Econ Chapter 9
12) Vaccination against a disease helps in preventing the spread of the disease. Which of the following can help in increasing the number of people vaccinated to the socially optimal level? A) A corrective tax B) An income tax C) A life insurance D) A health tax
A) A corrective tax
23) ________ occurs when an individual has no incentive in paying for a good because failure to pay does not prevent consumption. A) A free-rider problem B) The paradox of thrift C) A tragedy of the commons D) The paradox of plenty
A) A free-rider problem
2) Which of the following occurs when an externality is internalized? A) Higher social well-being B) Higher private benefit C) Larger deadweight loss D) Higher returns to scale
A) Higher social well-being
6) Which of the following is an example of a public good? A) National defense B) Natural forests C) Music downloads D) Designer clothes
A) National defense
7) Which of the following can give rise to a negative externality? A) Smoking a cigarette B) Planting a tree C) Consuming vegetarian food D) Working for long hours
A) Smoking a cigarette
24) Which of the following is true if the production of a good gives rise to a positive externality? A) The marginal social benefit from each level of output exceeds the consumersʹ willingness to pay. B) The marginal private benefit from production exceeds the marginal social benefit. C) The demand curve for the good shifts to the left in the presence of positive externalities. D) The demand curve for the good shifts to the right in the presence of positive externalities.
A) The marginal social benefit from each level of output exceeds the consumersʹ willingness to pay.
2) Which of the following leads to the tragedy of the commons? A) The use of common pool resources above the socially optimal level B) The low level of satisfaction derived from the use of common pool resources C) The high rate of taxation on common pool resources D) The tendency of consumers to use common pool resources without paying for them
A) The use of common pool resources above the socially optimal level
25) The presence of a positive externality in a market leads to ________. A) an underproduction of the good B) an overproduction of the good C) a deadweight loss D) a fall in the consumer surplus
A) an underproduction of the good
2) The market demand curve for a good shows ________ and the market supply curve shows ________. A) consumersʹ willingness to pay for the good; producersʹ marginal cost of producing the good B) producersʹ marginal cost of producing the good; consumersʹ willingness to pay for the good C) consumersʹ willingness to pay for the good; the opportunity cost of producing the good D) consumersʹ willingness to pay for the good; producersʹ total cost of producing the good
A) consumersʹ willingness to pay for the good; producersʹ marginal cost of producing the good
30) You bought a subscription for an online magazine and shared your log in details with a friend. Your friend is a ________ in this case. A) free-rider B) rent seeker C) speculator D) hedger
A) free-rider
29) Three friends stay in an apartment. Their landlord offers to air condition the apartment if they pay for the installation charges. Although they all want an air conditioner, none of them expresses their desire. This is an example of the ________. A) free-rider problem B) paradox of thrift C) tragedy of commons D) paradox of plenty
A) free-rider problem
21) A positive externality ________. A) gives rise to external benefits B) leads to increasing returns to scale C) imposes an additional cost on the society D) leads to higher economic profit
A) gives rise to external benefits
32) The citizens of a country often refuse to pay voluntarily for defense spending because ________. A) national defense is a common pool resource B) nobody can be excluded from being defended by the state C) all citizens do not derive equal satisfaction from national defense D) national defense is rival in consumption
A) national defense is a common pool resource
3) A good is non-rival in consumption if ________. A) one personʹs use of the good does not preclude consumption by others B) the government can regulate its production C) people cannot be prevented from using it D) the demand for the good increases with an increase in the consumerʹs income
A) one personʹs use of the good does not preclude consumption by others
39) If too little of a good is being produced in the free market, the production of the good is likely to have a(n) ________ externality. A) positive B) negative C) pecuniary D) absolute
A) positive
33) 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 ________. A) positive externality B) negative externality C) pecuniary externality D) comparative externality
A) positive externality
16) Most of the goods produced in an economy are ________. A) private goods B) public goods C) club goods D) inferior goods
A) private goods
26) The free-rider problem may arise in case of ________. A) public goods B) private goods C) club goods D) inferior goods
A) public goods
28) Four roommates have moved into an apartment. However, none of them cleans the apartment thinking that the others will do it. This is an example of ________. A) the free-rider problem B) the paradox of thrift C) the paradox of plenty D) the tragedy of commons
A) the free-rider problem
