Econ Exam 2

Club goods are a type of _____, since the amount produced will be _____ the socially efficient quantity.

local monopoly; below

Marginal social benefit equals

marginal private benefit plus marginal external benefit.

Cap-and-trade systems allow _____ efficient producers to produce above their quota limit and _____ overall efficiency.

more; increase

Which of the following is a social insurance program in the United States?

~Social Security ~worker's compensation ~Medicare

what are able to solve negative externality problems

~corrective taxes. ~fines. ~lawsuits.

which tragedies of the commons

~the cutting down of entire rainforests. ~overfishing. ~traffic jams.

An activity that has beneficial side effects for bystanders is called _____.

a positive externality

Randy is considered poor because his income is below a long-standing poverty line of $15,000. Michael is considered poor because his income is in the bottom quartile of the population. Randy is considered to be in poverty under _____ poverty standard, and Michael is considered to be in poverty under _____ poverty standard.

an absolute; a relative

An urban farmer decides to build a bee hive to help pollinate the rooftop gardens in his neighborhood. The beehive

generates a positive externality if the rooftop gardens benefit from the pollination and a negative externality if the neighbors get stung by bees.

Private bargaining is most likely to succeed when the benefits from solving the externality are _____ and the costs of bargaining are _____.

high; low

The Nobel Prize‑winning economist Oliver Hart once said, "If we know the marginal social cost [of pollution] emissions, a tax is better, but if we know the optimal quantity, cap and trade is better." Given this statement and the knowledge of ways governments can intervene in markets, evaluate the following statement: Any outcome that can be achieved by taxing can also be accomplished by establishing a quota. This is because

if we know the marginal social cost, we can set the tax so that price is equal to the optimal price. As a result, the optimal quantity will be achieved. If we know the optimal quantity, we can set a quota and the market will find the optimal price.

When the price elasticity of supply is _____ relative to the price elasticity of demand, then sellers bear _____ of the economic burden of a tax.

large; a smaller share

Suppliers pay:

the marginal private cost but not the external cost.

Public goods like _____ are often best managed when they are funded by _____.

the military; the government

The external costs imposed on bystanders reflect _____.

their opportunity costs

The private market for college education results in

too few individuals going to college to earn bachelor's degrees relative to the socially efficient outcome.

By leasing or otherwise assigning ownership of nonexcludable, rival goods to a group, the _____ can be avoided because owners will _____.

tragedy of the commons; strive to improve their own economic surplus

The externality problem can be summed up by saying that _____ outcomes occur when people don't account for the interests of _____.

worse; bystanders

From the list below, select the measure(s) that are measures of inequality.

~Intergenerational mobility ~Spending ~Wealth ~Permanent income

When price functions as a signal, it

creates a line of communication between buyers and sellers.

Jostin is ill and goes to the doctor. The doctor diagnoses him with a bacterial infection and prescribes an antibiotic. Jostin's visit to the doctor:

produces a positive externality if it prevents other people from getting sick and a negative externality if the bacterial infection becomes resistant to antibiotics.

Using cap‑and‑trade, the government could restrict pollution by placing a __________ on the amount of emissions each company may emit through the issue of permits.

quota

Instead of using corrective taxes to eliminate the overproduction problem, the government imposes a _____ to change the quantity of the harmful activity directly by _____.

quota; setting the maximum quantity of a good

To achieve the socially efficient outcome in the market for bachelor's degrees, the government should

subsidize college education.

Negative externalities create problems because:

people fail to account for their actions that impose costs on others.

Which of the following taxes is regressive? Raj pays a 10% tax on the first $15,000 he earns plus a _____ tax on any additional income.

5%

_____ is important because it leads to market failure, producing _____.

An externality; inefficient outcomes

Which of the following is a normative statement?

Congress should recognize that the growing national debt is the most serious problem that the country faces.

When there are negative externalities, what is the role of bystanders in determining the equilibrium outcome?

They play no role in determining the equilibrium outcome.

Goods that are nonexcludable and rival are known as:

common resources.

The positive externalities enjoyed by free-riders using nonrival goods:

do not hurt others.

When suppliers _____ external costs, they tend to _____ them.

don't pay; ignore

Anita decides to smoke a cigarette while she is waiting at a busy bus stop. Cigarettes create a ___________ externality. __________ cigarettes are produced relative to the socially efficient quantity.

negative; too many

What is positive analysis?

