ECO 202 Module 4
A cost-benefit analysis of a highway is difficult to conduct because analysts
will have difficulty estimating the value of the highway.
Pollution is a
negative externality that can be viewed as a common-resource problem.
When positive externalities are present in a market
social benefits will be greater than private benefits.
Which of the following is an example of the Tragedy of the Commons?
A type of duck becomes extinct due to overhunting.
Governments can improve market outcomes for
both public goods and common resources.
Hoa owns 40 acres of land. Hoa sells the land to a real estate developer who builds a subdivision with 20 houses. The land is an example of a good that is
both rival in consumption and excludable.
An externality is the uncompensated impact of
one person's actions on the well-being of a bystander.
When a good is rival in consumption,
one person's use of the good diminishes another person's ability to use it.
A good is excludable if
people can be prevented from using it.
Both public goods and common resources are
nonexcludable.
The phenomenon of free riding is most closely associated with which type of good?
Public goods
Which of the following is NOT a way of internalizing technology spillovers?
Taxes
Which of the following is an example of a positive externality?
Your neighbor plants a nice garden in front of his house.
Which of the following illustrates the concept of a negative externality?
Your sleep is disrupted by a neighbor's loud music.
Market failure associated with the free-rider problem is a result of
benefits that accrue to those who don't pay.
Two types of private solutions to the problem of externalities are
charities and the Golden Rule.
Pay-per-view broadcasts are
club goods.
If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a
command-and-control policy.
Goods that are rival in consumption include both
common resources and private goods.
Before considering any public project, the government should
conduct a cost-benefit analysis and compare the total cost and total benefits of the project.
If the government decides to build a new community center, the first step would be to conduct a study to determine the value of the project. The study is called a
cost-benefit analysis.
If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should
encourage the production of computer chips with subsidies.
Private goods are both
excludable and rival in consumption.
The parable called the Tragedy of the Commons applies to goods and services such as
grazing land and fishing.
Negative externalities lead markets to produce
greater than efficient output levels and positive externalities lead markets to produce smaller than efficient output levels.
Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking, and the trash cans overflow with food wrappers on summer afternoons. Otherwise, it is a great place. The park is a common resource because
if too many people use it, one person's use diminishes other peoples' use.
Ashlyn installed a wooden sculpture in her front yard. A positive externality arises if the sculpture
increases the value of other properties in the neighborhood.
When an externality is present, the market equilibrium is
inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution
is less costly to society.
For most goods in an economy, the primary signal that guides the decisions of buyers and sellers is
price.
For private goods allocated in markets,
prices guide the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources.
A textbook is a
private good and the knowledge that one gains from reading the book is a public good.
Goods that are excludable include both
private goods and club goods.
Because of the free-rider problem,
private markets tend to undersupply public goods.
The overuse of a common resource relative to its economically efficient use is called
the Tragedy of the Commons.
If a sawmill creates too much noise for local residents,
the government can raise economic well-being through noise-control regulations.
In some cases, tradable pollution permits may be better than a corrective tax because
the government can set a maximum level of pollution using permits.
Private companies are most likely to invest in medical research if
they will produce a specific product for which they may receive a patent.
Which of the following goods is rival and excludable?
A congested toll road
The town of Smallhaven is on a small island connected to Large City by a single bridge. Most of the residents of Smallhaven work in Large City. As a result, the bridge becomes very congested for two hours each day at the typical morning and evening commute times. Which of the following policies considered by the mayor of Smallhaven would likely be most efficient in alleviating the congestion?
A variable toll for the bridge payable only by vehicles crossing the bridge during the congested commute times.
Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
Which of the following is not a common resource?
An ice cream cone
Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?
At the current output level, the marginal social benefit exceeds the marginal private benefit.
Which of the following is not a characteristic of a public good?
Because it is a free good, there is no opportunity cost.
Which of the following would not be considered a private good?
Cable TV service
Which of the following statements is not correct about corrective taxes?
Corrective taxes require the government to set a target level of pollution.
In which of the following cases is the Coase theorem most likely to solve the externality?
Ed is allergic to his roommate's cat.
Who among the following is a free rider?
Mike listens to National Public Radio, but does not contribute to any fundraising efforts.
Which of the following statements is not correct?
The government cannot improve upon the outcomes of private markets.
The Pennsylvania Turnpike is a tolled freeway running through the state of Pennsylvania. Motorists must pay tolls at various points along the Turnpike based on the distance they traveled on the freeway. Suppose that despite the tolls, many motorists in the urban areas use the Turnpike causing traffic to slow during peak times. What type of good would the Turnpike be classified as in this case?
Private good
Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?
The equilibrium quantity is greater than the socially optimal quantity.
Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?
They are equal.
Which of the following is not an advantage of corrective taxes?
They subsidize the production of goods with positive externalities.
Which of the following is not a typical solution to the "Tragedy of the Commons?"
Turning the common resource into a club good
Under which of the following scenarios would a park be considered a common resource?
Visitors can enter the park free of charge, but frequently all of the picnic tables are in use.
A toll on a congested road is in essence
a corrective tax.
Education yields positive externalities. For example,
a more educated population tends to result in lower crime rates.
Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of
a transaction cost.
A lighthouse is typically considered to be a public good because
all passing ships are able to enjoy the benefits of the lighthouse without paying.
On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. An economist would suggest that
it would be more efficient if the electric company raised its rates for electricity at peak times.
If a highway is congested, then use of that highway by an additional person would lead to a
negative externality.
Because public goods are
not excludable, people have an incentive to be free riders.
A traffic light at an intersection is
not rival and not excludable in consumption.
The U.S. military defends Ngoc from foreign conflict. The fact that Ngoc enjoys this protection does not detract from other Americans' enjoyment of it. For this reason, we say that national defense is
not rival in consumption.
According to the Coase theorem, private parties can solve the problem of externalities if
property rights are clearly defined.
Markets fail to allocate resources efficiently when
property rights are not well established.
People cannot be prevented from using a good if the good is a
public good or a common resource.
A free rider is a person who
receives the benefit of a good but avoids paying for it.
The goal of requiring licenses for hunting and fishing is to
reduce the use of a common resource.
The Tragedy of the Commons results when a good is
rival in consumption and not excludable.
