ECON 2106 Exam 3

If it cost Firm A $100 to reduce its pollution by 1 unit & Firm B $50 to reduce its pollution by 1 Unit, what may happen?

Firm A will buy a permit to pollute from firm B for $75.

Four basic causes of market failure:

1. Lack of competition (Monopoly) 2. Externalities 3. Public Goods 4. Common Resources (Club Goods)

Define Pigouvian subsidy:

A subsidy on a good with external benefits.

Describe nonrival private goods (aka club goods)

Goods that are excludable but nonrival. -Nonrival private goods like TV, music, and software are excludable but nonrival. -Markets can provide club goods, but will be inefficient. -Some people who are willing to pay the cost (MC) but not the market price will be excluded.

Public choice theory suggests that larger special interest groups will:

Have more incentives to take into account the social costs of intellectual policies.

What is the socially efficient quantity in this market?

Intersection of social cost and demand lines.

There is a strong correlation between economic freedom and:

Living standards

What makes a graph a negative externality?

Social cost is higher than supply curve.

It is better to tax the emissions directly than to tax the good being produced. True or false?

True. Tax the problem more than goods that may or may not produce the problem. (i.e. tax emissions (the problem) and not TVs that do not cause emissions).

Compared to private goods, the free market will _____ public goods

Under produce

External benefits and subsidies:

When there are external benefits, market output is too low. -A subsidy equal to the external benefit: a. Shifts the demand curve to the right. b. Makes market equilibrium = efficient equilibrium. -A Pigouvian subsidy therefore: a. Reduces deadweight loss b. Increases social surplus.

Define the median voter theorem:

When voters vote for the policy that is closest to their ideal point on a line, then the ideal point of the median voter will beat any other policy in a majority-rule election.

CH 19 LC: Club goods are: a. rival and nonexcludable b. nonrival and excludable c. rival and excludable d. nonrival and nonexcludable

b. nonrival and excludable

Under the command and control method, the government: a. Pays firms to produce less b. Orders firms to produce less c. Lets the market force firms to produce less.

b. Orders firms to produce less

When a tax is imposed on a good with significant external costs, deadweight loss is: a. Increased b. Reduced c. Unchanged.

b. Reduced. A tax on a good with an external cost reduces deadweight loss.

Sirius XM Radio is a: (CH 19) a. common resource b. club good c. public good d. private good.

b. club good

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. A toll road in normal traffic: a. nonrivalrous and nonexcludable b. nonrivalrous and excludable c. rivalrous and nonexcludable d. rivalrous and excludable

b. nonrivalrous and excludable

Ostrom's view of the world was influenced by the principles of:

cooperation and resource conservation.

The diffusion of costs and concentration of benefits: I. leads to rational ignorance on the part of voters. II. is the formula to which the sugar quota owes its existence. III. is a formula for reelection to political office. a. I only b. I, II, and III c. I and II only d. II and III only

d. II and III only

Which of the following do democracies usually support? I. Institutions that are bad for economic growth II. Free markets, property rights, and the rule of law III. Policies that don't kill their own citizens. a. III only b. II only c. I and II only d. II and III only

d. II and III only

Not rival in consumption and not excludable: a. private goods b. club goods c. common resources d. public goods

d. public goods

Club goods examples are:

excludable & nonrival: online video games, a private beach, toll highways, cable Internet service

How do you find the market equilibrium quantity and efficient quantity?

market equilibrium quantity : Marginal cost to sellers = external cost efficient quantity: marginal benefit to buyers = marginal social cost

A good is excludable if:

people who do not pay can be easily prevented from using the good

When voters are myopic, politicians will prefer policies that generate:

small benefits now and large costs later

If the use of a good creates an external benefit, then a "demand curve" that reflects all of the good:

would be located upwards and to the right of the market demand curve.

External costs: Failure to fully register external costs:

•In this market the market equilibrium is output Q1 and price P1. •However, if all the costs were measured and included the supply curve S2 would result in output Q2 < Q1 and price P2 > P1. •With external costs (a negative externality) too many units are produced and price is below that which would prevail if all costs were identified and factored into the market process.

Negative vs positive externalities = tax or subsidy?

-Discourage (negative) externality = tax -Encourage (positive) externality = subsidy

Define / Describe inflation:

-Inflation is a general increase the average level of prices throughout the economy. -Individuals experience inflation as a decrease in the purchasing power of the dollar. -The following slide illustrates one measure of the inflation rate for the United States of America.

Democracy and nondemocracy:

-The countries that are most democratic are among the wealthiest countries and have the most economic freedom. -There is a strong correlation between democracy and a higher standard of living. -This is partially because greater wealth creates a greater demand for democracy. (That is, democracy appears to be a normal good.)

