list as you did in the previous question. Multiple answers: Multiple answers are accepted for this question Select one or more answers and submit. For keyboard navigation...SHOW MORE a Public radio b Library subscription c A fourth of July fireworks celebration d Disney's theme park

a & c

If the marginal cost is zero, how much of a good should be produced? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a "as much as possible" b "as much as possible" only if consumers derive any marginal benefit from the good c the allocatively efficient quantity of production is zero d depends on the total cost

b

In addition to taxes, what other regulation could the government impose that would achieve the efficient outcome? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The government could provide subsidies. b The government would have to mandate that there be no quantity produced greater than the allocatively efficient quantity. c Imposing a tax is the only option available to the government.

b

Using concepts from the first part of this chapter, why might some cities buy trees and give them to residents to plant? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Due to external costs of planting trees b Large external benefits of planting trees

b

Using the concepts we used to determine that "optimal amount," when does it make sense to have zero pollution? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a if the marginal cost of pollution reduction is greater than the benefits of eliminating pollution b if the marginal benefit of pollution reduction is greater than the costs of eliminating pollution c if the total cost of pollution reduction is greater than the benefits of eliminating pollution d It will always make sense to have some pollution.

b

Which of the following descriptions best characterizes common resources? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Common resources are those where it is hard to keep non-payers from using the good, but their use of the good does not negatively impact others' ability to use it. b Common resources are those where it is hard to keep non-payers from using the good, and their use of the good negatively impacts others' ability to use it. c Common resources are those without an external cost of production or an external benefit of production. d Common resources are those where individual consumers can be excluded from using the good, but the marginal cost is zero and so an infinite number of goods should be produced.

b

Which of the following is an example of a good where excluding non-payers is difficult? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Library subscription b Public radio c Disney's theme park d Electricity consumption

b

Which of the following individuals might be considered a free rider? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a A taxpayer who benefits from the garbage pickup that her tax dollars support. b An individual who lives near an airport and chooses to watch the local air show from his own yard rather than pay the admission fee next door. c An individual who lives near an amusement park but never visits the park, even when she is invited by management. d A taxpayer who frequents the local parks supported by his tax dollars.

b A free rider is someone who uses a good without paying for it. Taxpayers aren't free riders, by definition, but those who watch air shows from outside the confines of the airport are. The neighbor to the amusement park isn't a free rider because she isn't utilizing the good.

Consider a good with external costs. Which of the following best describes why the market does not produce an allocatively efficient amount? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The marginal benefit to consumers exceeds the marginal private cost of production and the marginal social cost of production. b The marginal social cost exceeds the marginal social benefit. c The marginal social benefit exceeds the marginal social cost. d The marginal private cost of production and the marginal social cost exceed the marginal benefit to consumers.

b Consumers make decisions based on private costs and benefits and normally consume where their marginal private benefits and costs are equal. Given that there are external marginal costs, the marginal social costs must be greater and thus we are not producing and consuming allocatively efficient amounts.

Common resources are used too ______________ for economic efficiency because the marginal cost of using the resource is ______________ than if the resources were private goods. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a slowly; lower b quickly; lower c slowly; higher d quickly; higher

b For a private good, like fish in a private lake, the marginal cost of using the resource is borne by the consumer. But for a common resource, the cost is borne by all potential future users of the resource. Because the marginal cost paid by the user is less than if the resource were owned privately, the user tends to use more of the resource. Thus, the resource use may not be economically efficient.

What can you say about the equilibrium quantity of production and the equilibrium price for a market with external benefits? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The equilibrium market quantity is too high, and the equilibrium market price is too low, relative to the efficient level of production. b The equilibrium market quantity is too low, and the equilibrium market price is too high, relative to the efficient level of production. c The equilibrium market quantity is too low, and the equilibrium market price is too low, relative to the efficient level of production. d The equilibrium market quantity is too high, and the equilibrium market price is too high, relative to the efficient level of production.

c A market with external benefits will not produce enough of the good for economic efficiency, and the price will be too low to induce enough supply to reach the efficient point.

Consider a good produced in a competitive market that has external costs. Too ______________ of the good will be produced for economic efficiency and the price will be ______________ than the price that will convince consumers to purchase the efficient amount. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a little; lower b little; higher c much; lower d much; higher

c A market with external costs over-produces goods relative to the efficient amount. In order for consumers to demand the efficient amount, the price will have to increase, and so the market price is too low.

