Chapter 7 Problems
D
A carbon tax which is designed to reduce pollution is an example of a A. noneffective incentive. B. strong-arm tactic. C. command-and-control policy. D. market-based policy.
A
A corrective or Pigouvian subsidy: A. incentivizes an increase in the output when positive externalities exist. B. incentivizes a reduction in the output when negative externalities exist. C. removes choice by requiring production to change for goods with externalities. D. provides more alternatives so that satisfaction rises with few units sold.
C
A corrective or Pigouvian tax leads: A. to a reduction of external benefits and costs. B. to a need for offsetting subsidies. C. people to internalize the external costs and benefits of their actions. D. to a Coase Theorem-based solution that arises from private bargaining.
B
A familiar example of a negative externality is loud music in a busy park on a weekend. In principle, it should be possible to solve this externality by permitting park visitors to negotiate rights to play music in particular locations or at specific times. The most likely reason these negotiations do NOT occur is that: A. most people are unfamiliar with the Coase theorem. B. the bargaining costs of identifying and establishing communications between all affected parties would be high. C. music is an experience, not a good. D. some park goers do not view loud music as a negative externality.
B
A good is characterized as _____ when one person's use of the good does not reduce another person's ability to use the same unit of the good. A. nonexcludable B. nonrival C. shareable D. free
D
A government action that can help correct positive externalities is A. a fee charged to producers of the good that provides external benefits. B. regulations aimed at reduced production by sellers of the good that provides external benefits. C. a tax on producers of the good that provides external benefits. D. a subsidy to consumers of the good that provides external benefits.
C
A knowledge problem exists when A. so much information is available to decision-makers that it is difficult to process all the relevant information. B. the information available to a decision-maker is not accurate and based on opinion. C. the information needed to make a good decision is not available to a decision-maker. D. a decision-maker refuses to believe or make use of available information.
B
A large farming operation which uses a potent fertilizer is located up river from a trout farmer. If property rights of the river exist and transactions costs are low, the amount of pollution will be A. efficient only if the trout farmer owns the river. B. efficient if either the farming operation or the trout farmer own the river. C. inefficient if the farming operation owns the river.
D
According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market? A. People who get flu shots actually end up decreasing the spread of the virus. B. A company recently turned an abandoned factory at the end of your street into a paper mill that now stinks up the entire town. C. A railroad train that runs the entire East Coast regularly emits both pollution and loud noises for people living near the tracks. D. Your neighbor's dog routinely gets out of his yard and does his "business" in your yard.
A
An externality is defined as: A. a side-effect of an activity that affects bystanders whose interests are not taken into account. B. an effect of market activity that impacts the opposite side of the market from the side whose decision caused the effect. C. the effect of an activity undertaken outside a building rather than inside a building. D. the impact of an activity on buyers and sellers in the market where the activity takes place.
C
Assume there are two people in a society. Person A is willing to pay $140 to have one unit of a public good produced and Person B is willing to pay $160 to have one unit of a public good produced and $140 to have two units produced. As a result, society would be willing to pay a price of ________ of this public good. A. $200 for 3 units B. $200 for 1 unit C. $300 for 1 unit D. $160 for 5 units
D
Common resources have: A. characteristics of being rival and exclusive. B. characteristics of being nonrival and nonexclusive. C. shared gains but private costs. D. private gains but shared costs
D
Competitive markets do NOT result in: A. goods going to the consumers who will receive the highest marginal benefit from the good. B. the largest possible economic surplus. C. goods produced at the lowest possible marginal cost. D. the largest possible economic profit for firms.
A
Externalities tend to occur because decision makers consider _____ and do NOT consider _____. A. their own costs and benefits; the effects of their actions on others B. their own income as limitless; their income as limited C. the welfare of others; their own welfare D. their own needs as most important; the fact that others also have needs
B
Market failure occurs when market forces lead to: A. high quantity. B. an inefficient outcome. C. high price. D. a marginal benefit that is equal to marginal cost.
