EC 110 Test 2 Part 2

A free-rider problem exists for any good that is not a. excludable. b. free. c. rival in consumption. d. a private good.

A

A congested side street in your neighborhood is a. not excludable and rival in consumption. b. excludable and not rival in consumption. c. excludable and rival in consumption. d. not excludable and not rival in consumption.

A

A cost imposed on someone who is neither the consumer nor the producer is called a a. negative externality. b. corrective tax. c. positive externality. d. command and control policy.

A

A toll collected from each car traveling during rush hour on a congested road is an effective correction to the Tragedy of the Commons for all of the following reasons except the toll provides an incentive for commuters to a. drive more fuel-efficient cars. b. car-pool. c. drive at times other than rush hour. d. use public transit rather than driving.

A

A view of a spectacular sunset along a private beach is an example of a a. nonrival but excludable good. b. private good. c. rival but nonexcludable good. d. public good.

A

According to the Coase theorem, in the presence of externalities a. private parties can bargain to reach an efficient outcome. b. the assignment of legal rights can prevent externalities. c. the initial distribution of property rights will determine the efficient outcome. d. government assistance is necessary to reach an efficient outcome.

A

Externalities tend to cause markets to be a. inefficient. b. overwhelmed. c. unnecessary. d. unequal.

A

If a market is characterized by a positive externality that is not the result of a technology spillover, a. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is greater than the equilibrium price. b. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. c. the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is less than the equilibrium price. d. the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater than the equilibrium price.

A

In a certain city, the local government regulates the destruction of historic buildings and provides tax breaks to owners of historic buildings who restore them. These government policies a. reflect the fact that restored historic buildings convey a positive externality. b. are likely to decrease the well-being of society as a whole. c. reflect the fact that the destruction of historic buildings conveys a positive externality. d. are likely to worsen the market failure that is associated with historic buildings and the restoration of such buildings.

A

Japan imposes a $300 per ton tariff on imported steel, raising the price charged in Japan to $1,000. Using only this information, which of the following statements is correct? a. The world price for steel is $700. b. The world price for steel is $300. c. The world price for steel is $1,000. d. The world price for steel is $1,300.

A

Negative externalities occur when one person's actions a. adversely affect the well-being of a bystander who is not a party to the action. b. reveal his or her preference for foreign-produced goods. c. cause his or her employer to lose business. d. cause another person to lose money in a stock market transaction.

A

Suppose the nation of Canada forbids international trade. In Canada, you can obtain a hockey stick by trading 5 baseball bats. In other countries, you can obtain a hockey stick by trading 8 baseball bats. These facts indicate that a. if Canada were to allow trade, it would export hockey sticks. b. Canada has an absolute advantage, relative to other countries, in producing hockey sticks. c. Canada has a comparative advantage, relative to other countries, in producing baseball bats. d. All of the above are correct.

A

The Coase theorem states that a. under certain circumstances government intervention is not needed to reach efficient outcomes when an externality is present. b. government intervention cannot lead to an efficient outcome when an externality is present. c. government intervention is always required to reach an efficient outcome when an externality is present. d. only negative externalities can be resolved using government intervention.

A

The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. If trade in peaches is allowed, the price of peaches in the United States a. will increase, and this will cause consumer surplus to decrease. b. will be unaffected, and consumer surplus will be unaffected as well. c. will decrease, and this will cause consumer surplus to increase. d. could increase or decrease or be unaffected; this cannot be determined.

A

The nation of Farmland forbids international trade. In Farmland, you can exchange 1 pound of beef for 2 pounds of pepper. In other countries, you can exchange 1 pound of beef for 4 pounds of pepper. These facts indicate that a. Farmland has a comparative advantage, relative to other countries, in producing beef. b. if Farmland were to allow trade, it would export pepper. c. the price of beef in Farmland exceeds the world price of beef. d. other countries have an absolute advantage, relative to Farmland, in producing beef.

A

The supply curve for a product reflects the a. cost to sellers of producing the product. b. seller's profit from producing the product. c. willingness to pay of the marginal buyer. d. quantity buyers will ultimately purchase of the product.