Which of the following might explain the pattern of marginal benefits of pollution reduction you calculated in EOC 13.12? The marginal benefits to pollution: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a increase with the amount of pollution reduction because a little bit of pollution doesn't have many negative side effects, whereas a lot of pollution can be harmful for health, productivity, and the environment. b increase with the amount of pollution reduction because a lot of pollution can be harmful for health, productivity, and the environment, whereas a little bit of pollution doesn't have many negative side effects. c decrease with the amount of pollution reduction because a little bit of pollution doesn't have many negative side effects, whereas a lot of pollution can be harmful for health, productivity, and the environment. d decrease with the amount of pollution reduction because a lot of pollution can be harmful for health, productivity, and the environment, whereas a little bit of pollution doesn't have many negative side effects.

c Because we are considering the marginal benefits of pollution reduction, we are starting from a position of a lot of pollution and calculating the benefits of moving toward less pollution. The marginal benefits are decreasing as we reduce more and more pollution, implying that the costs to health, productivity, and the environment are higher at higher levels of pollution and lower when pollution levels are lower.

A quasi-public good shares all characteristics of a public good except that access to the good can be limited, at least somewhat, so that there are no free riders. Which of the following products best fits the definition of a quasi-public good? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Clean air b Streetlights c An underused museum d Public radio broadcast

c It would be nearly impossible to limit access to clean air, streetlights, or public radio broadcasts. But admission to a museum can be controlled through user fees.

You have been charged with deciding on optimal fishing policies in order to both encourage growth in the salmon population in the Atlantic and allow fishermen to earn a living. You will need to allow some fishing, but not so much fishing that population counts are depleted for next year. Three proposals are on the table for you to choose from. Option 1: Institute a fishing "window" of 3 weeks wherein fishermen may fish as much as they wish, but after three weeks they must stop. Option 2: Institute a fishing "quota" that will limit the number of fish that any individual fisherman may harvest from the waters. Option 3: Sell a fixed number of licenses to harvest a certain number of fish.Which of these choices is most likely to produce the outcome you are interested in? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Option 1 b Option 2 c Option 3 d Do nothing

c Options 1 and 2 might work, but they depend on assumptions that the number of fishermen or the intensity of fishing won't quickly multiply as a result of your policy. If more fishermen are operating or fishermen are operating with more intensity within the 3 week window, or if there are more fishermen to catch an individual quota, the quantity of fish harvested may not fall very much. Indeed, if the reduction in supply you are aiming for produces an increase in the price of salmon, then you should expect new fishermen to enter this market! But under Option C, you are protected against these possibilities by determining the total harvest in advance.

The earth's environment is an example of a common resource because: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a the actions of any single individual are too inconsequential to meaningfully affect the quality of the environment. b it has a cost of use in the form of pollution, but the benefits of using it far outweigh the costs. c it is provided for all to use without a cost, and each person can use it without affecting other's use of it. d it is provided for all to use without a cost, but one person's use (or abuse) of it affects the ability of others to use it.

d A common resource is characterized by no restrictions on accessing the good, but a consumer's use will affect the ability of other consumers to use the good.

Demand curves in competitive markets represent which of the following? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Marginal costs of production b Average costs of production c Supplier fixed costs d Marginal benefit to consumers

d Consumers are willing to purchase when their marginal benefit exceeds the price. If you take a particular point on the demand curve, it will give you the price at which consumers will demand a given quantity of output --- in other words, the marginal benefit at that quantity. See Chapter 9: Competitive Markets for more details.

The Green River runs through Wyoming and is used free of charge by farmers for irrigation. When there is plenty of rain, the river is a ______________. But in low-rain years, the downstream farmers can experience water levels too low for irrigation and the river is a ______________. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a good with external benefits; common resource b common resource; good with external benefits c common resource; public good d public good; common resource

d In years where the river has plenty of water, the river is a public good because access cannot be controlled and each person's use does not affect others' use. But in low-water years, one person's use does affect another's use, making it a common resource as each farmer takes as much water as possible knowing that they may eventually run out.

What can you say about the equilibrium quantity of production for a market with external costs? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The equilibrium market quantity is too high and the equilibrium market price is too low, relative to the efficient point. b The equilibrium market quantity is too low and the equilibrium market price is too high, relative to the efficient point. c The equilibrium market quantity is too low and the equilibrium market price is too low, relative to the efficient point. d The equilibrium market quantity is too high and the equilibrium market price is too high, relative to the efficient point.

a A market with external costs will produce too much of the good and the price will be too low to reduce the quantity demanded by consumers to reach the efficient point. Too much is being produced from the point of view of economic efficiency.

Given your answer to Question 13.04, what can you say about the social cost of production at that point, compared to the consumer's marginal benefit? The social cost of production is ______________ than the consumer's marginal benefit. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a higher b lower c equal to d can't tell

a Explanation At the equilibrium market quantity, the total marginal cost of production, exhibited by the social cost curve, is greater than the consumer's marginal benefit (from the demand curve).

The economically efficient amount of pollution will be zero when which of the following is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a When costs of pollution are greater than the marginal costs of pollution reduction at all levels of pollution. b When costs of pollution are less than the marginal costs of pollution reduction at all levels of pollution. c Under no circumstances. Some pollution is always economically efficient. d Under all circumstances. It is never economically efficient to have consumers or producers force others to pay the costs of pollution.

a If the marginal cost of one more ton of particulate matter is greater than the cost of eliminating that ton of particulate matter, than it makes sense to do so. If that is true at all levels of pollution, then the economically efficient level of pollution is zero. In practice, this is rarely the case, and there is generally some non-zero amount of pollution where the marginal cost of pollution reduction is greater than the marginal cost of pollution itself.

In efforts to increase economic efficiency, governments should ______________ common resources. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a tax b subsidize c do nothing for

a Private markets over-consume common resources. Governments can discourage consumption through taxation and increase efficiency.

A U.S. company sends a lobbyist to Washington, D.C. to argue for increased tariffs on imported goods from China that compete with the company's own products. Which of the following represents an inefficiency in government due to misplaced incentives? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The lobbyist is successful at convincing legislators to pass the legislation, and American consumers pay higher prices. b The lobbyist fails because legislators fear their constituents will be upset at the price increases. c The lobbyist is successful at convincing the legislators to put the legislation up for a vote, but it fails to get a majority of the votes. d The lobbyist fails because there are many other lobbyists in town arguing for similar tariffs, but they cannot agree on the size of the tariff to be enforced.

a The legislators in this example would increase economic efficiency by not increasing tariffs on imported goods. By passing the legislation, they raise prices for American consumers. But because each individual consumer is unlikely to find it worth their time and effort to lobby for lower prices, the company's lobbyists are more effective.

One market characterized by incomplete information for consumers is the used car market. In the used car market, consumers don't know the condition of the car being sold and therefore cannot accurately project their marginal benefit from consuming the car. Suppose that consumers distrust used car salesmen and expect the worst from the cars they sell. How will the quantity of used cars sold in the used car market compare to the efficient quantity and how will the price of used cars sold in the used car market compare to the price when the efficient quantity is sold? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The quantity in the used car market will be too low relative to the efficient quantity and the price will be too low. b The quantity in the used car market will be too high relative to the efficient quantity and the price will be too low. c The quantity in the used car market will be too low relative to the efficient quantity and the price will be too high. d The quantity in the used car market will be too high relative to the efficient quantity and the price will be too high.

a When consumers assume the worst, they have a lower marginal benefit for each quantity than they would if they had complete information on the quality of each car. As a result, demand falls and the market quantity falls, as does the market price, and both are below the efficient point.

What can you say about the allocatively efficient level of output compared to the new equilibrium market quantity after the tax (that is the same size as the external cost per unit of output) on producers described above is imposed? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a They are the same. b The equilibrium market quantity is greater. c The allocatively efficient quantity is greater. d You cannot tell from the information given.

a With a tax that is the same size as the external cost per unit of output, the firm's new supply curve is exactly the same as the marginal social cost curve displayed in Figure 13.5, and the private market will now produce the allocatively efficient amount.

In efforts to increase economic efficiency, governments should ______________ goods with external costs. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a tax b subsidize c do nothing for

a Without government intervention, goods with external costs are over-produced by the market. The government can decrease the quantity traded by adding a tax on suppliers, raising their costs and reducing their supply. This will result in lower quantities sold.

In Section 13.5, we saw that farm subsidies generally lack an economic justification. What are the unintended consequences of these subsidies? The quantity of goods produced with the subsidy is ______________ and efficiency is ______________ than the market without a subsidy. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a too low; lower b too high; lower c too low; higher d too high; higher

b If farmers receive payments for producing, more is produced than would be produced in a competitive market. As a result, the true marginal utility / marginal cost ratio for agricultural products will be less than that for other products. Because the marginal cost paid by producers is lower than the true marginal cost due to the subsidies, prices are lower than they otherwise would be and consumers purchase more of the goods. However, we could increase our satisfaction with the same resources by consuming less of the subsidized goods and more of other goods. Our overall well-being would be enhanced with less agricultural output and more output of other goods and services.

In efforts to increase economic efficiency, governments should ______________ public goods. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a tax b subsidize c do nothing for

b Private markets under-produce public goods. Governments can produce the goods themselves, or they can subsidize the production by private firms and increase efficiency.

Your local government is contemplating adding a new fireworks show to your town's Fourth of July festivities. They have calculated that the total cost of producing the show will be $3M, and your town has 300,000 residents. The show would be financed through an increase in taxes on each of these residents. Under what conditions is the provision of the fireworks show the efficient outcome? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Only if each person in town values the fireworks show at $10 or more. b If the total benefit of the show is greater than or equal to $3M, even if some individuals value the show at less than $10. c If the total benefit of the show is greater than or equal to $3M, and every person in town has a positive (greater than $0) value for the show. (In other words, no one dislikes fireworks.) d Because the fireworks can only be provided if individuals are taxed, the provision of the fireworks show cannot be efficient.

b Public goods provision is efficient if the total benefit exceeds the total cost, even if some people end up paying a $10 tax for a product they value at less than $10.

How would you classify television broadcasts? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Private goods b Public goods c Ones with external benefits d Common resources

b The marginal cost of one more television turned to a channel is zero, and once the program is broadcast it is very difficult to prevent a user from watching the program. (Newer technologies such as satellite television delivery and cable delivery are changing the nature of the good.) Television programs can be produced in private markets because of advertising. Firms are willing to buy advertising, and thus the producers are able to pay for the production of the programs.

Consider a good with external benefits. Which of the following best describes why the market does not produce an allocatively efficient amount? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The marginal private cost of production equals both the marginal private benefit of production and the marginal social benefit of production. b The marginal private cost of production equals the marginal private benefit of production but is less than the marginal social benefit of production. c The marginal private cost of production exceeds the marginal social benefit of production but equals the marginal private benefit of production. d The marginal private benefit of production exceeds both the marginal private cost of production and the marginal social benefit of production.

b The market will produce where the private marginal cost equals the private marginal benefit. When there are external benefits, the marginal social benefit is above the marginal private benefit. Therefore, where the market produces the marginal social benefit will be higher than the marginal cost, which means the amount produced is inefficient. We could improve efficiency by producing more.

Common resources involve externalities. The consumption of common resources results in external ______________ and the free market quantity produced and consumed is ______________. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a costs; too low b costs; too high c benefits; too low d benefits; too high

b Users of common resources negatively affect other users and potential users, resulting in external costs. For this reason, the free market quantity is too high.

In efforts to increase economic efficiency, governments should ______________ goods with external benefits. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a tax b subsidize c do nothing for

b Without government intervention, goods with external benefits are under-produced by the market. The government can increase the quantity traded by paying a subsidy to suppliers, lowering their costs and increasing their supply. This will result in higher quantities sold.

Can you think of examples based on the above scenario? (i.e., where non-payers cannot be prevented from using the good, but where only one person or producer can consume the good at a time.) Multiple answers: Multiple answers are accepted for this question Select one or more answers and submit. For keyboard navigation...SHOW MORE a Free WiFi b Fish in oceans c Free WiFi in an overcrowded cafe d Public grazing lands

b, c, & d

In the aftermath of the financial crisis of 2008, several banking practices came into sharp focus for contributing to the crisis. One of those practices was the issuance of "subprime" mortgages - mortgages made to borrowers who were unlikely to be able to repay in the case of a recession or a decline in housing values. Banks defended their choice by arguing that if the mortgage holders defaulted on the payments, the banks themselves would be the ones taking a loss in profits. In the end, however, the default rate on these loans was so high that the country's entire financial system was at risk of collapse, and taxpayer dollars were used to keep banks solvent. This information indicates that subprime mortgages are _________. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a public goods b common resources c goods with additional social costs d goods with additional social benefits

c Subprime mortgages carry additional costs beyond those incurred by the bank because, if they go bad, they may endanger the whole financial system, having a negative impact on taxpayers and other individuals who are neither suppliers nor buyers in that market.

Suppose the government chooses to provide a public good at a zero price, and the increased consumption makes it so that one person's use begins to interfere with others' use. Think of a crowded road or a crowded park. What should the government do now to keep this market efficient? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Stop providing the good. b Close the goods to users at peak demand times. c Pay consumers to use the good. d Add prices that reflect the costs of an individual's use of the good.

d One additional consumer does now create a cost. That cost is increased travel time or inconvenience to the current drivers or the other people who would also enjoy park. The marginal cost is no longer zero, and economic efficiency will require that a price be charged. That is why freeways in Singapore and Riverside, California and bridges in San Francisco and New York charge prices that depend upon how crowded the roads and bridges actually are. These prices now force consumers to determine whether their marginal benefit from consumption exceeds the marginal cost.

Your local government is considering building a new highway bypass to circumvent your city. The bypass will traverse private property as it makes its way around the city and may even require some individuals to move residences. Which of the following is NOT a justifiable concern regarding the decision-making process or the construction of the bypass? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Because there is no competition within local government, the project might be completed in an inefficient manner, costing taxpayers more than necessary. b It is difficult to estimate how much a new highway bypass is worth to citizens, and the government may have incorrectly estimated the benefits of this project. c Because the bypass will need to traverse private properties and disrupt some people's property and lives, they may lobby against the project even it if it has a positive net benefit to all of the city's citizens. d Because private contractors are often licensed and bonded, but the government is not, if the government builds the new bypass themselves, there is likely to be a greater number of safety violations.

d Public good provision by governments is subject to concern over efficiency of government production (Option A) and poor estimation of the benefits of a public good (Option B). In addition, government incentives are not always aligned to pursue the most efficient outcome, including cases where the benefits or costs of a public good are concentrated so that a certain group holds most of the voice in the decision-making process.

Consider a good with external costs. Which of the following descriptions characterizes quantities of goods between the market equilibrium quantity and the allocatively efficient quantity? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a These quantities will not be produced by the private market, but the government can add these quantities to production using a subsidy, resulting in higher economic efficiency. b These quantities will not be produced by the private market, but the government can add these quantities to production using a tax, resulting in higher economic efficiency. c These quantities will be produced by the private market, but the government can eliminate these quantities from production using a subsidy, resulting in higher economic efficiency. d These quantities will be produced by the private market, but the government can eliminate these quantities from production using a tax, resulting in higher economic efficiency.

d The efficient quantity is lower than the market quantity, but the government can tax production to achieve the efficient quantity.

Once a government has introduced a proper (that is, economically efficient) policy to address the market failure, the price of a good that has external benefits will be ______________ than its free market price and the price of a good that has external costs will be ______________than its free market price. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a higher; lower b higher; higher c lower; lower d lower; higher

d This question is tricky. Assume that subsidies or taxes are used to adjust production of goods and services with external benefits or costs and that those subsidies or taxes are paid directly to or by the producers. With external benefits, not enough of the good is produced. Thus the current price is too low to justify producing more of the good. However, if the producer is subsidized, the price of the good in the market will actually fall and the quantity demanded will increase. So the market price after the policy will actually be lower than the free market price. Too many goods with external costs are produced. And thus their prices should be higher for a reduction in quantity demanded. That will happen if the good is taxed.

What will happen in a competitive market if consumers are unable to estimate accurately the marginal utilities of goods? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a There will be no change relative to a market where consumers know marginal utilities. b Consumers may over-estimate benefits and consume too much of a good. c Consumers may under-estimate benefits and consume too little of a good. d Both b and c are possible. e All three outcomes (a, b, and c) are possible.

e If consumers do not know the marginal benefit of a good for certain, they must estimate. Although their estimates might be right (Option A), they might also be wrong, and their guess might be an overestimate or an underestimate (Options B and C).

A rural county in the U.S. has no broadband internet providers. A broadband provider from a neighboring county makes a proposal to the county government about building the infrastructure needed to bring broadband to individual businesses and households. The city asks for donations from its residents to cover the costs of the infrastructure (users would still be charged a monthly rate for access) and comes up short of the total amount needed. Which of the following is true if the county is interested in achieving the efficient outcome? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The county should not pursue the broadband connection any further. Their residents clearly do not value it enough to cover the infrastructure costs. b The county should undertake a study of potential benefits from broadband access. If the benefits exceed the costs, the county should tax all its citizens to pay for the infrastructure. c The county should undertake a study of potential benefits from broadband access. If the benefits exceed the costs, the county should tax only the eventual users of the broadband service, not all its citizens. d Either a) or

e The county shouldn't take the non-response to its requests for donations as evidence that its citizens don't value the good. Free riders may value the good but not be willing to pay for it, knowing they will be able to access it anyway. If the benefits of the broadband access exceed the costs, then, for the purposes of allocative efficiency, it matters not whether the county gets the money for infrastructure from all citizens or only from those that use the service.