Microeconomics Chapter Ten

b. offer a subsidy on rain barrels that is equal to the per-unit externality

A rain barrel is a container that captures and stores rainwater for landscape and garden use during dry periods. Rain barrels provide an external benefit to the community through water conservation. What can the government do to equate the equilibrium quantity of rain barrels and the socially optimal quantity of rain barrels? a. impose a tax on rain barrels that is equal to the per-unit externality b. offer a subsidy on rain barrels that is equal to the per-unit externality c. encourage homeowners to bargain with rain barrel producers d. nothing

c. do not cause deadweight losses.

Corrective taxes differ from most taxes in that corrective taxes a. reduce economic efficiency. b. do not raise revenue for the government. c. do not cause deadweight losses. d. always result in a high burden on sellers of goods to which the corrective tax applies.

b. command-and-control policy to increase social efficiency.

Emission controls on automobiles are an example of a a. corrective tax. b. command-and-control policy to increase social efficiency. c. policy that reduces pollution by allocating resources through market mechanisms. d. policy to reduce congestion on urban freeways.

b. benefit of $36.

Refer to Figure 10-19. Each additional unit of the good that is produced yields an external a. benefit of $15. b. benefit of $36. c. cost of $15. d. cost of $36.

c. $36.

Refer to Figure 10-19. Each additional unit of the good that is produced yields an external benefit of a. $15. b. $23. c. $36. d. $89.

b. 73 units.

Refer to Figure 10-19. The socially optimal quantity of output is a. 58 units. b. 73 units. c. between 73 and 94 units. d. 94 units.

c. the private value of the good

Refer to Figure 10-19. Which of the following decreases as the quantity of the good is increased? a. the private cost of the good b. the social cost of the good c. the private value of the good d. the external benefit of the good

b. P1.

Refer to Figure 10-3. At the private market outcome, the equilibrium price will be a. P0. b. P1. c. P2. d. None of the above is correct.

b. cost of spillover effects from the concert (e.g., noise and traffic).

Refer to Figure 10-3. The difference between the social cost curve and the supply curve reflects the a. profit margin of each concert. b. cost of spillover effects from the concert (e.g., noise and traffic). c. value of concerts to society as a whole. d. amount by which the city should subsidize the concert organizers.

a. it takes into account the external costs imposed on society by the concert.

Refer to Figure 10-3. The social cost curve is above the supply curve because a. it takes into account the external costs imposed on society by the concert. b. it takes into account the effect of local noise restrictions on concerts in parks surrounded by residential neighborhoods. c. concert tickets are likely to cost more than the concert actually costs the organizers. d. residents in the surrounding neighborhoods get to listen to the concert for free.

b. P2, Q0

Refer to Figure 10-3. What price and quantity combination best represents the optimum price and number of concerts that should be organized? a. P1, Q1 b. P2, Q0 c. P2, Q1 d. The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected by noise and congestion.

c. $7

Refer to Table 10-2. How large would a subsidy need to be in this market to move the market from the equilibrium level of output to the socially-optimal level of output? a. $3 b. $5 c. $7 d. $9

b. 4 units

Refer to Table 10-2. What is the equilibrium quantity of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units

c. 5 units

Refer to Table 10-2. What is the socially-optimal level of output in this market? a. 3 units b. 4 units c. 5 units d. 6 units

b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy- based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome? a. The railroad will continue to operate but will pay the farmer $1,500 in damages. b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur. c. The farmer will incur $1,500 in damages to his crops. d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

True

T/F: A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality.

True

T/F: A market for pollution permits can efficiently allocate the right to pollute by using the forces of supply and demand.

False

T/F: According to the Coase Theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved.

True

T/F: According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.

True

T/F: Firms that can reduce pollution easily would be willing to sell their pollution permits.

False

T/F: In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.

True

T/F: Laws that are passed that either require or forbid certain behaviors are examples of command-and-control policies.

False

T/F: Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

True

T/F: When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.

False

T/F: When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.