A

What is the fundamental basis for trade among nations? a. comparative advantage b. misguided economic policies c. absolute advantage d. shortages or surpluses in nations that do not trade

A

Which of the following is a disadvantage of government provision of a public good? a. The government lacks information about what people are willing to pay for the good. b. The government does not provide enough of any public good. c. The private sector can provide all public goods at a lower cost. d. None of the above is a disadvantage.

A

Which of the following is true of markets characterized by positive externalities? a. Social value exceeds private value, and market quantity is less than the socially optimal quantity. b. Social value exceeds private value, and market quantity exceeds the socially optimal quantity. c. Social value is less than private value, and market quantity exceeds the socially optimal quantity. d. Social value seldom exceeds private value; therefore, social quantity is less than private quantity.

A

Which of the following statements is not correct? a. The Tragedy of the Commons illustrates the underuse of a common resource. b. A gasoline tax is an imperfect solution to the problem of traffic congestion on public roads. c. A free rider is a person who benefits from something for which he or she does not have to pay. d. The creation of general knowledge is a public good.

A

A positive externality a. is a benefit to the producer of the good. b. is a benefit to someone other than the producer and consumer of the good. c. results in an optimal level of output. d. is a benefit to the consumer of the good.

B

A positive externality arises when a person engages in an activity that has a. a beneficial effect on a bystander who pays the person who causes the effect. b. a beneficial effect on a bystander who does not pay the person who causes the effect. c. an adverse effect on a bystander who is compensated by the person who causes the effect. d. an adverse effect on a bystander who is not compensated by the person who causes the effect.

B

Each of the following is likely to be a successful way for the government to solve the problem of overuse of a common resource except a. taxing the use or consumption of the common resource. b. asking individuals to voluntarily reduce their use of the resource. c. regulating the use or consumption of the common resource. d. selling the common resource to a private entity.

B

For any country, if the world price of copper is lower than the domestic price of copper without trade, that country should a. export copper. b. import copper. c. neither export nor import copper, since that country already produces copper at a low cost compared to other countries. d. neither export nor import copper, since that country cannot gain from trade.

B

Goods that are not excludable are usually a. the government has good information about what people are willing to pay to eliminate poverty. b. fighting poverty is a public good. c. private sector will incur higher costs than the public sector for these programs. d. All of the above are correct.

B

Many species of animals are common resources, and many must be protected by law to keep them from extinction. Why is the cow not one of these endangered species even though there is such a high demand for beef? a. There is a natural ecological balance between the birth rate of cows and human consumption. b. Cows are privately owned, whereas many endangered species are owned by no one. c. Public policies protect cows from predators and diseases. d. Cows reproduce at a high rate and have adapted well to their environment.

B

One of the least regulated common resources today is a. the Great Lakes. b. the ocean. c. state parks. d. forest preserves.

B

Since air pollution creates a negative externality, a. social welfare is optimal when all air pollution is eliminated. b. social welfare will be enhanced when some, but not all air pollution is eliminated. c. governments should encourage private firms to consider only private costs. d. the free market result maximizes social welfare.

B

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution? a. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. b. Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15). c. Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off. d. Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section.

B

Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality? a. The economic impact of a large-scale pork production facility is localized in a small geographic area. b. The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility. c. The groundwater pollution reduces the cost of large-scale pork production. d. Consumers will not reap the benefits of lower production cost from large-scale pork production.

B

The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. If trade in peaches is allowed, the United States a. will become an importer of peaches. b. will become an exporter of peaches. c. may become either an importer or an exporter of peaches, but this cannot be determined. d. will experience increases in both consumer surplus and producer surplus.

B

The before-trade price of fish in Germany is $8.00 per pound. The world price of fish is $6.00 per pound. Germany is a price-taker in the fish market. If Germany allows trade in fish, then Germany will become an a. exporter of fish and the price of fish in Germany will be $6.00. b. importer of fish and the price of fish in Germany will be $6.00. c. exporter of fish and the price of fish in Germany will be $8.00. d. importer of fish and the price of fish in Germany will be $8.00.

B

The provision of a public good generates a a. positive externality, as does the use of a common resource. b. positive externality and the use of a common resource generates a negative externality. c. negative externality, as does the use of a common resource. d. negative externality and the use of a common resource generates a positive externality.

