ECON Test 2 Quizzes

A green pasture has turned barren due to overgrazing. This happened because the pasture was ____.

Non-excludable but rival.

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

Non-excludable but rival.

Public goods are distinguished by two primary characteristics. What are they?

Nonrivalry and nonexcludability.

Private producers have no incentive to provide public goods because

Once produced, it will not be possible to exclude those who do not pay for the good.

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

The actual division of the burden of a tax between buyers and sellers in a market is called

Tax incidence.

During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

$35

Consider the following methods of pollution reduction: a. the government sets a target for maximum emissions b. the government mandates the installation of specific pollution abatement equipment c. the government imposes a per unit tax on the good that creates pollution d. the government gives firms a tax rebate for every unit of pollution abated Which of the above is an example of a command-and-control approach to reducing pollution?

A and B only

Consider the following characteristics: a. Low transaction 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.

The market demand for a public good can be determined by

Adding up how much each consumer is willing to pay for each unit of the public good.

When the government taxes a good or service, it

Affects the market equilibrium for that good or service.

An externality occurs when ______.

An economic activity affects third parties not engaged in the activity.

Suppose a negative externality exists in a market. If transaction costs are low and parties are willing to bargain then, according to the Coase Theorem

An efficient solution can be reached regardless of the initial assignment of property rights.

The presence of a positive externality in a market leads to _____.

An underproduction of the good

For-profit producers will produce only private goods because

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

A marginal tax rate is calculated as

Change in taxes paid divided by the change in total taxable income

Policies that mandate the installation of specific pollution control devices are called

Command-and-control policies.

Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?

Consumer surplus decreases

When the demand for a product is less elastic than the supply

Consumers pay the majority of the tax on the product.

Which of the following gives rise to a positive externality?

Consumption of a drug to cure a communicable disease

A study by the Congressional Budget Office (CBO) regarding the corporate income tax included the following statement: "A corporation may write its check to the Internal Revenue Service for payment of the corporate income tax, but the money must come from somewhere..." The comments that followed this statement argued that

Corporations pass on some of the burden of the tax to investors in the company, to workers, and to consumers.

A price ceiling leads to a(n) _____ if below equilibrium price.

Decrease in total surplus

The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the

Demand curve for imported champagne is vertical.

Which of the following is an example of a common resource?

Elephants in the wild

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.

A chemical factory releases its byproducts in a nearby river, which harms aquatic flora and fauna. This is an example of a ___.

Negative externality.

The division of the tax burden between buyers and sellers in a market is called tax allocation (T or F)

False

For a given supply curve, the deadweight loss from the imposition of a tax is smaller if the demand is more elastic (T or F)

False.

The Coase Theorem asserts that government intervention is a prerequisite for addressing externality problems. (T or F)

False.

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

Forcing producers to factor into 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.

Which of the following activities can give rise to a positive externality?

Getting a flu vaccination.

A positive externality ______.

Gives rise to external benefits

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

Government intervention is not always necessary to solve externality problems.

The Coase Theorem states that

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

A Pigouvian tax is a tax designed to ____.

Induce producers generating negative externalities to reduce production.

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

Is too low and the equilibrium quantity is too high.

An advantage of imposing a tax on the producer that generates pollution is that

It forces the polluting producer to internalize the external cost of the pollution

Which of the following activities creates a negative externality?

Keeping a junked car parked on your front lawn.

In a city with rent-controlled apartments, all of the following are true except

Landlords have an incentive to rent more apartments than they would without rent control

Classifying a good as excludable means

That anyone who does not pay for the good cannot consume it.

In a regressive tax system, _____.

Low income households pay a higher percentage of their income as taxes

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

Market-based policy.

Which of the following would result in a positive externality?

Medical research results in a cure for malaria

In order to be binding, a price ceiling

Must lie below the free market equilibrium price.

A _____ occurs when an economic activity has a spillover cost that does not affect those directly engaged in the activity.

Negative externality

Pollution is an example of a

Negative externality

If a good is excludable, _______.

