Econ Module 5 Sample Questions

One way to place a value on human life is to examine the risks that people voluntarily take and how much they must be paid for taking them. What is the approximate value of a human life according to studies that use this approach?

$10 million

Why does the commercial value of ivory threaten the elephant, while the commercial value of beef protects the cow?

Elephants are a common resource, whereas cows are a private good. Poachers have a strong incentive to kill as many elephants as they can find, while ranchers have a strong incentive to maintain the cattle population on their ranches.

For private goods allocated in markets,

Prices guide the decisions of buyers and sellers and these decision lead to an efficient allocation of resources.

Are whales excludable? Are they rival in consumption? How do we classify whales in terms of the four types of goods?

Whales are not excludable, but they are rival in consumption, so whales are classified as common resources.

A city street is

a common resource when it is congested, but it is a public good when it is not congested.

Resources tend to be allocated inefficiently when goods

are available free of charge.

The idea that "externalities arise because something of value has no price attached to it" is associated with

both public goods and common resources

Governments can improve market outcomes for

both public goods and common resources.

Drivers have to pay a toll to drive on certain roads. In essence, a toll is a corrective tax on the externality of

congestion

someone who uses a good without paying for it is called a?

free rider

When goods do not have a price, which of the following primarily ensures that the good is produced?

government

What can the government do to solve the problem of excessive use of common resources?

government can impose regulations or taxes to reduce consumption of a common resource. In some cases, government can transform the common resource into a private good.

Private decisions about consumption of common resources and production of public goods usually lead to an

inefficient allocation of resources and external effects.

When a good is excludable

people can be prevented from using the good.

22. The provision of public goods gives rise to

positive externalities

23. The provision of public goods gives rise to

positive externalities, whereas the use of common resources gives rise to negative externalities.

The provision of a public good generates a

positive externality and the use of a common resource generates a negative externality.

For most goods in an economy, the primary signal that guides the decisions of buyers and sellers is

price

The old lyric "the best things in life are free"

refers to goods provided by nature of the government.

What is the main difficulty facing cost-benefit analysts when they attempt to evaluate the worthiness of proposed public projects?

the main difficulty is that cost-benefit analysts have no market prices with which to evaluate proposed projects.

The mayor of Newton is considering proposals to deal with an unsafe intersection. She could install a traffic light at a cost of $50,000 or she could install stop signs at a cost of $5,000. The traffic light is expected to reduce the risk of fatality by 0.45 percent and the stop signs are expected to reduce the risk of fatality by 0.054 percent. If the value of human life is estimated to be $10 million, what choice should the mayor make? Briefly explain.

the mayor should install stop signs because the benefit, $5,400, exceeds the cost, $5,000. The mayor should not install a traffic light because the cost, $50,000, exceeds the benefit, $45,000.

If good x is available free of charge, then

the private market cannot ensure an efficient allocation of resources in the market for good x.

In what way do public goods give rise to positive externalities?

when one person provides a public good, other people can benefit from it; thus, a positive externality arises.

In what way do common resources give rise to negative externalities?

when one person uses a common resource, other people become worse off because there are now fewer units of the resource; thus, a negative externality arises.

Recall the 4 types of goods. Are national defense and basic research the same type of good? Explain.

yes, both national defense and basic research are classified as public goods.