D
Market failure refers to a situation in which: A. it is not possible to make some people better off without making other people worse off. B. markets establish a high price for necessities. C. market-determined wages are not high enough to raise all workers above the poverty line. D. markets fail to reach an efficient outcome.
B
Montgomery owns a nuclear power plant in the town of Springfield. His power plant dumps substantial quantities of radioactive waste into the local pond, which has given rise to a mutant guppy fish population with three eyes. The town decides to have Montgomery do something about the externality. Which method would NOT result in Montgomery accounting for the social cost of running the power plant? It would not work to A. define property rights clearly to identify Springfield as the owner of the pond with the right to compensation from Montgomery for damages from the pollution. B. subsidize Montgomery for every three‑eyed fish found in the pond. C. charge Montgomery $1,000 for every barrel of toxic waste his nuclear reactors produce. D. have the government give Montgomery a permit to allow a limited amount of pollution but no more.
A
Most neighborhood streets have traffic lights to help control the flow of traffic. Traffic lights are _____ and _____. Therefore, they will be _____ by the competitive market. A. nonrival; nonexcludable; underprovided B. nonrival; nonexcludable; overprovided C. rival; excludable; efficiently provided D. nonrival; excludable; underprovided
A
Ronald Coase's ideas on property rights have helped economists and policymakers better understand environmental problems. Identify the true statement regarding Coase and property rights. Coase contended that A. the assignment of property rights to someone is essential. B. property rights allocation is unimportant because the affected parties will contract with one another to find an efficient solution to externality problems regardless of who is assigned the initial property right. C. property rights refer exclusively to ownership of land. D. environmental harms will be greater when property rights are assigned to firms.
B
Select the best description of "special interest" groups in the context of legislation and politics. A. All of these descriptions apply to special interest groups. B. Small and well-organized groups that exert a disproportionate political influence. C. Groups that have special needs. D. Groups of people who care about only one specific issue. E. Large groups that advocate for the benefit of society in general.
A
Suppose a classmate claims that the reason he knows nothing about politics is rational ignorance. What does he mean? A. that the cost associated with becoming informed is greater than the benefit B. that he is scared of discovering the extent of corruption in politics C. that cable television is too expensive D. that he does not understand certain policies, so there is no point in paying attention E. that he is lazy
C
Suppose that instead of each farmer in an area owning a specific parcel of land, all farmland is pooled together. The profits that remain from all of the pooled farmland is divided among all of the participating farmers equally. Which is the most likely consequence of a property right system like this being used? A. Technological innovations will occur that will help the farmers become more productive. B. Farmers will undertake increased investment in human and physical capital. C. Free riding would occur from various farmers on the land. D. The farmers would develop a sense of altruism and work hard to accomplish as much as possible as a group.
B
Which of the following would be both nonrival and nonexcludable? A. a museum B. a siren tornado warning system C. a road D. an immunization
D
A market with negative externalities will tend to _____ compared to a market producing the socially optimal output. A. underproduce and sell at a lower price B. underproduce and sell at a higher price C. overproduce and sell at a higher price D. overproduce and sell at a lower price
C
A nonexcludable good is a good in which: A. the good has no cost of production and so is available to consumers at no cost. B. one person consuming or using the good cannot prevent others from using or consuming the same unit of the good. C. it is difficult to prevent someone from using or having access to the good. D. there is a regulation that the good must be provided to everyone.
A
A positive externality causes A. the marginal social benefit to exceed the marginal private cost of the last unit produced. B. the marginal social benefit to be less than the marginal private cost of the last unit produced. C. the marginal social benefit to be equal to the marginal private cost of the last unit produced. D. the marginal private benefit to exceed the marginal social cost of the last unit produced.