Pigouvian Taxes vs Tradable Allowances are equivalent if:

-The tax = the level of the external cost -The number of allowances = the efficient quantity.

Takeaway CH 20:

-Voters in a democracy often have little incentive to be informed about political matters. -Rational ignorance means that special interests can dominate parts of the political process. -Politicians can build support by concentrating benefits and diffusing costs. -Voters focus on current economic conditions. -Politicians typically increase spending before an election. -The record of democracies on some of the big issues is quite good. -Politicians in a democracy can't ignore the major interests of voters. -If things do go wrong, voters in a democracy can vote the politicians out.

Disposable personal income:

-is a person's earning after taxes are deducted. -Economists usually like to focus on real disposable personal income. The adjective real means that the measure has been adjusted so that inflation is not an issue. This is sometimes called inflation-adjusted by news outlets.

Describe the four types of goods:

1. Excludeable: You don't pay, you don't benefit. 2. Nonexcludable: you don't pay, you can still benefit. 3. Rival: If someone uses it, it becomes unavailable for others to use. 4. Nonrival: Once it exists, it doesn't cost anyone to use it and it will not be used up.

why the invisible hand may fail: public goods:

1. non-rival- Individuals can simultaneously enjoy consumption of the same product or service. 2. non-excludable- it is costly, and in some cases, impossible to restrict the availability of the good to only those who pay for it.

Types of goods:

1. private goods: rival and exclusive. EX: bicycles. 2. public goods with exclusion: non-rival and exclusive. EX: music or TV 3. common resources: rival and non-exclusive. EX: fishing. 4. Club goods: non-rival and non-exclusive. EX: fireworks.

Define the Pigouvian tax:

A tax on a good with external costs. If the tax = the external cost, then the market will move to the efficient output.

A special interest group, group S, has spent years lobbying for government support, claiming that its enterprise is in the public's best interest. The government has agreed to an initiative that provides benefits of $200 million to group S at a taxpayer cost of $240 million. This is a good example of the application of what principle from the textbook?

Diffusing costs and concentrating benefits can lead to political success.

A free market with externalities ______ social surplus.

Does not maximize.

Positive externality equals what?

External benefit. -The market tends to produce too little. -Perhaps internalize the external benefit with a Pigouvian subsidy.

Negative externality equals what?

External cost. -The market tends to produce too much. -Perhaps internalize the external cost with a Pigouvian tax.

How do you find the socially efficient quantity on a graph?

Positive externality is when social value is above the demand curve. Find intersection of social value and supply curve.

If the production of a good creates a positive externality, then the market is likely to:

Produce too little

The economic way of thinking about markets and government:

The following factors can result in market failure: -Lack of competition -Externalities -Public goods -Poor information The following factors can result in government failure: -Rational ignorance -The special-interest effect: concentrated benefits and widespread costs -Missed opportunities: widespread benefits and concentrated costs -Voter myopia This formula for political success works for many types of public policies: -Trade quotas and tariffs -Agricultural subsidies and price supports -Government projects such as roads, bridges, dams and parks -tax credits and deductions.

If the production of a good creates an external cost, then a "supply curve" that reflects all of the costs of the good:

Would be located upwards and to the left of the market supply curve.

For each of the goods and services listed, please determine whether or not advertising is an effective way to cover the cost of its provision. a. the fireworks displays in your town on July 4th b. Lighthouses on the coast of Maine c. public television d. the sandwich you ate for lunch e. the house you live in.

a. Advertising WILL help b. Advertising WILL help c. Advertising WILL help d. Advertising will NOT help e. Advertising will NOT help

Suppose that the government levies a new national tax on every working individual in order to pay for the annual fireworks celebration to be held on Independence Day. Please categorize the individuals according to whether they would be free riders or forced riders. a. Frank pays the tax, but he will be out of the country during Independence Day. b. Maria lives in Spain and she does not pay U.S. taxes. However, she plans to watch the fireworks on television. c. Irene is 16 and does not work. She loves fireworks and cannot wait until Independence Day. d. Jack does not celebrate Independence Day nor does he care about fireworks, but he has to pay the tax anyway.

a. Not free rider. b. Free rider. c. Free rider. d. Not free rider.

Select the best definition of a public good. a. a good that is nonexcludable and nonrival in consumption b. a good that is excludable and nonrival in consumption c a good that is paid for by public funds d. a good that is nonexcludable and rival in consumption e. a good that is excludable and rival in consumption

a. a good that is nonexcludable and nonrival in consumption

Which statements are reasons why advertising is an effective solution to the problem of some private nonrival goods? a. advertising provides a way for firms to make an even higher profit than offering the good with exclusion. b. advertising attracts new clientele. c. advertising covers the cost of provision.

a. advertising provides a way for firms to make an even higher profit than offering the good with exclusion. c. advertising covers the cost of provision.