B

Thurman is a writer who works from his home. Thurman lives next door to Phil, the drummer for a local band. Phil needs a lot of practice to earn $250, which is his share of the band's profit. Thurman gets distracted by Phil's drumming but he needs to get his writing done to earn $500 for his current article. Which of the following is an efficient solution? a. Phil offers Thurman $249 to allow Phil to continue drumming. Thurman accepts and both are better off. b. Thurman offers Phil $251 to stop practicing his drumming. Phil agrees and both are better off. c. Phil offers Thurman $499 to allow Phil to continue drumming. Thurman accepts and both are better off. d. Thurman offers Phil $501 to stop practicing his drumming. Phil agrees and both are better off.

B

When a country abandons a no-trade policy, adopts a free-trade policy, and becomes an exporter of a particular good, a. producer surplus decreases and total surplus decreases in the market for that good. b. producer surplus increases and total surplus increases in the market for that good. c. producer surplus increases and total surplus decreases in the market for that good. d. producer surplus decreases and total surplus increases in the market for that good.

B

When an externality is present, the market equilibrium is a. efficient, but the equilibrium does not maximize the total benefit to society as a whole. b. inefficient, and the equilibrium does not maximize the total benefit to society as a whole. c. efficient, and the equilibrium maximizes the total benefit to society as a whole. d. inefficient, but the equilibrium maximizes the total benefit to society as a whole.

B

Which of the following would not be considered a negative externality? a. Smelter, Inc. creates steel and pollution. b. You have an adverse reaction to a medication your doctor prescribed for you. c. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck. d. Your friend buys a new puppy that barks every night.

B

A major difference between tariffs and import quotas is that a. tariffs create deadweight losses, but import quotas do not. b. tariffs help domestic consumers, and import quotas help domestic producers. c. tariffs raise revenue for the government, but import quotas create surplus for those who get the licenses to import. d. All of the above are correct.

C

All remedies for externalities share the goal of a. decreasing the allocation of resources. b. moving the allocation of resources toward the market equilibrium. c. moving the allocation of resources toward the socially optimal equilibrium. d. increasing the allocation of resources.

C

Because there are positive externalities from higher education, a. private markets will over-supply college classes. b. the government should impose a tax on college students. c. private markets will under-supply college classes. d. government intervention cannot improve the market for college classes.

C

People can be prevented from using a good if the good is a. rival in consumption but not excludable, a sweatshirt is a club good. b. excludable but not rival in consumption, a sweatshirt is a club good. c. both excludable and rival in consumption, a sweatshirt is a private good. d. neither excludable nor rival in consumption, a sweatshirt is a public good.

C

People cannot be prevented from using a good if the good is a. a public good or a club good. b. a private good or a common resource. c. a public good or a common resource. d. a private good or a public good.

C

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The farmer will incur $1,500 in damages to his crops. b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur. d. The railroad will continue to operate but will pay the farmer $1,500 in damages.

C

Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

C

University researchers create a positive externality because what they discover in their research labs can easily be learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship between the equilibrium quantity of university research and the optimal quantity of university research produced? a. They are equal. b. The equilibrium quantity is greater than the socially optimal quantity. c. The equilibrium quantity is less than the socially optimal quantity. d. There is not enough information to answer the question.

C

Which of the following is correct regarding road tolls as a way to reduce traffic? a. They reduce drivers' explicit cost of driving but increase drivers' implicit cost. b. They are the solution to the free rider problem that occurs on roads. c. They can vary based on the amount of traffic that is present. d. Some drivers can be made better off, but some drivers will inevitably made worse off.

C

Which of the following statements about a well-maintained yard best conveys the general nature of the externality? a. A well-maintained yard cannot provide any type of externality. b. A well-maintained yard conveys a negative externality because it increases the property tax liability of the owner. c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood. d. A well-maintained yard conveys a positive externality because it increases the home's market value.

C

A negative externality a. is a cost to the seller. b. is a cost to the buyer. c. exists with all market transactions. d. is a cost to a bystander.

