Econ 202 TAMU Exam 2

To affect the market outcome, a price ceiling

must be set below the equilibrium price

The Coase theorem relies on internalizing externalities through ________.

negotiations between the parties involved

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

If a monopolist's price is $50 per unit and its marginal cost is $25, then

Not enough information is given to say what the firm should do to maximize profit.

Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.

Which of the following statements refers to rent seeking?

"Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws."

The marginal social benefit from the production of the last unit of a good is $4,800. If the willingness to pay for that unit is $3,900, what is the external benefit from its production?

$900

To establish Arrow's theorem you need to

-Consider who would win when you vote in various ways, -Show that the outcome depends on the order in which things are compared,

The Coase Theorem states that ________.

-negotiation between economic agents leads to an efficient allocation of resources -if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

What is the difference between a public franchise and a public enterprise?

A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government.

Sewage treatment is an example of

An externality,

________ are highly excludable but non-rival in consumption.

Club/Quasi-Public goods

The central question In trying to determine whether to involve the government in an economic issue is

Determining whether or not the government can be relied on to make things better.

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

(True or False) If there is pollution in producing a product, then the market equilibrium price is too high and equilibrium quantity is too low

False

Which two factors make regulating mergers complicated?

First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually.

For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government likely to use to determine what quantity of a public good should be supplied?

It evaluates the costs and benefits of producing the good.

What is regulatory capture?

It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?

Meterville

Beginning in the 1950s economists began to investigate incentives within government. They found that:

One should be cautious in calling on the government to improve economic performance.

The key to Viscusi's findings about the net impact of smoking on healthcare costs is that

People who smoke need more medical care, but they also (unfortunately) tend to die younger, and that creates an offsetting reduction in health care costs

A key advantage of assigning property rights to owners of restaurants is that

Smokers and nonsmokers are likely to be able to eat meals the way they like.

T/F The possibility of "government failures" should be evaluated before getting the government involved in addressing "market failures."

TRUE

W. Kip Viscusi studied tobacco smoking and concluded that

The external costs and benefits of smoking were about equal, so there wasn't a significant negative externality to smoking.

Arrrow's theorem investigates:

The impossibility of determining the "will of the people" by voting.

Sam Peltzman's paper, "Toward a More General Theory of Regulation," argued that regulators would reach an equilibrium when

The marginal benefit to the regulator of providing special treatment to producers equals the marginal cost of angering consumers into voting to remove the regulator.

What occurs on the graph if the production of a good gives rise to positive externalities?

The marginal social benefit curve lies to the right of the demand curve.

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.

Which of the following must be present to reach a private solution to an externality problem?

The transactions costs to negotiate a solution must be relatively low.

Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?

There was no price control on gasoline at the time.

Arrow's impossibility theorem shows that political outcomes often critically depend on the order in which things are considered. T/F

True

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

True

Economists investigate voting mechanisms because:

Voting systems are just another method for allocating resources.

When the government taxes a good or service, it

affects the market equilibrium for that good or service.

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

An externality is

a benefit or cost experienced by someone who is not a producer or consumer of a good or service.

Relative to a perfectly competitive market, a monopoly results in

a gain in producer surplus less than the loss in consumer surplus.

If the social cost of producing a good or service exceeds the private cost

a negative externality exists.

Which term refers to a legally established minimum price that firms may charge?

a price floor

If the sellers of a good are taxed for each unit sold

a smaller quantity of the good is sold

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.

Collusion is

an agreement among firms to charge the same price or otherwise not to compete

Suppose a negative externality exists in a market. If transactions 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.

In the United States, government policies with respect to monopolies and collusion are embodied in

antitrust laws.

The public choice model

applies economic analysis to government decision making.

The public choice model assumes that government policymakers

are likely to pursue their own self-interests, even if their self-interests conflict with the public interest.

For-profit producers will produce only private goods because

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

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

command-and-control policies

When the federal government orders firms to use particular methods to reduce pollution, it is said to be using

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.