It describes what is happening, explains why it is happening, or predicts what will happen based on facts and relationships.

Why is it important to consider more than just annual income when assessing inequality?

Living standards and the quality of life encompass more than just current income.

Which is NOT considered a goal of the government in setting a quota instead of imposing a corrective tax?

To increase the marginal private cost to equal the marginal social cost

On a market graph, producer surplus is the area that is: You Answered

above the supply curve and below the price.

__________ poverty judges the adequacy of resources to an unchanging standard. _________ poverty compares contemporary society to the material standard of living. The poverty line is a(n) _________ measure of poverty.

absolute; relative; absolute

Each of the given scenarios involves an externality. Classify each scenario based on whether or not it is likely that private bargaining could be used to achieve a socially optimal outcome in each case.

likely ~opening an apple store in a mall causes overall sales in the mall to increase by 10%. ~laShawn's neighbor mows his lamn during the night. Not likely ~the production of steel results in pollution that affects millions of residents in the surrounding area.

Externalities create tension between _____ and _____.

personal interests; society's interests

When people fail to factor in _____ externalities, they are less likely to engage in activities that are beneficial to _____.

positive; society

Jerome has a beautifully landscaped front lawn with lots of colorful flowers. Landscaped lawns produce a _________ externality. ________ landscaped lawns exist relative to the socially efficient quantity.

positive; too few

What type of good is rival and excludable?

private goods

A _____ good is a good for which your use of it _____.

rival; comes at someone else's expense

_____ tax is designed to encourage people to take responsibility for the negative externalities they cause. Correct!

A corrective

Classify the following examples of social norms by whether the behavior is undertaken to avoid society's judgement, i.e., working as a corrective tax, or to receive social recognition, i.e., working as a corrective subsidy.

Corrective tax ~deciding to throw your trash in the garbage bin ~picking up after your dog when you are out on a walk Corrective Subsidy ~holding the door open for an elderly lady entering s store behind you ~deciding to donate blood at a local blood drive

_____ are inefficient outcomes that are not in society's best interest.

Market failures

_____ goods provided by the government are public goods, _____ are nonexcludable.

Not all; and not all

A policy maker argues that congestion on the roads can be solved by private ownership of the roads. He argues that if the roads were privately owned, then the externality of congestion would be fully internalized and solved by the market. Discuss this by first explaining the externality problem that leads to congestion, and then explain whether the private market would deliver the efficient level of roads. The externality is caused by drivers considering the private benefit of using the road, but not the cost. More and more drivers pull onto the road, not recognizing the cost other drivers experience as a result. Private roads, or publicly operated toll roads, can reduce congestion because now the right to use the road is excludable

On the other hand, turning the public good into a club good poses other problems. Now the external benefits will not be fully considered. When there is a positive externality, private markets will underproduce the good.

The government imposes taxes equal to the damage (such as pollution) that electric companies do while producing electricity. What is the role of taxes in this example?

Taxes help firms internalize the externalities.

Which of the following is an example of a negative externality?

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.

Normal wear and tear on roads while driving is _____ because it involves side effects on bystanders whose interests aren't fully taken into account.

an externality

An example of a public good would be:

an interstate highway.

The owners of Jamal's Diner have lobbied their city council for lower business taxes on small businesses. The ordinance was finally passed, and several other businesses, including SuperSudz Car Wash a few blocks away, also saw their city tax burden lowered. The owners of Jamal's Diner were participants in the action and received a _____ from the tax cuts. The owners of SuperSudz Car Wash were not participants in the lobbying effort and received a _____ from the tax cuts.

benefit; positive externality

When trade is based on comparative advantage

both trading partners end up better off than when there is no trade.

The person who has an absolute advantage in a task:

can perform the task using the fewest inputs.

In some states, it is illegal to pick certain kinds of wildflowers by the side of the road. This is because wildflowers are a

common resource. Without these laws, wildflowers are both rival in consumption and nonexcludable. In passing these laws, the states are hoping to avoid a tragedy of the commons.