In the town of Merryweather, citizens are very serious about their Christmas light displays. Consider each scenario and the type of good described. Maple Havens, an expensive gated community, has tasteful light displays sponsored by the neighborhood association. Only those who know the code to unlock the gates are able to drive through the streets and enjoy the lights. Maple Haven's lights are: a. club goods b. public goods c. private goods d. common resources

a. club goods

In the town of Merryweather, citizens are very serious about their Christmas light displays. Consider each scenario and the type of good described. Merryweather's courthouse square is well‑known for its elaborate decorations, including a real Santa for the children. Unlike at the mall, parents are not required to buy a photo before their children can talk to Santa, but the line is long and Santa leaves at 8:00 p.m. Santa is a: a. common resource b. club good c. private good d. public good

a. common resource

Neither public goods nor common resources are a. excludable, but only public goods are not rival in consumption. b. excludable, but only common resources are not rival in consumption. c. rival in consumption, but only public goods are not excludable. d. rival in consumption, but only common resources are not excludable.

a. excludable, but only public goods are not rival in consumption.

Identify each statement as either true or false. a. Command and control policies are examples of a tradable allowance, which is a solution to the tragedy of the commons. b. It is harder to find a solution to the tragedy of the commons within a small village or tribal group. d. Creating individual transferable quotas (ITQs) while also defining property rights has resulted in some success in addressing the tragedy of the commons.

a. false b. false c. true

Rival in consumption and excludable: a. private goods b. club goods c. common resources d. public goods

a. private goods

If the production of a good creates a negative externality, then the market is likely to: a. produce too much. b. produce too little. c. produce the efficient quantity, but charge too high a price. d. produce the efficient quantity, but charge too low a price.

a. produce too much.

Under tradable pollution permits, those polluters who buy permits and continue to pollute would do so because: a. the permit price is lower than their pollution reduction cost. b. a certain amount of pollution is actually beneficial to the environment. c. it is impossible for them to reduce their pollution. d. the pollution fines that they will face from polluting are less than the price of the permits.

a. the permit price is lower than their pollution reduction cost.

When there are external benefits, market output is: a. Too low b. Too high c. Socially efficient

a. too low.

According to the Coase theorem, private bargains will ensure that the market equilibrium will be efficient even when there are externalities, so long as: a. transaction costs are low and property rights are clearly defined. b. the government regulates the market through command-and-control methods. c. Pigouvian taxes or Pigouvian subsidies are imposed on the market.

a. transaction costs are low and property rights are clearly defined.

When Professor Tabarrok suggests that we may "be on the wrong side of the pollution Laffer curve," he means that: a. we've allowed pollution to increase past the point where it correlates positively with economic growth. b. we now have so much pollution that current technologies are unable to combat it. c. if we continue to let pollution increase, eventually it will lead to higher levels of GDP. d. reducing pollution could cause government tax revenues to rise.

a. we've allowed pollution to increase past the point where it correlates positively with economic growth.

Suppose your neighbor's daughter just got a new drum set for Christmas. She practices late into the night. You have a right to peace and quiet, and the practice keeps you up all night. Private bargaining between you and your neighbor will be most successful at solving this externality problem if: a. your neighbor offers to pay you not to enforce your right so he can continue to let his daughter practice. b. you offer to pay your neighbor and his daughter to not have drum practice at night so you can sleep. c. the government imposes a tax on drums equal to the value that your neighbor receives from letting his daughter have drum practice. d. the government subsidizes new soundproof windows for you

a. your neighbor offers to pay you not to enforce your right so he can continue to let his daughter practice.

Assume that television broadcasts are nonrival and nonexcludable (some TV stations, such as those on cable TV, are excludable, but many are not) and that there are no live TV recording devices, such as VCRs or DVRs like TiVo. How can advertising solve the free‑rider problem? a. Advertising prevents too many people from watching the broadcast, which would make the broadcast signal weaker for everyone else. b. Advertising acts in a method similar to a fee. People who watch TV broadcasts must watch ads, which they would rather not do. TV stations turn this into money by selling airtime to advertisers. c. Advertising solves the free‑rider problem only for TV stations such as cable television stations that must be paid for since people will be unwilling to pay money for a TV station and then not watch that station. d. Advertising cannot solve the free‑rider problem since people do not have to buy the products being advertised.

b. Advertising acts in a method similar to a fee. People who watch TV broadcasts must watch ads, which they would rather not do. TV stations turn this into money by selling airtime to advertisers.

Which of these is NOT mentioned in the video as a possible reason that one polluter might face lower costs for reducing pollution? a. The product produced has a less-polluting substitute. b. The factory faces lower pollution-related fines. c. The factory is newer. d. The factory uses a different kind of coal.

b. The factory faces lower pollution-related fines.

If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will: a. emit a lower level of sulfur dioxide than is socially efficient b. emit a higher level of sulfur dioxide than is socially efficient c. emit an acceptable level of sulfur dioxide d. not emit any sulfur dioxide in an attempt to avoid paying the entire cost.

b. emit a higher level of sulfur dioxide than is socially efficient. positive = too much negative = too little

In the case of an external benefit, marginal private benefit is _____ marginal social benefit at all quantity levels. (CH 10) a. equal to b. less than c. greater than d. incomparable to

b. less than.

Arthur Pigou noted that a negative externality could be internalized into the market by: a. granting producers a subsidy to encourage production. b. levying a tax equal to the value of the external cost c. imposing a price ceiling to lower the price of the good.

b. levying a tax equal to the value of the external cost

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. The air we breathe: a. rivalrous and excludable b. nonrivalrous and nonexcludable c. rivalrous and nonexcludable d. nonrivalrous and excludable

b. nonrivalrous and nonexcludable

In the town of Merryweather, citizens are very serious about their Christmas light displays. Consider each scenario and the type of good described. Bob's Hardware Store stocks a large selection of the most commonly used lights for sale. Bob's lights are: a. public goods b. private goods c. club goods d. common resources

b. private goods

Because other firms are willing to pay to advertise with them, suppliers of nonrival private goods often modify their products to take on the qualities of what type of goods in distribution? a. private goods b. public goods c. common resources d. none of the above; producers of nonrival private goods do not change their characteristics.

b. public goods

Kirsten opened a charming bookstore in a shopping plaza. Business in other shops in the plaza has increased because of the customers whom Kirsten's bookshop has attracted. Given the external benefits that her bookshop generates, if Kirsten is selling the market equilibrium quantity of books, she is: a. selling too many books. b. selling too few books. c. selling the socially efficient quantity of books. d. charging too much for her books.

b. selling too few books.

Prices provide signals and incentives to market participants. When an externality exists: a. the market price provides the right signals and incentives. b. the market prices provides the wrong signals and incentives.

b. the market price provides the wrong signals and incentives.

Under tradable allowances, producers of electricity have: a. Reduced both output and emissions. b. Increased both output and emissions. c. Reduced emissions and increased output.

c. Reduced emissions and increased output.

If the external cost associated with the use of one gallon of gasoline is equal to $5: a. then gasoline should be banned. b. then a subsidy of $5 per gallon would be efficient c. then a tax of $5 per gallon would be efficient

c. Then a tax of $5 per gallon would be efficient.

A congested non-toll road is not excludable and it is rival in consumption. This makes it a: a. private goods b. club goods c. common resources d. public goods

c. common resources

Markets tend to over-produce goods when there is a negative externality because: a. buyers must pay a price that reflects the full cost. b. Sellers cover all of the costs associated with production. c. neither the buyers nor the sellers face the full cost. d. sellers ignore the incentive provided by the market price.

c. neither the buyers nor the sellers face the full cost.

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. Atlantic bluefin tuna in the Mediterranean Sea: a. nonrivalrous and excludable b. nonrivalrous and nonexcludable c. rivalrous and nonexcludable d. rivalrous and excludable

c. rivalrous and nonexcludable

A person _____ be cheaply prevented from using a book, which is a(n) ______ good.

can; excludable

The median voter theorem states that:

candidates whose policies reflect the preferences of the median voter are more likely to win an election

If the price of a good does not take into account of the relevant costs of its production, then the price of that good is too: a. high, and the product will be underproduced b. high, and the product will be overproduced c. low, and the product will be underproduced d. low, and the product will be overproduced

d. low, and the product will be overproduced

In the town of Merryweather, citizens are very serious about their Christmas light displays. Consider each scenario and the type of good described. As part of the holiday celebration, the local church bells play carols every evening. The church bells are: a. common resources b. club goods c. private goods d. public goods

d. public goods

Classify each of the foods goods according to whether it is rivalrous, nonrivalrous, excludable, or nonexcludable. Rivalrous is also referred to as rival in consumption. A sports team t-shirt: a. nonrivalrous and excludable b. nonrivalrous and nonexcludable c. rivalrous and nonexcludable d. rivalrous and excludable

d. rivalrous and excludable