ECON 201 - Externalities + Negative Externalities

On average, it can cost ______________ and take ______________ to discover a new drug, perform the necessary safety tests, and bring the drug to market.

$800 million; more than a decade

Suppose that each kilowatt-hour (kwh) of electricity produced using natural gas results in 0.2kgs of carbon dioxide emissions. If each ton of carbon dioxide emissions results in environmental costs of $360, then the marginal external cost per kwh of electricity produced is equal to (0.2kg is equal to about 0.000220462 tons):

8 cents.

Under current U.S. copyright legislation, works produced on a for-hire basis and owned by firms enjoy monopoly protection for

95 years from the date of publication.

Which if the following statements about environmental policy is true? I. A cap and trade policy allows the government to directly control the quantity of pollution, but the price of pollution is determined by private agents.II. A carbon tax allows the government to directly control the price of pollution, but the quantity of pollution is determined by private agents.III. Both carbon taxes and cap and trade programs will result in least-cost abatement.

I, II, and III.

Which of the following statements about negative externalities is/are TRUE? I. At the social-surplus maximizing level of output, external costs equal zero.II. At the unregulated competitive equilibrium, marginal social cost is greater than marginal social benefit.III. At any output level, social costs are greater than private (market) costs.

II and III

Which of the following statements about external costs is TRUE?

None of the above statements are true.

If a competitive market is characterized by a negative externality, then which of the following statements is true?

Social surplus is less than market surplus.

Which of the following legislation was enacted in 1998 to allow copyright to be extended from 50 to 70 years after an author's death?

Sonny Bono Copyright Term Extension Act

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. If both states clean the lake, the payoffs will be

Wisconsin gains 200, Illinois gains 300

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. If Wisconsin does not clean the lake and Michigan does then the payoffs will be

Wisconsin gains 300, Illinois loses 100

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. In the absence of any agreement, the outcome of this game will be

Wisconsin not cleaning the lake, Illinois cleaning the lake

A complementary approach to supporting R&D that does not involve the government's close scrutiny of particular R&D projects is to give firms

a reduction in corporate taxes based on amount of R&D performed.

The federal government funds ______________ of the nation's basic research, much of which ______________.

about half; conducted at colleges and universities

The term "applied research" refers to research that is focused on a particular product that promises

an economic payoff in the short or medium-term.

Because of the legal protection for intellectual property, such as patents, a firm has a better chance of recouping the costs of research if it pursues

applied technological research

How does the cost of financial capital influence innovative research and development activities in a competitive market?

at a low cost, firms demand a large quantity, as R&D projects will likely return a higher rate.

Tom, Mary and Jill have apartments in the same building. A security system for their building costs $750. Tom is willing to pay $100 for the security system, Mary is willing to pay $300 and Jill is willing to pay $300. They have a meeting to vote on whether to pay $250 each for the security system. At least two of them must vote for the system to be installed before the vote is passed. The efficient outcome is to have the security system installed. After the meeting the security system will ______________, which illustrates ______________.

be installed, the free rider problem

Paddy and Mick are the only two inhabitants of a small island off the coast of Ireland. They burn coal to keep their houses warm at night. However, this coal burning is harming the air quality on their island. Both Paddy and Mick could install air filters on their chimneys. These filters cost 50 each. Each filter provides a social benefit of 80, but those benefits are divided equally among Paddy and Mick. If both Paddy and Mick install the filters

both will gain 30

If I'MSmartCo's research and development project succeeds, then

competitors may find a way to adapt and copy the underlying idea without incurring R&D costs.

When technology is advancing so quickly, even a patent from, say, two years ago may be ______________, because ______________.

completely outdated; no firm is relying on that technology any longer

Which of the following would be classified as a positive externality?

converting a derelict empty lot to a public vegetable garden

Which of the following circumstances would encourage I'MaPharmaCo. to increase research and development activities?

cost of financial capital is low

Which of the following would some economists be likely to perceive as the most appropriate public policy response to a positive externality created by the development of a highly innovative new technology?

develop ways to provide a greater share of the social benefits to the innovator

Many residents of a particular town enjoy taking their dogs with them when they go to their local park for recreation and picnics. Everybody enjoys the park more when each group cleans up after themselves and their pets, but nobody enjoys the act of cleaning up after themselves or their dogs. We can expect the park to be ______________, due to a ______________.

dirty, prisoner's dilemma

The term "basic research" applies specifically to research pertaining to fundamental scientific breakthroughs that may offer commercial applications in the ______________.

distant future

Ideally, a patent should cover a long enough period of time for the inventor to ______________, but that period should not be so long that it allows the inventor to ______________.

earn a hearty return; charge a high monopoly price permanently

Which of the following is the most appropriate response of public policy to a negative externality like pollution?

find ways to account for the social costs of the negative externality in economic decisions

An individual who wants others to pay for public goods, but plans to use those goods for their own purposes, is often referred to as a ______________.

free rider

If the government determines that the private sector does not have sufficient incentive to carry out research and development, which of the following is likely to be a reasonable response?

government can use public funds to pay for the R&D activities directly.