A, B, A, D
Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. a. A sports team t-shirt A. rivalrous and excludable B. rivalrous and nonexcludable C. nonrivalrous and nonexcludable D. nonrivalrous and excludable b. The air we breathe A. nonrivalrous and excludable B. nonrivalrous and nonexcludable C. rivalrous and nonexcludable D. rivalrous and excludable c. Atlantic bluefin tuna in the Mediterranean Sea A. rivalrous and nonexcludable B. nonrivalrous and nonexcludable C. nonrivalrous and excludable D. rivalrous and excludable d. A toll road in normal traffic A. rivalrous and nonexcludable B. nonrivalrous and nonexcludable C. rivalrous and excludable D. nonrivalrous and excludable
C
Command and control methods do not always produce the most efficient outcomes because: A. they reduce consumption in all cases. B. consumers sometimes are misled regarding their own preferences. C. they lack the flexibility to allow buyers and sellers to choose the least costly methods to alter their behavior. D. they do not always allow suppliers to produce the efficient market quantity.
B
Every few months, public television asks viewers to contribute to their local public television station. Although they raise money during this time, it often falls short of the amount they wish to raise because: A. they do not make the pledge period long enough. B. viewers know they will be able to watch public television, even if they don't contribute. C. public television free-rides on the viewers. D. the marginal social cost equals the marginal social benefit of public television viewing.
D
How can the tragedy of the commons be averted? A. The parties involved can engage in public bargaining. B. The government can implement a cap and trade policy. C. The government can assess corrective taxes. D. Ownership rights can be assigned.
B
If the social benefit of consuming a good or a service exceeds the private benefit A. the sum of consumer surplus and producer surplus is maximized. B. a positive externality exists. C. the market achieves economic efficiency. D. a negative externality exists.
D
John receives a marginal benefit of $80 from one missile. Nick receives a marginal benefit of $50 from one missile. Christina receives a marginal benefit of $65 from one missile. John, Nick, and Christina are the only people in the economy. What is the economy's marginal social benefit from one missile? A. $50 B. $80 C. $65 D. $195
D
Many people who own dogs do not pick up after them in public places. This is an example of: A. free riders. B. forced riders. C. a public good. D. the tragedy of the commons
B
Marginal external costs of pollution are the A. sum of the marginal private cost and marginal social cost of pollution. B. additional negative effects imposed on others due to one more unit of pollution. C. sum of the marginal private benefit and marginal external benefits of pollution. D. additional positive effects imposed on others due to one more unit of pollution.
C
One of the key underpinnings of public choice analysis is the assumption that politicians and bureaucrats A. act not out of self‑interest but desire to increase the general utility of the public. B. seek only to maximize long term economic growth through increasing GDP. C. make political decisions based on self‑interest, just as individuals and firms do. D. make political decisions based primarily on benefiting future generations.
A
Some researchers estimate that all saltwater fish will be extinct by 2048, in large part due to overfishing. But surveys also show that more households eat chicken and beef than fish; however, neither chickens nor cattle are in danger of extinction. Which of the following best explains these observations? A. Fish tend to be nonexcludable resources, whereas chicken and beef are excludable. B. The supply of fish has always been less than the supply of chicken and beef. C. The price of fish is much higher than the price of chicken and beef. D. Fish tend to be nonrival resources, whereas chicken and beef are rival.
B
Sunday afternoon NFL football games on television are nonrival because: A. the provider cannot prevent people who do not pay for them from watching them. B. more than one person can consume the same unit of the good at the same time. C. individuals ignore the effect of their use on the amount of the resource remaining for others. D. the market suffers from inefficiently low consumption.
B
The Coase theorem implies that: A. private individuals will not produce the socially optimal outcome because bargaining costs are generally quite high. B. given low bargaining costs, private individuals can achieve a socially optimal solution without the involvement of the government. C. given external costs, the government must intervene to achieve the socially optimal output. D. all goods that generate an external cost (or benefit) should be produced up to the point where the marginal social benefit equals the marginal social cost of the good.
C
The advantage of using command and control to solve an externality problem is that: A. it is usually the least costly approach. B. it is a very flexible approach. C. it is inflexible, and some problems require an inflexible approach. D. it solves the problem efficiently without the government requiring very much information.
A
The free-rider problem results from: A. the inability to prevent individuals who do not pay for a good from consuming it. B. average cost pricing. C. monopoly pricing. D. the horizontal summing of supply curves.
D
The incentive to dedicate private resources to maintaining a common resource is low because: A. there is no benefit from maintenance of a common resource. B. maintenance is very expensive. C. entrepreneurs have not found a way to profit from common resources. D. the benefits of maintenance are external, not private benefits.
D
The marginal cost of producing 40 units of a public good is $200. There are two individuals in the society. Person A is willing to pay $80 for 40 units of the public good. If 40 units of the public good are provided, how much must Person B be willing to pay? A. $150 B. $0 C. $80 D. $120
A
The marginal social benefit from the production of the last unit of a good is $4,800. If the willingness to pay for that unit is $3,900, what is the external benefit from its production? A. $900 B. $8,700 C. $3,800 D. $4,100
C
The market demand for a public good can be determined by A. adding up how much each citizen expects to consume at each possible price. B. estimating the value of the benefit that each unit provides and multiplying that by the number of consumers. C. adding up how much each consumer is willing to pay for each unit of the public good.
B
Traffic congestion is a common example of a negative externality. In principle, it should be possible for drivers to negotiate the right to drive at particular times, thereby compensating those who would prefer not to drive at peak times and solving the externality. The most likely reason these negotiations do NOT occur is that: A. individuals are unfamiliar with the Coase theorem. B. the bargaining costs of such negotiations would be prohibitive, as there are (in large cities) many interested parties. C. such an agreement could not be enforced, since all individuals have free access to all public roads. D. the punitive nature of the negotiations for those not involved would ensure it cannot come to pass.
B
What is the difference between a positive externality and a negative externality? A. Whether bystanders have a direct or inverse relationship to the decision maker. B. Whether the welfare of bystanders rises or falls. C. Whether the price rises or falls. D. Whether the perspective is the buyer's or the seller's.
A
What is the net effect of a negative externality? It decreases A. both producer and consumer surpluses. B. the market equilibrium output. C. only producer surplus. D. only consumer surplus.
D
Which is a source of market failure? A. Market power B. Externalities C. Irrationality D. These are all sources of market failure.
A
Which of the following describes a situation with a negative externality? A. After a commercial poultry farm opens, neighbors on all sides complain of its smell. B. The buyer of a skateboard falls when using it and is injured. C. When the price of gasoline rises by 10%, the quantity sold drops by 8%. D. When 10% more people get a flu shot, the incidence of the flu drops by 20%.
D
Which of the following is NOT a problem that occurs when rules and regulations are used to control externalities? A. Rule and regulations tend to eliminate rather than reduce externalities when reduction might be the better option. B. Rules and regulations may focus on an easy-to-monitor way to achieve a goal rather than the best way to achieve it. C. Rules and regulations may stifle innovation and discovery of how to achieve the rule's goal. D. Rules and regulations tend to focus on the most extreme cases of an externality rather than the most common.
D
Which of the following is NOT a source of market failure? A. market power B. externalities C. irrationality D. excessive information
C
Which of the following statements supports the idea that price changes are not externalities? A. A change in price adversely affects all suppliers in the market. B. Prices are a side effect of decisions making. C. A price change redistributes costs and benefits but does not generate new costs or benefits. D. A drop in price is a clear signal that the market was negatively impacting buyers.
B
Which scenario is the best example of the tragedy of the commons? The best example is when A. all artists in a mass-media environment face an incentive to create works that are lower quality in order to appeal to the lowest common denominator. B. users of a shared shower in a dorm allow the shower to get nasty by failing to clean it often enough. C. a country experiences widening income inequality. D. two countries engaged in international trade of a good reach the same equilibrium price, which is higher than it would have been in the absence of trade. E. a group of farmers forms a collective to coordinate a common pricing strategy.
B
In a market system, public goods would: A. lack demand. B. be underproduced. C. have no costs. D. be overproduced.
A
A corrective/Pigouvian tax designed to resolve a negative externality problem is typically set at an amount equal to the _____ cost. A. marginal external B. marginal social C. total social D. total externality
D
A factor that is NOT a possible reason for market failure is: A. firms having the capacity to raise the market price. B. transactions that have side effects on the welfare of others. C. lack of information about the quality of a second-hand car. D. extremely high prices for prescription eyewear.
C
Aurora Township is asking all of its citizens to chip in and donate money to build a new library. Tommy thinks he already pays enough money in taxes, so he chooses not to donate. He knows that even if he does not contribute he will be able to use the library once it is built. This is an example of A. the tragedy of the commons. B. moral hazard. C. the free rider problem. D. adverse selection. E. asymmetric information.
B
Individual transferable quotas (ITQs) are like a _____, allowing _____. A. cartel; fisherman to raise market prices by limiting competition B. permit; fishermen the right to catch a limited number of fish C. corrective tax; fishermen a tax write-off for capital purchases D. subsidy; the internal benefit of fishing to be externalized
B
Irrational decision making in markets results in: A. consistent overproduction. B. some supply decisions not matching marginal costs, and some demand decisions not reflecting marginal benefits. C. evidence that the rational rules do not lead to their claimed outcomes. D. externalities.
A
One of the main problems with the Coase theorem is that: A. bargaining costs are generally not low (or zero). B. individuals only act in their own self-interest. C. the consumer evaluation theorem implies that bargaining costs are not sufficiently high. D. a corrective tax or subsidy is needed to ensure that a social optimum is reached.
A
When government policies lead to outcomes that are worse than those that would occur in unregulated markets: A. government failure occurs. B. marginal costs occur. C. liveweight loss occurs. D. government efficiency occurs.
A
When negative externalities occur as a result of a product market's activity, the market will _____ than is desirable. A. produce more B. charge a higher price C. produce less D. function further from equilibrium
B
Which of the following is an example of the tragedy of the commons? A. Television's popularity has become a common tragedy in our society. B. Tuna in the ocean are being overharvested because it is difficult to prevent anyone from fishing for tuna. C. There is an increasing threat to wildlife due to habitat loss in national forests. D. Personal computers have become a commonplace appliance in many homes, causing an expedited tragedy of technology.
B
Which statement best illustrates a cause of government failure as it relates to economics and markets? One cause is A. the cessation of government business due to lack of funding. B. when the incentives of government officials do not allign with public interest C. a situation in which rebels overtake an established government. D. a failure of governments to meet budgetary needs.
C
How does rational ignorance reduce social welfare? A. Special interests are able to get projects with higher costs than benefits passed because they have the necessary connections. B. Special interests are able to get projects with higher costs than benefits passed because of lobbying measures. C. Special interests are able to get projects with higher costs than benefits passed because voters fail to acquire sufficient understanding of complex issues. D. All of the above result from rational ignorance.
B
How does the construction of a market demand curve for a private good differ from that for a public good? A. There is no difference; in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price. B. The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good. C. There is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good. D. The market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price.
A
In economics, what is the meaning of the phrase 'the tragedy of the commons?' A. People will overuse or misuse a common resource that is not excludable but is rivalrous. B. In market economies products are often similar and common, so the government must actively attempt to create variety in goods and services. C. In decisions involving intellectual property rights, policy-makers must compromise in order to reach common ground among competing interest groups. D. It serves the common good to produce items that are neither rivalrous nor excludable, but profit‑maximizing firms will not produce such products. E. Goods that are not rivalrous but are excludable are under‐produced by private markets, often with consequences that reduce social welfare.
D
When someone can enjoy the benefits of a good without bearing the cost, the good: A. is a nonmarket good. B. is attractive to manufacturers. C. is excludable and rival. D. is subject to the free-rider problem.
