ECON 202 Module 8

Which of the following statements about rent seeking is false? Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for. Because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law. If a firm can benefit from government intervention in the economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market. A person is engaging in rent-seeking behavior when he uses the political process to acquire ownership of a resource that belongs to the public.

Because rent seeking redistributes society's resources, anyone engaging in such behavior is violating the law.

If the social cost of producing a good or service exceeds the private cost

a negative externality exists

Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity? A gain in consumer surplus An economic profit A positive externality A gain in producer surplus

a positive externality

Which of the following is an example of a public good? A magazine subscription A radio broadcast A house in a tourist destination A training program for a company's employees

a radio broadcast

The public choice model

applies economic analysis to government decision making.

Private costs

are borne by producers of a good while social costs are borne by society at large.

According to public choice theory, policymakers

are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest.

The public choice model assumes that government policymakers

are likely to pursue their own self-interests, even if their self-interests conflict with the public interest.

If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set

equal to the marginal external cost at the economically efficient level of pollution

What does the phrase "internalizing an external cost" mean?

forcing producers to factor their production costs the cost of the externalities created in the production of their output

Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behavior known as

free riding

If there is pollution in producing a product, then the market equilibrium price

is too low and equilibrium is too high

The economically efficient amount of recycling will occur if

recyclers pay the full cost of picking up recycled products

Economists often analyze the interaction of individuals and firms in markets. Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others, a process that is referred to as

rent seeking

A product is considered to be rivalrous if

your consumption of the product reduces the quantity available for others to consume.

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?

$900

The central question In trying to determine whether to involve the government in an economic issue is Determining whether or not the government can be relied on to make things better. Determining whether or not property rights are involved. Determining the social value of the goods in question. Determining the appropriate tax rate.

Determining whether or not the government can be relied on to make things better.

Some economists who use the public choice model to explain the ways government intervenes in the economy believe that regulatory capture results when an agency or commission is given authority over a particular industry or product. Which of the following is the best example of regulatory capture?

Firms that were regulated by the Interstate Commerce Commission (ICC) attempted for many years to influence the ICC's actions.

Which of the following is an implication of the Coase Theorem?

Government intervention is not always necessary to solve externality problems

What is regulatory capture?

It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.

Which of the following statements refers to rent seeking? "The federal government should spend more money on programs that help low income citizens and less money on national defense." "The role of the federal government in the U.S. economy grew significantly after the Great Depression. Government spending and taxes are a much greater proportion of total income today than they were in 1929." "There is an opportunity cost whenever the federal government spends tax revenue. For example, an additional $1 billion spent on national defense means there will be less revenue for highway construction and maintenance or some other program." "Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws."

Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws."

Beginning in the 1950s economists began to investigate incentives within government. They found that: Government should not get involved in the economy. Government should only implement monetary policy income taxes, and leave the rest of the economy alone. One should be cautious in calling on the government to improve economic performance None of the above.

One should be cautious in calling on the government to improve economic performance

According to the video, the key to Viscusi's findings about the net impact of smoking on healthcare costs is that

People who smoke need more medical care, but they also (unfortunately) tend to die younger, and that creates an offsetting reduction in health care costs.

Which of the following describes how a positive externality affects a competitive market?

The externality causes a difference between the private benefit from consumption and the social benefit.

The U.S. government has frequently used a "command-and-control" approach in dealing with pollution. Which of the following describes this approach?

The government imposes quantitative limits on the amount of pollution firms are allowed to generate

The possibility of "government failures" should be evaluated before getting the government involved in addressing "market failures."

True

How does the construction of a market demand curve for a private good differ from that for a public good?

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.

he opportunity cost of using land for a landfill is determined by:

The value of the land before the landfill was developed, minus the cost of the land after the landfill is full.

The net effect of smoking in a restaurant is to

There is no general answer.

The appropriate charge for trash disposal should be set by The opportunity cost of using the landfill, The cost of the trucks and labor needed to haul trash away, The impact of buried plastic bottles that only slowly degrade. All of the above. A and B above.

a and b

The key problem(s) with externalities is that Private costs do not equal social costs. Private benefits do not equal social benefits. The government is often inefficient. All of the above. A and B above.

a and b

Consider the following characteristics: a. low transactions costs b. small levels of pollution c. high levels of pollution d. clear assignment of property rights Which of the above are assumptions behind the Coase Theorem?

a and d

Government imposed quantitative limits on the amount of pollution firms are allowed to produce is an example of

a command and control approach to pollution reduction

Restaurant owners have an incentive to Fully account for the value impact of restaurant smoking on nonsmokers. Fully account for the value of restaurant smoking to smokers. Take into account how smoking shifts the overall demand curve for restaurant meals. All of the above.

all of the above

To evaluate recycling, you must consider The demand for recycled products, The incremental costs to society for recycling products, The value of the land used for landfills, All of the above. B and C above.

all of the above

An externality occurs when:

an economic activity affects third parties not engaged in the activity

Sewage treatment is an example of

an externality

The key to solving problems associated with smoking in restaurants is to

assign property rights to restaurant owners

For-profit producers will produce only private goods because

buyers will be willing to pay for the goods since the benefits are excludable.