31) 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 ________. A) the free-rider problem B) the paradox of thrift C) the paradox of plenty D) the tragedy of the commons
A) the free-rider problem
5) When a Pigouvian tax is imposed, ________. A) the marginal private cost curve shifts upward B) the demand curve shifts rightward C) the marginal social cost curve shifts downward D) the marginal social benefit curve shifts downward
A) the marginal private cost curve shifts upward
3) Overfishing leading to a rapid depletion of the stock of fish is an example of ________. A) the tragedy of the commons B) the free-rider problem C) the paradox of thrift D) the prisonersʹ dilemma
A) the tragedy of the commons
4) A 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 ________. A) tragedy of the commons B) pecuniary externality C) paradox of thrift D) prisonersʹ dilemma
A) tragedy of the commons
9) Private solutions to externalities are most effective if ________. A) transaction costs associated with bargaining are low B) transaction costs associated with bargaining are high C) property rights are not defined clearly D) a large number of people are affected by the externalities
A) transaction costs associated with bargaining are low
20) Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity? A) An economic profit B) A positive externality C) A gain in producer surplus D) A gain in consumer surplus
B) A positive externality
27) Which of the following products may have a free-rider problem? A) On-the-job training programs B) Environmental protection programs C) Movie DVDs D) Mobile phones
B) Environmental protection programs
37) Which of the following activities can give rise to a positive externality? A) Jogging every morning B) Getting a flu vaccination C) Consuming herbal products D) Buying a pair of gloves
B) Getting a flu vaccination
8) Which of the following is an implication of the Coase Theorem? A) Bargaining cannot lead to an efficient allocation of resources. B) Government intervention is not always necessary to solve externality problems. C) Negotiation leads to an efficient outcome if transaction costs are high. D) Taxation leads to an efficient allocation of resources regardless of who holds the property rights.
B) Government intervention is not always necessary to solve externality problems.
11) Which of the following is true? A) If consumption of a good gives rise to a positive externality, it can be internalized by taxing the producers of the good. B) If production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good. C) If production of a good gives rise to a positive externality, it can be internalized by taxing the consumers of the good. D) If consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good.
B) If production of a good gives rise to a negative externality, it can be internalized by taxing the producers
10) ________ are non-rival in consumption. A) Public goods and private goods B) Public goods and club goods C) Public goods and common pool resources D) Private goods and common pool resources
B) Public goods and club goods
9) ________ are non-excludable in consumption. A) Public goods and private goods B) Public goods and common pool resources C) Private goods and club goods D) Club goods and common pool resources
B) Public goods and common pool resources
38) Which of the following results in a positive externality? A) Visiting a beach B) Recycling of waste C) Buying a room heater D) Following a healthy lifestyle
B) Recycling of waste
41) Which of the following gives rise to a pecuniary externality? A) Excessive consumption of alcohol leading to ill health B) Sudden increase in the demand for diamonds leading to an increase in their price C) Deforestation leading to the extinction of many species D) Globalization leading to the displacement of indigenous workers
B) Sudden increase in the demand for diamonds leading to an increase in their price
11) ________ is an example of a common pool resource. A) Food B) Water C) National defense D) Wi-Fi
B) Water
2) A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ to solve an externality. A) social enforcement mechanism B) command and control approach C) market-based approach D) Coasian approach
B) command and control approach
33) Alex is a non-union employee in a factory. If the union negotiates certain benefits for the employees, Alex enjoys all the benefits although he does not pay the union fee. His behavior is an example of ________. A) rent-seeking B) free-riding C) profit maximizing D) rivalry
B) free-riding
13) Pay-As-You-Throw programs that charge people a small price for each bag of trash they throw out are likely to ________. A) increase waste creation B) increase recycling and reuse C) increase the social cost of waste disposal D) reduce social surplus
B) increase recycling and reuse
3) A Pigouvian tax is a tax designed to ________. A) induce consumers of a good to reduce the consumption of the good B) induce producers generating negative externalities to reduce production C) induce producers generating positive externalities to reduce production D) induce producers to stop the production of a good
B) induce producers generating negative externalities to reduce production
1) An economic agent ________ when he accounts for the full costs and benefits of his actions. A) is called a free rider B) internalizes an externality C) maximizes his profit D) is called a rent seeker
B) internalizes an externality