Joe decides to build a chicken coop in his suburban backyard. He has several hens and one rooster. The rooster wakes up his neighbor each morning at 5:00 am. Joe's chicken coop:

creates a negative externality if the neighbor wants to sleep longer and a positive externality if the neighbor is happy to be awaken early each day.

Bystanders' benefits are a part of social benefits; they do not appear on the _____ because they are _____.

demand curve; external benefits

A seat on a subway train is _________ and __________.

excludable; rival

An even more popular national park, which charges an entrance fee, is _________ and __________.

excludable; rival

When people make choices that benefit others, they create _____, which lead to a _____ quantity than the socially optimal quantity.

external benefits; smaller

A solution to the free-rider problem is the government's power to _____, which is something businesses and individuals _____ have the power to do.

force people to pay for the goods they benefit from; do not

Positive externalities create the _____ problem when people cannot be excluded from using something.

free-rider

A Canadian-made sewing machine purchased by a U.S. citizen is an example of a U.S. _____, and a U.S.-made sewing machine purchased by a Canadian citizen is an example of a U.S. _____.

import; export

An audiobook is an example of a club good because

it is excludable and nonrival in consumption

Dave takes advantage of the low price of gas to purchase a sports utility vehicle. Sports utility vehicles generate a __________ externality. __________ sports utility vehicles are produced relative to the socially efficient quantity.

negative; too many

National defense is ________ and _________.

nonexcludable; nonrival

A popular national forest known for having dozens of access points for its well-used hiking trails located along public roads and highways is _________ and ___________.

nonexcludable; rival

Most laws aimed at mitigating the harm inflicted on third parties by market transactions work by increasing the _____ of creating _____.

opportunity cost; negative externalities

Regulations should target _____ to avoid _____.

outcomes; stifling innovation

The poverty rate is the:

percent of people whose family income is below the poverty line.

Susan decides to walk to work instead of driving. Walking to work creates a _________ externality. _________ walks to work exist relative to the socially efficient quantity.

positive; too few

The median earnings for a 25 to 34 year old, full-time, year round worker with a high school education was about $31,830 in 2016, while similar workers with a bachelor's degree (but no further education) earned $49,990, and as a result, they pay more income tax. There is a

private benefit for individuals who attend college and earn a bachelor's degree.

Price minus marginal cost equals the:

producer surplus of a unit sold.

One feature of the cap‑and‑trade policy is that permits can be traded between the "greener" companies that have already invested in emission lowering technologies and those that have not. Greener companies will most likely

purchase more permits because it allows them to expand output by a far greater amount than a "dirty" company, thus they are worth more to a green company.

In the face of positive externalities, the Rational Rule for Society says that the _____ occurs at the quantity where the marginal social benefit is equal to the _____.

socially optimal outcome; marginal social cost

Which are true about the solutions to externality problems?

~A corrective tax raises the direct financial cost of creating externalities. ~A cap-and-trade system raises the opportunity cost of creating externalities. ~Regulations can often blunt the forces of competition.

What is true about externalities?

~Market failures arise because the interests of bystanders are ignored or underweighted. ~Externalities lead to inefficient outcomes, causing market failure. ~Externalities lead to inefficient outcomes that aren't in society's best interest.

Identify the possible reason or reasons for this stark difference between income inequality and consumption inequality.

~The richest quintile has the ability to save a larger percentage of its income. ~Individuals experiencing temporary fluctuations in their incomes are more likely to maintain moderate spending habits.

Does an individual's attainment of a bachelor's degree generate an externality?

A positive externality exists because college educated individuals pay higher taxes and are often considered more valuable to employers than individuals without college diplomas.

Overfishing in lakes and oceans produces a(n) _____ benefit to those who consume or sell the fish, but this creates a _____ externality by reducing the number of fish left in those areas.

private; negative

In 2018, a wind farm developer was ordered to dismantle its newly constructed wind turbines after adjacent residents filed a lawsuit complaining that they never consented to the loud noise and visual obstructions of the turbines. How could the wind farm developer have utilized insights from the Coase Theorem to avoid its legal troubles and ultimately wasting millions of dollars on wind turbines it never got to operate? Select all situations that would apply.

~The developer could have paid people living near the wind farm a stipend for putting up with the noise and the restricted views. ~The developer could have invested in improved infrastructure for power generation to lower residents' electricity costs as well as to promote the use of wind farms.