If a firm's efforts to be technologically innovative will create a positive externality, then that firm will likely

have less incentive to innovate to the extent that the whole of society desires.

Why did Gordon Gould have to endure a lengthy legal battle in order to receive a patent for his innovative laser idea concocted in 1957?

he delayed applying to patent his idea, mistakenly believing he needed to have a working laser to apply

If an alternative policy could encourage both ______________, instead of ______________, consumers would benefit.

invention and competition; invention and monopoly

I'mAComputerCo. would likely be more willing to undertake an innovative research project to reduce the amount of electricity required to run its computers if there were some form of guarantee that if it succeeded,

it could sell the new computers as a monopoly for at least a few years.

If some of the products developed by I'mASoftwareCo. must face market competition that can very quickly produce either an identical product or a close substitute for it, then

it may decide against R&D projects of this sort.

Once it's patent application has been accepted, a firm is able to earn ______________ on its product, which ______________.

monopoly profits; offers an incentive for research and development to take place

Why did Thomas Edison vow that he would work only on ideas for things that people would buy?

no government would buy his first patented invention.

When it is costly or impossible to exclude someone who hasn't paid to use a particular good from using it, then that good is classified as being

nonexcludable

A public good is a good that is ______________, and thus is difficult for market producers to sell to individual consumers.

nonexcludable and nonrivalrous

In order for a good to be classified as ______________, when one person uses the good, others are also able to use it.

nonrivalrous

If the maintenance fees for a lighthouse are paid in full each year by charging port fees, then the lighthouse is

nonrivalrous and nonexcludable

It is commonly understood that every invention

often results in new technology and all of the above.

Some studies done by economists have found that the original inventor receives ______________ from innovations, while other businesses and new product users receive the rest of the benefit.

one-third to one-half of the total economic benefits

One reason some economists doubt that patent protection encourages innovation is that economic studies show that inventors receive only ______________ of the total economic value of their inventions in countries that ______________.

one-third to one-half; already had patents

Which of the following mechanisms will increase the rate of return that can be earned by inventors of new technology?

patents, copyrights, and each of the above

In economic terms, when I'mASoftwareCo. invests in new technology innovations,

positive externalities arise.

For a positive externality, ______________ than the social benefits.

private benefits of an action are less

When a firm invests in new technology, the ______________ that the firm receives are ______________.

private benefits; only a portion of the overall social benefits

For a negative externality, the ______________ than the costs imposed on society as a whole.

private costs of an action are less

In the case of technology, it can sometimes be quite difficult for ______________ to earn a ______________ rate of return from their inventions.

private investors; reasonable

Which of the following represents one of the methods that the government uses to promote technology?

protection of intellectual property

Raven Farms raises a substantial number of bees and uses the honey to produce its own skin healing cream. Raven Farms is situated next to the Oakcreek Apple Orchard. The bees from Raven Farms pollinate Oakcreek's apple trees. In this instance, Raven Farms

provides more social benefits than it derives in private benefits.

Many economists would view market competition as supporting the invention of new technology because it

provides short-term above-normal profits, and b and c as well.

Government has a variety of policies that allow inventors to ______________, such as the granting patents and ______________.

receive an increased rate of return; subsidization of research and development

Cathy can take either of two separate roads to drive to work. The first is a lightly used new toll road that is rarely congested. The second road is a local road with no tolls, but it is often congested and has many potholes. In this instance, the toll road is

rivalrous and nonexcludable

There is a skating rink in your city that is open to anybody to use at any time. They even provide skates for people who don't own any. This is an example of a good that is

rivalrous and nonexcludable

If a small electric automobile manufacturer is able to gain the social return generated by its electric motor, its demand for financial capital would

shift to the left.

A highly innovative firm operating in a competitive market will usually have

some time before competitors catch up to its innovations.

Generally, market competition and technology can

sometimes a or b

While the majority of economists acknowledge that intellectual property rights do provide a method for increasing the rate of return for inventors, some have suggested there are number of reasons to doubt whether patents provide

sufficient incentives for innovation, as well as c.

The difference between playing a board game and a playing a video game is the

technology of the video game

If the research and development efforts of a firm have ended in failure, then

the firm could experience a and/or b.

Which of the following would most likely be recognized as a defining characteristic of a public good?

the good is both a and b above

Market competition can provide ______________ for ______________,

the needed incentive; discovering new technologies

If large numbers of individuals choose to behave as free riders,

the public good may never be provided.

Market competition may sometimes encourage a firm to innovate out of fear because of the perception that

they will inevitably fall behind other competitors seeking out innovations.

Which of the following would most likely be identified as being the ultimate goal of public policies that pertain to technology?

to encourage a stream of invention that benefits the whole of society.

One difficulty with direct government support of R&D is that it inevitably involves government decisions about ______________.

which of the vast number of proposed projects are worthwhile

If the government altered its invention patent policy from a monopolistic policy to a competitive policy, then consumers

would benefit from the lower price and greater quantity sold.