16) A chemical factory releases its by products in a nearby river, which harms aquatic flora and fauna. This is an example of a ________. A) free-rider problem B) negative externality C) pecuniary externality D) positive externality
B) negative externality
3) A ________ occurs when an economic activity has a spillover cost that does not affect those directly engaged in the activity. A) positive externality B) negative externality C) gain in producer surplus D) gain in consumer surplus
B) negative externality
4) Traffic congestion is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) free-rider problem
B) negative externality
4) Public goods are ________ in consumption. A) excludable but non-rival B) non-excludable and non-rival C) rival but non-excludable D) excludable and rival
B) non-excludable and non-rival
1) The tragedy of the commons occurs because some goods are ________ in consumption. A) excludable B) non-excludable but rival C) non-rival and non-excludable D) non-rival
B) non-excludable but rival
22) A congested street is ________ in consumption. A) excludable and rival B) non-excludable but rival C) excludable but non-rival D) non-excludable and non-rival
B) non-excludable but rival
2) If a good is excludable, ________. A) one personʹs use of the good reduces the amount of the good available to others B) people can be prevented from using the good C) more than one person cannot use the good at the same time D) several people can use the good simultaneously
B) people can be prevented from using the good
20) A street light is a ________. A) private good B) public good C) common pool resource D) club good
B) public good
35) A video available on a Web site that allows free download is a ________. A) private good B) public good C) club good D) common pool resource
B) public good
26) If the production of a good involves positive externalities, ________. A) the market price of the good is higher than its optimal price B) the market price of the good is lower than its optimal price C) the average cost of production of the good in the long run is zero D) the variable cost of production of the good is zero
B) the market price of the good is lower than its optimal price
10) If the production of a good involves negative externalities, ________. A) the quantity of the good supplied in the market is lower than the efficient level B) the optimal price of the good is higher than the price charged in the market C) total welfare can be increased by increasing the production of the good D) average cost of production can be reduced by increasing output above the optimal level
B) the optimal price of the good is higher than the price charged in the market
9) If negative externalities are present in a market, ________. A) the price charged in the market is higher than the socially optimal price B) the quantity supplied in the market is larger than the socially optimal level C) the marginal social cost of production is lower than the marginal private cost D) the average cost of production exceeds the marginal cost of production at all output levels
B) the quantity supplied in the market is larger than the socially optimal level
7) The cost of making an economic exchange is called a(n) ________ cost. A) sunk B) transaction C) social D) accounting
B) transaction
18) Which of the following goods is rival in consumption and is also excludable? A) A fireworks display B) A movie shown on cable television C) A DVD D) A magic show in a public park.
C) A DVD
7) Smoking increases the risk of lung infections not only for active smokers but also for other people inhaling the smoke passively. Which of the following will help in reducing smoking? A) A corrective tax B) A life insurance C) A health insurance D) A health tax
C) A health insurance
17) Which of the following is an example of a public good? A) A house in a tourist destination B) A training program for a companyʹs employees C) A radio broadcast D) A magazine subscription
C) A radio broadcast
8) ________ are non-excludable but rival in consumption. A) Public goods B) Private goods C) Common pool resources D) Club goods
C) Common pool resources
18) Which of the following gives rise to a negative externality? A) Sudden increase in the price of wheat due to a fall in supply B) Sudden increase in the demand for diamonds leading to an increase in their price C) Deforestation leading to the extinction of many species D) Globalization leading to creation of many new job opportunities
C) Deforestation leading to the extinction of many species
44) Which of the following is necessary for efficient markets? A) Positive externalities B) Negative externalities C) Pecuniary externalities D) Free-riding
C) Pecuniary externalities
23) Which of the following occurs if the production of a good gives rise to positive externalities? A) The marginal social cost curve lies to the right of the supply curve. B) The marginal social cost curve lies to the left of the supply curve. C) The marginal social benefit curve lies to the right of the demand curve. D) The marginal social benefit curve lies to the left of the demand curve.
C) The marginal social benefit curve lies to the right of the demand curve.
4) 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? A) Marginal external cost will increase. B) Marginal private cost will fall. C) The quantity supplied of the good will decrease. D) The demand for the good will increase.
C) The quantity supplied of the good will decrease.
35) Mary plants a number of trees in her garden every week, which keeps her neighborhood cool. Which of the following is true? A) The marginal social cost of planting a tree is lower than the marginal private cost of planting a tree. B) The marginal private benefit of planting a tree is higher than the marginal social benefit of planting a tree. C) There is an external benefit in planting a tree. D) There is a deadweight loss in planting trees.
C) There is an external benefit in planting a tree.
15) A view of a spectacular sunset on a beach is ________. A) a rival and excludable good B) an excludable good C) a non-rival good D) a rival but non-excludable good
C) a non-rival good
21) Pay-per-view broadcasts are ________. A) public goods B) private goods C) club goods D) common pool resources
C) club goods
8) A corrective subsidy induces the ________ to the socially optimal level. A) consumers of a negative externality to increase the quantity consumed B) producers of a negative externality to increase the quantity produced C) consumers of a positive externality to increase the quantity consumed' D) producers of a positive externality to reduce the quantity produced
C) consumers of a positive externality to increase the quantity consumed
13) A concert in a crowded auditorium is ________ in consumption. A) non‐excludable and non‐rival B) excludable but non‐rival C) excludable and rival D) non‐excludable but rival
C) excludable and rival
7) The marginal social cost curve ________ when production involves negative externalities. A) is parallel to the horizontal axis B) is parallel to the demand curve C) lies above the supply curve D) lies to the right of the supply curve
C) lies above the supply curve
8) In a market, social surplus is maximized if consumersʹ willingness to pay for the good equals the ________. A) marginal private cost of producing the good B) marginal external cost of producing the good C) marginal social cost of producing the good D) opportunity cost of producing the good
C) marginal social cost of producing the good
42) Jack wants to buy a new house. But the surge in housing demand over the last few months has led to a sharp increase in housing prices making it impossible for him to afford one on his current income. This is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) conspicuous externality
C) pecuniary externality
43) The increasing popularity of hotdogs in a food joint has pushed up their price, making it unaffordable for many students living in the surrounding areas. This is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) free-rider problem
C) pecuniary externality
5) The social cost of producing a good that generates negative externalities is the sum of the ________. A) average variable cost and average fixed cost of production B) average total cost and the marginal cost of production C) private cost and external costs of production D) total fixed cost and total variable cost of production
C) private cost and external costs of production
9) A Pigouvian subsidy leads to a socially efficient outcome by ________. A) raising individualsʹ marginal benefit from consumption B) lowering the marginal private cost of production C) raising the marginal external benefit from consumption D) lowering the marginal external cost of production
C) raising the marginal external benefit from consumption
24) A free rider is a person who ________. A) can produce a good at a very low cost B) only consumes products provided by the government C) receives the benefit of a good without paying for it D) purchases products available for discounts
C) receives the benefit of a good without paying for it
36) The government should provide one more unit of a public good if ________. A) the marginal benefits equal the marginal costs of providing the additional unit B) the marginal cost of providing the next unit exceeds the marginal benefits C) the marginal benefits exceed the marginal costs of providing the next unit D) the marginal costs of providing the next unit equal the average cost of providing the next unit
C) the marginal benefits exceed the marginal costs of providing the next unit
6) 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. A) the marginal private cost B) the marginal social cost C) the marginal external cost D) the marginal external benefit
C) the marginal external cost
1) Government invention is required to solve externality problems if ________. A) transaction costs associated with private negotiations are low B) the number of people affected by the externality is small C) the number of people affected by the externality is large D) property rights are clearly defined
C) the number of people affected by the externality is large
11) Deadweight loss refers to the loss in ________. A) producer surplus due to a fall in the market price B) consumer surplus due to an increase in the market price C) total surplus due to a market distortion such as an externality D) total surplus due to a change in consumersʹ preferences
C) total surplus due to a market distortion such as an externality
12) Which of the following is an example of a club good? A) Streetlights B) A diamond ring C) Forests D) Cable TV
D) Cable TV
5) Which of the following is an example of an ordinary private good? A) Furniture B) The Internet C) Water D) Cable TV
D) Cable TV
7) ________ are highly excludable but non-rival in consumption. A) Public goods B) Private goods C) Common pool resources D) Club goods
D) Club goods
34) Which of the following gives rise to a positive externality? A) Sudden increase in the price of oil due to a supply shock B) Sudden increase in the demand for diamonds leading to an increase in their price C) Deforestation leading to the extinction of many species D) Consumption of a drug to cure a communicable disease
D) Consumption of a drug to cure a communicable disease
10) Which of the following happens when a Pigouvian subsidy is provided? A) The marginal social cost curve shifts upward. B) The marginal private cost curve shifts downward. C) The marginal social benefit curve shifts downward. D) The marginal private benefit curve shifts upward.
D) The marginal private benefit curve shifts upward.
38) Which of the following is true? A) The market demand curve for a public good has a positive slope. B) The market demand curve for a private good has a positive slope. C) The market demand curve for a public good is arrived at by the horizontal sum of individual demand curves. D) The market demand curve for a public good is arrived at by the vertical sum of individual demand curves.
D) The market demand curve for a public good is arrived at by the vertical sum of individual demand curves.
5) Which of the following will lead to an efficient private solution if negative externalities are present in a market? A) The party having the legal right is taxed. B) The party creating the externality has the legal property right. C) The party suffering from the externality has the legal property right. D) The parties involved negotiate with each other and reach an agreement.
D) The parties involved negotiate with each other and reach an agreement.
An externality occurs when ________. A) the quantity demanded of a good exceeds the quantity supplied B) the quantity supplied of a good exceeds the quantity demanded C) the government regulates production and consumption decisions D) an economic activity affects third parties not engaged in the activity
D) an economic activity affects third parties not engaged in the activity
1) Private goods are ________. A) excludable but non-rival in consumption B) non-excludable and non-rival in consumption C) non-excludable but rival in consumption D) excludable and rival in consumption
D) excludable and rival in consumption
6) The Coase Theorem states that ________. A) positive externalities lead to higher market prices B) negative externalities lead to lower equilibrium output C) transaction costs are higher in free markets D) negotiation between economic agents leads to an efficient allocation of resources
D) negotiation between economic agents leads to an efficient allocation of resources
10) The Coase theorem relies on internalizing externalities through ________. A) social enforcement mechanisms B) the provision of corrective subsidies C) the imposition of corrective taxes D) negotiations between the parties involved
D) negotiations between the parties involved
25) The free-rider problem exists for goods that are ________. A) excludable B) rival C) free D) non-excludable
D) non-excludable
5) A green pasture has turned barren due to overgrazing. This happened because the pasture was ________. A) excludable and rival B) non-excludable and non-rival C) excludable but non-rival D) non-excludable but rival
D) non-excludable but rival
14) A beach is ________ in consumption. A) non‐excludable and non‐rival B) excludable but non‐rival C) excludable and rival D) non‐excludable but rival
D) non‐excludable but rival
40) A ________ externality occurs when a market transaction affects others through market prices. A) positive B) negative production C) negative consumption D) pecuniary
D) pecuniary
19) A room heater is a ________. A) club good because it is excludable but non-rival in consumption B) club good because it is non-excludable but rival in consumption C) public good because it is non-excludable and non-rival in consumption D) private good because it is excludable and rival in consumption
D) private good because it is excludable and rival in consumption
11) Energy Star is a voluntary labeling program designed to identify and promote energy-efficient products to reduce greenhouse-gas emissions. This is an example of a ________ to solve an externality. A) Coasian approach B) Pigouvian approach C) command and control mechanism D) social enforcement mechanism
D) social enforcement mechanism
12) People seldom break a line while waiting for checkout in a supermarket. This is an example of a ________ to solve an externality. A) Coasian approach B) Pigouvian approach C) command and control mechanism D) social enforcement mechanism
D) social enforcement mechanism
22) If positive externalities are present in a free market, ________ at any output level. A) the marginal cost of production equals the average cost of production B) the marginal social cost of production exceeds the marginal private cost C) the marginal private benefit from production equals marginal social benefit D) the marginal social benefit of production exceeds marginal private benefit
D) the marginal social benefit of production exceeds marginal private benefit
6) If the production of a good gives rise to negative externalities, ________. A) the fixed cost of production is zero B) the variable cost of production is zero C) the private cost of production exceeds the social cost of production D) the social cost of production exceeds the private cost of production
D) the social cost of production exceeds the private cost of production