D

A neighborhood voted to develop a vacant lot into a vegetable garden. All of the neighbors worked the land and sowed the seeds. A few neighbors picked and ate the produce before the other neighbors had a chance. Which of the following could solve this example of the Tragedy of the Commons? a. The neighborhood divides the lot into equal size plots and each family can plant and harvest only on their plot. b.The neighborhood continues to work the land and sow the seeds as a group, but sells all of the produce to willing buyers and reinvests the proceeds into the garden for the next year. c. The neighborhood decides to stop gardening on this land because there is no equitable way to allocate the produce. d. Both a and b are possible solutions to this example of the Tragedy of the Commons

D

After a country goes from disallowing trade in coffee with other countries to allowing trade in coffee with other countries, a. the domestic price of coffee will be lower than the world price of coffee. b. The world price of coffee does not matter; the domestic price of coffee prevails. c. the domestic price of coffee will be greater than the world price of coffee. d. the domestic price of coffee will equal the world price of coffee.

D

Becky is a single mother of two young children who spend their days at a daycare center while Becky goes to work. The daycare center closes at 5:30. If parents do not pick up their children at or before 5:30, the daycare center charges a late fee of $5 per child for every 10 minutes the parent is late. Due to traffic, Becky expects to be 20 minutes late to pick up her children. How much would she be willing to pay for a variable toll road that would get her to the daycare center on time? a. Becky would not be willing to pay out of pocket to avoid traffic. b. any price less than $10 c. any price less than $5 d. any price less than $20

D

Examples of goods that are excludable include a. fireworks displays and fire protection. b. internet radio subscriptions and knowledge. c. premium movie channels and streetlights. d. mobile phones and fire protection.

D

Market failure associated with the free-rider problem is a result of a. market power. b. losses that accrue to providers of the product. c. a problem associated with pollution. d. benefits that accrue to those who don't pay.

D

Nine friends who love the beach decide to pool their financial resources and equally share the cost of a one-week house rental on Nantucket. Suppose that the beach outside of the house becomes more congested when the nine additional people join the other beachgoers. Which of the following statements is not correct? a. Use of the beach by the nine new beachgoers will yield a negative externality. b. An increase in the fee to access the beach could be viewed as a corrective tax on the externality of congestion. c. The town can reduce the congestion externality by raising the fee to access the beach. d. Each of the nine friends would have been better off staying at home.

D

Residents of Hong Kong are able to find restaurants that advertise a dish that contains grizzly bear paws. Since it is unlikely that grizzly bear paws are purchased from a private producer of animal paws, we can likely conclude that a. there are likely to be very few grizzly bear poachers. b.international laws making it illegal to sell grizzly bear paws are likely to be very effective at eliminating these offerings at Hong Kong restaurants. c. higher penalties for poaching grizzly bears will prevent poachers from killing. d. allowing individuals to own and raise grizzly bears for meat would likely reduce the threat of extinction to grizzly bear populations.

D

The term market failure refers to a. an unsuccessful advertising campaign which reduces demand. b. ruthless competition among firms. c. a firm that is forced out of business because of losses. d. a market that fails to allocate resources efficiently.

D

When a country that imports a particular good imposes an import quota on that good, a. consumer surplus decreases and total surplus increases in the market for that good. b. consumer surplus increases and total surplus decreases in the market for that good. c. consumer surplus increases and total surplus increases in the market for that good. d. consumer surplus decreases and total surplus decreases in the market for that good.

D

Which of the following is an example of a positive externality? a. A college student buys a new car when she graduates. b. Local high school teachers have pizza delivered every Friday for lunch. c. An avid fisherman buys new fishing gear for his next fishing trip. d. The mayor of a small town plants flowers in the city park.

D

Which of the following is not a reason why government agencies subsidize basic research? a. The general knowledge developed through basic research can be used without charge. b. The social benefit of additional knowledge is perceived to be greater than the cost of the subsidies. c. The private market devotes too few resources to basic research. d. The government wants to attract the brightest researchers away from private research firms.

D

Which of the following quotations illustrates the Tragedy of the Commons? a. "A bird in the hand is worth two in the bush." b. "The only difference between the rich and other people is that the rich have more money." c. "Anyone who is not a socialist before he is 30 has no heart; anyone who is still a socialist after he is 30 has no head." d. "What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others."

D