Chapter 16

Given high transactions costs, the best way to deal with a positive externality is A. to tax it. B. to subsidize it. C. to allow both parties to negotiate. D. to limit the extent of the externality.

B. to subsidize it.

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table: If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if Peter had the rights to stop any cell phone calls from taking place at the coffee shop? A. 2 B. 0 C. 1 D. 3

A. 2

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table: If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any calls he liked at the coffee shop? A. 2 B. 0 C. 1 D. 3

A. 2

If grazing land is used by all individuals on a free open range, they will operate until the A. AP of the land equals the opportunity cost of the input. B. MP of the land equals the opportunity cost of the input. C. TP of the land equals the opportunity cost of the input. D. MP of the land is larger than the opportunity cost of the input.

A. AP of the land equals the opportunity cost of the input.

A positional externality occurs when A. one person's increase in consumption lowers his neighbor's utility. B. one person builds a house which obstructs his neighbor's view. C. a polluter positions himself in a crowded city. D. a drunk person decides to drive.

A. one person's increase in consumption lowers his neighbor's utility.

An example of a negative externality is A. pollution. B. an apple orchard increasing the number of trees next to a bee farm. C. the Clean Air Act. D. a consumer paying too much for an item.

A. pollution.

If the costs of negotiation are small but not negligible, A. the best available outcome results if the liability is placed on the party with the lowest cost of prevention. B. an efficient outcome results no matter how the law assigns responsibility. C. efficiency cannot be reached without government intervention. D. the best way to deal with the externality is to tax it.

A. the best available outcome results if the liability is placed on the party with the lowest cost of prevention.

Negative externality occurs when A. the production of a good harms third parties. B. the production of a good helps third parties. C. a buyer is sold inferior and damaged merchandise. D. the consumption of a good helps third parties.

A. the production of a good harms third parties.

According to the text, if diamonds represent a form of conspicuous consumption, then A. they should be taxed. B. they should be outlawed. C. they should be subsidized. D. they should be given for free.

A. they should be taxed.

Suppose fishermen go fishing at a fishery that has no property rights (meaning any fishermen could fish as she liked). The marginal cost of a fishing boat is constant at $100, and the price for each pound of fish sells at $1. Further, assume the relation between the number of vessels and the total catch is given by the following table: Each boat that goes out get an equal share of all the fish caught and there are 8 boats possible. If the fishery was own collectively by all the fishermen, how many boats would be sent out fishing? A. 0 B. 6 C. 7 D. 8

B. 6

The story in your book about Austria and the nuclear power plants is a clear case of which of the following? A. When externalities exist it is easy to negotiate an agreement between the offender and the offended party. B. Political differences can sometimes override rationality, raising negotiation costs and making solutions difficult or impossible. C. The story supports the claim of the Coase Theorem that the liability for actions should be placed on the side that has the lowest cost of correcting the problem. D. When coal powered plants become offensive countries will switch to nuclear power in order to maintain political stability in a region.

B. Political differences can sometimes override rationality, raising negotiation costs and making solutions difficult or impossible.

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall. What if negotiation is impossible and you have the rights to play? A. You will play at 10 and insulate your walls. B. She will insulate her walls and you will play at 10. C. You will play at 6 and she will suffer through the listening of your playing. D. You will play at 3 and she will listen to the music that comes into her apartment.

B. She will insulate her walls and you will play at 10.

If transactions costs are very high and auctions for pollution permits are not possible, which of the following is the most effective way to deal with pollution? A. Allow the parties to negotiate B. Tax pollution C. Require all polluters to limit their pollution to a certain level with regulation D. Give subsidies to reduce pollution

B. Tax pollution

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall. If she has the property rights with negotiation impossible, then what will the outcome be? A. You will shut your stereo off. B. You will play to 3 and insulate so that the noise does not reach her. C. You will play to 6 and she will insulate her walls. D. You will play to 4 and she will absorb the noise even though she dislikes it.

B. You will play to 3 and insulate so that the noise does not reach her.

An example of a positive externality is A. pollution. B. an apple orchard increasing the number of trees next to a bee farm. C. the Clean Air Act. D. smoking in a crowded place.

B. an apple orchard increasing the number of trees next to a bee farm.

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table: According to the Coase theorem, when the parties affected by externalities can negotiate costlessly with one another A. an efficient outcome results if the liability is placed on the party with the lowest cost of prevention. B. an efficient outcome results no matter how the law assigns responsibility. C. efficiency cannot be reached without government intervention. D. the correct way to deal with an externality is to tax it.

B. an efficient outcome results no matter how the law assigns responsibility.

If a company dumps pollution in the water and fishermen are hurt and if transactions costs are prohibitively high and efficiency is the most important criteria, A. the company should be made liable for the damage. B. liability should be placed on the group that has the least cost of solving the problem. C. the company should be allowed to pollute because a river is not private property. D. the company should be taxed enough so the government can keep the river clean.

B. liability should be placed on the group that has the least cost of solving the problem.

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall. If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? The answer to the questions are to the nearest whole dial number. A. 3 B. 4 C. 6 D. 10

C. 6

Laws are efficient if they A. uphold absolute property rights. B. restrict all undesirable action like polluting. C. work to equate the marginal benefits and marginal costs of behavior. D. help maximize total benefits of behavior. E. impose no costs on citizens.

C. work to equate the marginal benefits and marginal costs of behavior.

Suppose the problem is the stereo noise in the dorm. On the graph on the next page the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the marginal costs and benefits of various levels of music (noise). Also measured on the vertical axis is the marginal cost of insulating the walls to prevent the externalities from penetrating the wall. If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played? A. 0 B. 3 C. 4 D. 6

D. 6

Suppose fishermen go fishing at a fishery that has no property rights (meaning any fishermen could fish as she liked). The marginal cost of a fishing boat is constant at $100, and the price for each pound of fish sells at $1. Further, assume the relation between the number of vessels and the total catch is given by the following table: Each boat that goes out get an equal share of all the fish caught and there are 8 boats possible. If there were no controls over fishing, how many vessels would be sent out fishing? A. 0 B. 6 C. 7 D. 8

D. 8

The laws relating to trespass, the use of airspace and unobstructed view tell us what about property rights definition in the United States? A. The laws are not absolute in protecting a property owner from intrusion. B. The laws rely on cost-benefit analysis to arrive at efficient outcomes. C. The laws vary depending on information costs and enforcement costs. D. Property laws involve all of these considerations.

D. Property laws involve all of these considerations.

According to Pigou, the best way to deal with a negative externality is to A. allow both parties to negotiate. B. assign liability to the party with the highest cost of prevention. C. assign liability to the party with the lowest cost of prevention. D. tax it.

D. tax it.