When the federal government orders firms to use particular methods to reduce pollution, it is said to be using

command and control policies

Which of the following is an example of a common resource? a college education public transportation lions in a zoo elephants in the wild

elephants in the wild

Which of the following is not an example of rent-seeking behavior?

engaging in aggressive advertising that slams a competitor's product

Financial contributions to the campaigns of members of Congress, state legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are

examples of rent seeking

According to the video, the government should ban smoking in restaurants because of the diseases caused by passive smoking.

false

Banning smoking in restaurants is clearly economically efficient because passive smoke is harmful. True False

false

Economics shows that it is inefficient to recycle plastic bottles because they have little value.

false

If transactions costs are low, private bargaining will always result in an efficient solution to the problem of externalities.

false

Recycling is an economic problem because the land is substantially damaged by the creation of garbage dumps.

false

Recycling is not an economic problem because there is only so much land on Earth.

false

The best solution to water pollution is to make the responsible people clean the water and return it to its natural state.

false

The government can be relied on to efficiently solve problems associated with pollution through (Pigovian) taxes

false

The point of the video is that the government can seldom enhance economic efficiency.

false

The social problem of smoking in restaurants is caused because smokers want to pollute the air, causing harm to people around them.

false

The use of landfills means the land will lose all its value for subsequent use.

false

When there is a positive externality in a free market, too much of the good is produced and consumed.

false

Which of the following is an example of an ordinary private good? Furniture Cable TV The Internet Water

furniture

A positive externality ________.

gives rise to external benefits

A Pigouvian tax is a tax designed to ________.

induce producers generating negative externalities to reduce production

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

it evaluates the costs and benefits of producing the good

A carbon tax which is designed to reduce pollution is an example of a

market-based policy

The Coase Theorem states that ________.

negotiation between economic agents leads to an efficient allocation of resources

The Coase theorem relies on internalizing externalities through ________.

negotiations between the parties involved

A green pasture has turned barren due to overgrazing. This happened because the pasture was ________. excludable and rival excludable but non-rival non-excludable but rival non-excludable and non-rival

non-excludable but rival

The tragedy of the commons occurs because some goods are ________ in consumption.

non-excludable but rival

According to the video, W. Kip Viscusi studied tobacco smoking and concluded that There were significant negative externalities associated with smoking, There were significant net social benefits to smoking. Smokers, in general, made poor decisions. None of the above.

none of the above

A public good is

nonrival and nonexcludable

A good is non-rival in consumption if ________.

one person's use of the good does not preclude consumption by others

In economics, the term "free rider" refers to

one who waits for others to produce a good and then enjoys its benefits without paying for it.

The free rider problem refers to a situation in which

people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay it

The "tragedy of the commons" refers to the phenomenon where

people overuse a common resource

A positive externality results when

people who are not directly involved in producing or paying for a good or service benefit from it

The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community. This is an example of a ________.

positive externality

The cost borne by a producer in the production of a good or service is called

private cost

A private good is

rival and excludable

A tragedy of the commons occurs when a resource is

rival and non-excludable

Which of the following is an example of a common resource? sea otters in the coastal waters of the Pacific Ocean public health care services in the United States impounded dogs in a dog pound catfish in a private pond in Mississippi

sea otters in the coastal waters of the pacific ocean

A key advantage of assigning property rights to owners of restaurants is that

smokers and non-smokers are likely to be able to eat meals the way they like

When production generates a negative externality, the true cost of production is the

social cost of production

Governments can increase the consumption of a product that creates positive externalities by

subsidizing the production of the product so that the supply is increased and market price is reduced

In England during the Middle Ages each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cow or sheep would get enough to eat. The reason the grass was depleted was

the area of pasture was nonexcludable and the consumption of the grass was rival.

Which of the following describes how a negative externality affects a competitive market?

the externality causes a difference between private cost of production and the social cost

A fireworks show has been arranged in a park. The ticket for the show is $5 but only 40% of the tickets get sold as spectators can watch the show without entering the park. This is an example of ________.

the free-rider problem

Conceptually, the efficient level of carbon emissions is the level for which

the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissisons

The production of steel in a factory generates a negative externality. A per-unit tax on the factory that equals ________ of steel production will internalize the externality entirely.

the marginal external cost

When a Pigouvian tax is imposed, ________.

the marginal private cost curve shifts upward

A positive externality causes

the marginal social benefit to exceed the marginal private cost of the last unit produced

If the production of a good involves positive externalities, ________

the market price of the good is lower than its optimal price

If the production of a good involves negative externalities, ________.

the optimal price of a good is higher than the price charged in the market

Which of the following will lead to an efficient private solution if negative externalities are present in a market? The parties involved negotiate with each other and reach an agreement. The party creating the externality has the legal property right. The party suffering from the externality has the legal property right. The party having the legal right is taxed.

the parties involved negotiate with each other and reach an agreement

If negative externalities are present in a market, ________.

the quantity supplied in the market is larger than the socially optimal level

when there is a positive externality

the social benefit received by consumers is greater than the private benefit.

Haiti was once a heavily forested country. Today, 80 percent of Haiti's forests have been cut down, primarily to be burned to create charcoal. The reduction in the number of trees has lead to devastating floods when it rains heavily. This is an example of

the tragedy of the commons

Overfishing leading to a rapid depletion of the stock of fish is an example of ________.

the tragedy of the commons

Which of the following must be present to reach a private solution to an externality problem?

the transactions costs to negotiate a solution must be relatively low

A retired athlete built a gym near his house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________.

tragedy of the commons

Private solutions to externalities are most effective if _______

transaction costs associated with bargaining are low

If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered

transactions costs

The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called

transactions costs

One problem with using taxes to solve economic externalities is that politicians may spend the money on things they like, rather than things their constituents want.

true

Recycling is an economic issue because the goods that are recycled, the land for landfills, and the trucks and labor needed for both recycling and trash disposal are all examples of scarce resources.

true

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level.

true

The social problem of smoking in restaurants because smokers and nonsmokers want to use the air in different ways.

true

The video indicated that there is a significant difference between recycling fluorescent lights and plastic bottles.

true

One difference between the demand for a private good and that for a public good is that

with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity.