Microeconomics Final Exam Questions (Chapter 16)

The table coal mine pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. The efficient quantity of pollution is _____ tons.

4 (When marginal social benefit= marginal social cost)

Emissions tax

A tax that depends on the amount of pollution a firm produces

EAuction and EMarketplace are two competing Internet auction sites, where buyers and sellers transact goods. Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to their site. Suppose that, after complaints to the Justice Department by EMarketplace, EAuction agreed to stop its practice of eliminating fees for new sellers. But since it provided much better technical service than its rival, EMarketplace, buyers and sellers came to prefer EAuction anyway. Eventually, EMarketplace closed down, leaving EAuction as a monopolist. Should the Justice Department intervene to break EAuction into two companies? C. Yes, the Justice Department should intervene. Two firms are better than one. A. No, the Justice Department should not intervene. EAuction did nothing illegal. B. Yes, the Justice Department should intervene. EAuction is likely to become a monopoly.

A. No, the Justice Department should not intervene. EAuction did nothing illegal. The preference of a customer over another company does not mean the other company has done anything illegal.

How does the ability to earn money from capturing and transforming methane gas behave like a Pigouvian tax on methane gas pollution and lead dairy farmers to emit the efficient amount of methane gas pollution? Which of the following statements about this is INCORRECT? B. The new technology creates an opportunity cost to the farmer. C. The financial reward should be set equal to the marginal external cost of a unit of methane gas pollution. A. The financial reward should be set above the marginal external cost of a unit of methane gas pollution.

A. The financial reward should be set above the marginal external cost of a unit of methane gas pollution.

The city of Falls Church, Virginia, subsidizes trees planted in homeowners' front yards when they are within 15 feet of the street. Which of the following best describes the marginal social benefit and the marginal social cost of trees as more trees are planted? B. The marginal social benefit is increasing: the marginal social cost is decreasing. C. The marginal social cost and marginal social benefit are increasing. A. The marginal social benefit is decreasing: the marginal social cost is increasing. D. The marginal social cost and marginal social benefit are decreasing.

A. The marginal social benefit is decreasing: the marginal social cost is increasing. As more trees are planted, the MSB faces a diminishing return, while the MSC increases because costs increase per unit.

After its rival EMarketplace closed down, EAuction became a monopolist in the Internet auction industry. It also owns a site that handles payments over the Internet, called PayForIt. It is competing with another Internet payment site, called PayBuddy. EAuction has now stipulated that any transaction on its auction site must use PayForIt, rather than PayBuddy, for the payment. Should the Justice Department intervene? A. Yes, the Justice Department should intervene. EAuction is using its monopoly position in one industry to gain a monopoly in another industry. B. No, the Justice Department should not intervene. EAuction is not doing anything illegal.

A. Yes, the Justice Department should intervene. EAuction is using its monopoly position in one industry to gain a monopoly in another industry.

Coase theorem

According to the _____ theorem, even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are relatively low

Your community requires the sewage treatment plant to process raw sewage so that it is sage to return the water to the environment. This is:

An environmental standards

EAuction and EMarketplace are two competing Internet auction sites, where buyers and sellers transact goods. Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to their site. Why is this likely to be a good strategy for EAuction in its competition with EMarketplace? A. It is not a good strategy for EAuction. C. It is a good strategy for EAuction because even though fewer sellers will come to EAuction than EMarketplace, it will still draw more buyers. B. It is a good strategy for EAuction because more sellers will come to EAuction than EMarketplace, which will also draw more buyers.

B. It is a good strategy for EAuction because more sellers will come to EAuction than EMarketplace, which will also draw more buyers.

Problem 9c). Is the following characterized by network externalities? The choice of a printer, where each printer requires its own specific type of ink cartridge A. This choice is not characterized by a network externality. B. This choice is characterized by a network externality. C. It is not clear whether or not this choice is characterized by a network externality.

B. This choice is characterized by a network externality.

(Problem 9d). Is the following characterized by network externalities? The choice of whether to purchase an iPod or an iPod Nano, both products that use the same iTunes software B. This choice is not characterized by a network externality. A. This choice is characterized by a network externality. C. It is not clear whether or not this choice is characterized by a network externality.

B. This choice is not characterized by a network externality.

Mr. Chau plants lots of colorful flowers in his front yard. A. This is a negative externality; the marginal social benefit of the activity is greater than the marginal benefit to the individual; too few flowers will be planted. C. This is a positive externality; the marginal social benefit of the activity is greater than the marginal benefit to the individual; too many flowers will be planted. B. This is a positive externality; the marginal social benefit of the activity is greater than the marginal benefit to the individual; too few flowers will be planted. D. This is a negative externality; the marginal social benefit of the activity is greater than the marginal benefit to the individual; too many flowers will be planted.