A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of

economies of scale.

Financial contributions to the campaigns of members of Congress, state legislators, and other elected officials by firms that seek special interest legislation that make the firms better off are

examples of rent seeking.

A price floor set above the equilibrium price leads to a(n)

excess supply of goods in the market

If, as your taxable income decreases, you pay a smaller percentage of your taxable income in taxes, then the tax is

progressive

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

firms pay the majority of the tax on the product.

You bought a subscription for an online magazine and shared your log-in details with a friend. Your friend is a ________ in this case.

free-rider

A patent

gives a firm the exclusive right to a new product for 20 years from the date the product is invented.

A positive externality ________.

gives rise to external benefits

When there is an externality in a market

government intervention may increase economic efficiency.

A profit maximizing monopoly's price is

greater than the price that would prevail if the industry was perfectly competitive.

A Pigouvian tax is a tax designed to ________.

induce producers generating negative externalities to reduce production

A public franchise

is a government designation that a private firm is the only legal producer of a good or service.

A price floor is the ________

lower limit on the price of a good

In a natural monopoly, throughout the range of market demand

marginal cost is below average total cost and pulls average total cost downward.

To maximize profit a monopolist will produce where

marginal revenue is equal to marginal cost.

If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the

marginal revenue of the sixth performance is $38,000.

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

market-based policy.

In order to be binding, a price ceiling

must lie below the free market equilibrium price.

A proportional tax is a tax for which people with lower incomes

pay the same percentage of their incomes in tax as do people with higher incomes.

Firms do not have market power in which of the following market structures?

perfect competition only

The cost borne by a producer in the production of a good or service is called

private cost.

A free rider is a person who ________.

receives the benefit of a good without paying for it

Economists often analyze the interaction of individuals and firms in markets. Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others, a process that is referred to as

rent seeking.

A tragedy of the commons occurs when a resource is

rival and non-excludable.

A Herfindahl-Hirschman Index is calculated by

summing the squares of the market shares of each firm in the industry.

The U.S. Congress has given two government entities the authority to police mergers. These two entities are

the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

Market power refers to

the ability of a firm to charge a price higher than the marginal cost of production.

The term tax incidence refers to

the actual division of the burden of a tax between buyers and sellers in a market.

The tax incidence on sellers is higher if ________.

the buyers are more sensitive to price changes than the sellers

If a tax is imposed on each unit of a good purchased

the demand curve shifts to the left

The deadweight loss of taxation on a good is higher if ________.

the demand or the supply of the good is relatively price elastic

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 natural monopoly regulatory commission sets a price where marginal cost is equal to demand

the firm would incur a loss.

In reference to the federal income tax system, a tax bracket is

the income range within which a tax rate applies.

Conceptually, the efficient level of carbon emissions is the level for which

the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.

The production of steel in a factory generates a negative externality. A per-unit tax on the factory that equals ________ of steel production will internalize the externality entirely.

the marginal external cost

A positive externality causes

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

If the production of a good involves positive externalities, ________.

the market price of the good is lower than its optimal price

A possible advantage of a horizontal merger for the economy is that

the merged firm might reap economies of scale which could translate into lower prices.

If negative externalities are present in a market, ________.

the quantity supplied in the market is larger than the socially optimal level

Overfishing leading to a rapid depletion of the stock of fish is an example of ________.

the tragedy of the commons

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 lawsuit the Justice Department brought against Apple regarding the pricing of e-books for its iPad is an example of attempts by the government

to keep firms from artificially restricting competition to raise prices.

The average tax rate faced by an individual is the ________

total tax paid by her divided by the total income earned

Private solutions to the problem of externalities are most likely when

transactions costs are low and the number of bargaining parties is small

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

true

Common resources differ from public goods in that

unlike public goods, common resources are rivalrous in consumption.

A monopolist's profit maximizing price and output correspond to the point on a graph

where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.