People can be prevented from using the good.

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.

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.

A market supply curve reflects the

Private costs of producing a good or service.

A _______ tax system is one in which tax rates increase with taxable base incomes.

Progressive

_______ are nonrival in consumption.

Public goods and club goods.

In New York City, about 1 million apartments are subject to rent control by the local government. Rent control

Puts a legal limit on the rent that landlords can charge for an apartment.

When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?

Quantity demanded.

Which of the following displays these two characteristics: nonrivalry and excludability?

Quasi-public goods

Which of the following is an objective of government taxation?

Redistribution of funds.

Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the fourth household pays the lowest percentage of its income as tax, it can be inferred that the government follows a ________ tax system.

Regressive

Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. If the first household pays 20% of its income as tax, the second household pays 17.5% of its income as tax, the third household pays 13% of its income as tax, and the fourth household pays 10% of its income as tax, income taxes are ________ in nature.

Regressive

Price controls distribute resources in many unintended ways. In the following cases below, who will probably spend more time waiting in line to get scarce, price-controlled goods? (Retired or Working people)

Retired people

Goods can be classified on the basis of whether their consumption is

Rival and excludable.

A tragedy of the commons occurs when a resource is

Rival and non-excludable.

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 the 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.

In a proportional tax system, _____.

The average tax rate equals the marginal tax rate.

The incidence of a per-unit tax on a good is identical for buyers and sellers of the good if:

The buyers and sellers of the good are equally sensitive to price changes.

If a tax is imposed on each unit of a good purchased, ________.

The demand curve shifts to the left.

The tax incidence on buyers is higher if _______.

The elasticity of the market supply curve is higher than the elasticity of the market demand curve.

If a tax is imposed on a good, _______.

The equilibrium quantity of the good in the market falls.

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.

A positive externality causes

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

A negative externality exists if

The marginal social cost of producing a good or service exceeds the private cost

In a progressive tax system, ______.

The marginal tax rate exceeds the average tax rate.

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.

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 burden of a tax falls entirely on buyers if ________.

The price elasticity of demand is zero (perfectly inelastic)

The production of an industrial good in a plant emits harmful gases that cause breathing difficulty. Which of the following will happen if the government imposes a Pigouvian tax on the plant?

The quantity supplied of the good will decrease.

When there is a positive externality

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

Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities?

The social cost of production

Suppose the excise tax of $1 is imposed on every case of beer sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph?

The supply curve for cases of beer would shift to the left by $1

The demand for chocolate is perfectly inelastic in Foodieland. If a tax is imposed on chocolate, _____.

The tax burden will fall entirely on buyers.

Suppose that in Canada the government places a $1,500 tax on the buyers of new snowmobiles. After the purchase of a new snowmobile, a buyer must pay the government $1,500. How would the imposition of the tax on buyers be illustrated in a graph?

The tax will shift the demand curve to the left by $1500.

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 leads to the tragedy of the commons?

The use of common pool resources above the socially optimal level.

Refer to Figure 5-7. What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units?

The value of the area QbBEQe

With an increase in the demand for a good, if prices are not allowed to increase:

There will be no incentive for firms to increase the quantity supplied of the good.

The average tax rate faced by an individual is the ______.

Total tax paid by her divided by the total income earned.

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.

For the Coase Theorem to work there must be clear assignment of property rights. (T or F)

True

The social benefit of a given level of a public good is the vertical sum of all private benefits for that level. (T or F)

True

When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit. (T or F)

True

When there is a negative externality, the competitive output is greater than the economically efficient output. (T or F)

True

A quasi-public good differs from a public good in that unlike a public good, it is possible to keep those who do not pay for the quasi-public good from enjoying the benefits of the good. (T or F)

True.

If the government wants to minimize the welfare loss of a tax, it should tax goods with more inelastic demands or supplies. (T or F)

True.

As a result of the tax, is there a loss in consumer surplus?

Yes, because consumers pay a price above the economically efficient price.