D
When the forces of supply and demand lead to an inefficient outcome A. economists call this a deadweight loss. B. it is a signal that the government needs to take ownership of that market including all the resources involved. C. the economic surplus is maximized. D. economists call this a market failure.
D
When the lawn care services market is characterized by positive externalities: A. output is too low, and price is too high. B. too many lawn care services are produced. C. output is too high, and price is too low. D. too few lawn care services are produced.
A
Which of the following is NOT a reason for government failure? A. Regulators are overly focused on efficiency. B. Government leaders are focused on enriching themselves. C. Elected officials are more concerned about reelection than efficiency. D. Regulators act in the interest of the industries they regulate.
A
Which of the following is NOT a result of an efficient market? A. Economic surplus is minimized to reduce waste. B. Goods go to the consumers who will gain the highest marginal benefit from the good. C. Goods are produced by the firms that can do so at the lowest marginal cost. D. Allocative efficiency is achieved.
A
Which of the following is a positive externality? A. After measles vaccinations increase by 20%, the number of cases of measles falls by 35%. B. After the price of dental care decreases, more people can afford regular dental check-ups. C. After a large stadium is built in a neighborhood, homeowner property values in the neighborhood fall because of noise and traffic. D. Researchers develop a new drug that effectively treats a devastating disease that previously had no cure.
D
Which of the following is an example of a negative externality? A. Bae's company has a decrease in profits when the demand for its product falls. B. Paul loses weight because he wants to feel better, but the weight loss means that he needs new clothes. C. Rita gains weight while she is on vacation because she eats more than normal. D. When Fazio parks his big truck at the grocery store, people in the cars on each side of his parking space have a hard time opening their car doors.
A
Which of the following is an example of rent seeking behavior? A. U.S. sugar firms convinced Congress to impose a quota on imports of sugar. B. Amazon introduced the Kindle to compete with Sony's Digital Reader. Amazon was motivated by the desire to earn profits from the Kindle but also increased the choice of digital music players available to consumers. C. Apple earned large profits from the development and sale of the iPhone. D. Recent increases in cigarette taxes faced little opposition from voters, many of whom were rationally ignorant with respect to the tax.
C
Which of the following statements describes the Coase Theorem? A. Even if bargaining is not costless, and property rights are unclear, externality problems can be solved through private bargaining. B. Elimination of an externality is possible only when the marginal benefit of a good is no higher than its marginal cost. C. If bargaining is costless, and property rights are clearly established and enforced, then externality problems can be solved through private bargaining. D. If the marginal benefit of a good exceeds the good's marginal cost, more of it should be produced.
D
Which of the following statements describes the occurance of a positive externality resulting from the production of a good by a new technology? A. When the customer resells the good to his neighbor B. When pollution is produced during the development of the new technology C. When the company that pays for developing new technology benefits from the advancement in its production of other goods D. When people who neither paid for developing the technology nor the good produced by the new technology are better off from the advancement E. When income is received by the developer for selling the good made by the new technology
B
Which of the following statements is TRUE? I. Sugar consumers pay higher prices because of sugar quotas, a sufficient incentive for them to campaign against politicians that favor quotas. II. Sugar producers know more about sugar quotas than do sugar consumers because the quota system has a large effect on sugar industry profits. III. When it comes to sugar trade policy, sugar producers are rationally informed and sugar consumers are rationally ignorant. A. I only B. II and III only C. I, II, and III D. I and II only
C
Why might an efficient outcome be reached even without Coasian bargaining? A. It is not possible to reach the efficient outcome without bargaining and payments. B. When many people are involve, the benefits of coming to an agreement are very large. C. Social norms can lead people to consider the impact on others, even without bargaining and payments.
D
Your college roommate has the right to practice her tuba during the day. You, however, find that studying during the day is most conducive to good grades, and her tuba-playing makes it difficult for you to concentrate. You make a deal with your roommate: you will clean the dorm room once a week if she will practice her tuba at other times or elsewhere. This is an example of A. emission permits. B. a corrective tax. C. a corrective subsidy. D. the Coase theorem.