B. This is a positive externality; the marginal social benefit of the activity is greater than the marginal benefit to the individual; too few flowers will be planted.

The city of Falls Church, Virginia, subsidizes trees planted in homeowners' front yards when they are within 15 feet of the street. Which of the following best explains why a municipality would subsidize trees planted on private property, but near the street? B. Without the subsidy, the market equilibrium quantity would be below the socially optimal quantity. A. An optimal Pigouvian subsidy will lead homeowners to plant fewer than the socially optimal quantity of trees. C. Trees planted near the street provide only private benefits.

B. Without the subsidy, the market equilibrium quantity would be below the socially optimal quantity.

Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require legislative authority, which is often hard to obtain. The 33/50 program started by the Environmental Protection Agency (EPA) is an example of such a program. With this program, the EPA attempted to reduce industrial emissions of 17 toxic chemicals by providing information on relatively inexpensive methods of pollution control. Companies were asked to voluntarily commit to reducing emissions from their 1988 levels by 33% by 1992 and by 50% by 1995. The program actually met its second target by 1994. What kind of environmental policy does the 33/50 program most closely resemble? A. emissions taxes C. tradable permits B. an environmental standard

B. an environmental standard

Suppose some dairy farmers have lower costs of transforming methane into electricity than others. How does this system lead to an efficient allocation of emissions reduction among farmers? C. Farmers with lower costs will transform more units of methane gas into electricity than will farmers with higher costs. A. Farmers with lower costs will transform fewer units of methane gas into electricity than will farmers with higher costs. B. This system will not lead to an efficient allocation of emissions reduction among farmers.

C. Farmers with lower costs will transform more units of methane gas into electricity than will farmers with higher costs.

EAuction and EMarketplace are two competing Internet auction sites, where buyers and sellers transact goods. Each auction site earns money by charging sellers for listing their goods. EAuction has decided to eliminate fees for the first transaction for sellers that are new to their site. EMarketplace complained to the Justice Department that EAuction's practice of eliminating fees for new sellers was anti-competitive and would lead to monopolization of the Internet auction industry. Is EMarketplace correct? How should the Justice Department respond? C. The Justice Department should intervene; EAuction's practice is anti-competitive. A. The Justice Department should not intervene. B. The Justice Department should intervene only if EMarketplace starts to lose money.

C. The Justice Department should intervene; EAuction's practice is anti-competitive. This violates the anti-trust act with violates fair competition amongst businesses.

Is the following characterized by network externalities? The choice between installing 110-volt electrical current in structures rather than 220-volt B. This choice is not characterized by a network externality. C. This choice is characterized by a network externality. A. It is not clear whether or not this choice is characterized by a network externality.

C. This choice is characterized by a network externality.

(Problem 9b). Is the following characterized by network externalities? The choice between purchasing a Toyota versus a Ford A. It is not clear whether or not this choice is characterized by a network externality. B. This choice is characterized by a network externality. C. This choice is not characterized by a network externality.

C. This choice is not characterized by a network externality.

Your next-door neighbor likes to build bonfires in his backyard, and sparks often drift onto your house. A. This is a negative externality: the marginal social cost is greater than the marginal cost to the individual; there will be fewer bonfires in your neighbor's yard than is socially optimal. C. This is a negative externality: the marginal social cost is greater than the marginal cost to the individual; there will be more bonfires in your neighbor's yard than is socially optimal. D. This is a positive externality: the marginal social cost is less than the marginal cost to the individual; there will be fewer bonfires in your neighbor's yard than is socially optimal. B. This is a positive externality: the marginal social cost is less than the marginal cost to the individual; there will be more bonfires in your neighbor's yard than is socially optimal.

C. This is a negative externality: the marginal social cost is greater than the marginal cost to the individual; there will be more bonfires in your neighbor's yard than is socially optimal.

Do you expect the total quantity of pollution before the program was put in place to have been less than or more than the optimal quantity of pollution? A. less than the optimal quantity of pollution B. the same as the optimal quantity of pollution C. more than the optimal quantity of pollution

C. more than the optimal quantity of pollution

According to a report from the U.S. Census Bureau, "the average [lifetime] earnings of a full-time, year round worker with a high school education are about $1.2 million compared with $2.1 million for a college graduate." This indicates that there is a considerable benefit to a graduate from investing in his or her own education. Tuition at most state universities covers only about two-thirds to three-quarters of the cost, so the state applies a Pigouvian subsidy to college education. Is a Pigouvian subsidy appropriate in the case of education? Is the externality created by a college education a positive or a negative externality? What does this imply about the differences between the costs and benefits to students compared to social costs and benefits? What are some reasons for the differences? D. The Pigouvian subsidy is appropriate; the marginal social benefit of education is higher than the marginal benefit going to graduates. A. The Pigouvian subsidy is not appropriate; the marginal social benefit of education is lower than the marginal benefit going to graduates. B. The Pigouvian subsidy is not appropriate; the marginal social benefit of education is higher than the marginal benefit going to graduates. C. The Pigouvian subsidy is appropriate; the marginal social benefit of education is lower than the marginal benefit going to graduates.

D. The Pigouvian subsidy is appropriate; the marginal social benefit of education is higher than the marginal benefit going to graduates.

Fishing for sablefish has been so intensive that sablefish were threatened with extinction. After several years of banning such fishing, the government is now proposing to introduce tradable vouchers, each of which entitles its holder to a catch of a certain size. Explain how fishing generates a negative externality and how the voucher scheme may overcome the inefficiency created by this externality. A. The marginal cost of fishing is greater than the marginal social cost. Vouchers will not reduce overfishing. B. The marginal cost of fishing is greater than the marginal social cost. Vouchers will reduce overfishing. C. The marginal cost of fishing is less than the marginal social cost. Vouchers will not reduce overfishing. D. The marginal cost of fishing is less than the marginal social cost. Vouchers will reduce overfishing.

D. The marginal cost of fishing is less than the marginal social cost. Vouchers will reduce overfishing.

Justine buys a large SUV that consumes a lot of gasoline. B. This is a positive externality: marginal social cost is greater than the marginal cost incurred by Justine; too few SUVs will be purchased. D. This is a negative externality: marginal social cost is greater than the marginal cost incurred by Justine; too many SUVs will be purchased. A. This is a positive externality: marginal social cost is greater than the marginal cost incurred by Justine; too many SUVs will be purchased. C. This is a negative externality: marginal social cost is greater than the marginal cost incurred by Justine; too few SUVs will be purchased.

D. This is a negative externality: marginal social cost is greater than the marginal cost incurred by Justine; too many SUVs will be purchased.

Maija, who lives next to an apple orchard, decides to keep bees to produce honey. A. This is a negative externality: the marginal social benefit is greater than the marginal benefit to Maija; too many bees will be kept. C. This is a positive externality: the marginal social benefit is greater than the marginal benefit to Maija; too many bees will be kept. B. This is a negative externality: the marginal social benefit is greater than the marginal benefit to Maija; too few bees will be kept. D. This is a positive externality: the marginal social benefit is greater than the marginal benefit to Maija; too few bees will be kept.

D. This is a positive externality: the marginal social benefit is greater than the marginal benefit to Maija; too few bees will be kept. When MSB > MB to self there is too few.

For the same amount of pollution emitted, an emissions tax is said to be more efficient than an environmental standard because all polluters

Emit pollution up to the point at which the marginal benefit of polluting is equal to the emissions tax

Externalities, Negative/Positive Externalities

External costs and benefits -External costs negative externalities -External benefits are positive externalities

The marginal social benefit received from pollution is equal to its marginal social cost in the market for highly polished glass. In this situation:

Firms in the market produce the social optimal level of pollution

External benefits are associated with the production of batteries. Without government regulation, the market will:

Price batteries at less than the marginal social benefit

Environmental standards

Rules that protect the environment by specifying actions by producers and consumers

External benefit

a benefit that an individual or firm confers on others without receiving compensation

Pigouvian subsidy

a payment designed to encourage activities that yield external benefits

Technology spillover

an external benefit that results when knowledge spreads among individuals and firms

External cost

an uncompensated cost that an individual or firm imposes on others

Tradable emissions permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters

If drivers decide to make phone calls without considering the costs imposed on others, the:

numbers of phone calls made while driving will be more than the socially optimal quantity

Pigouvian taxes

taxes designed to reduce external costs

Marginal social cost of pollution

the additional cost imposed on society as a whole by an additional unit of population

Marginal social benefit of pollution

the additional gain to society as a whole from an additional unit of pollution

The efficient rate of emissions occurs when:

the change in social benefits and the change in social costs due to an additional unit of emissions are equal

socially optimal quantity of pollution

the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for

Internalize the externality

when individuals take external costs or benefits into account

Positive feedback

when success breeds greater success and failure breeds further failure