MicroEcon Exam 2
What is an externality?
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
What is free riding?
Free riding is benefiting from a good without paying for it.
Q5#5 Dissolvable tobacco products contain less nicotine than cigarettes and can help people quit smoking. Suppose the figure to the right illustrates five consumers' willingness to pay for tobacco lozenges.
If the price of a pack of tobacco lozenges is $4.00, what is the consumer surplus for these consumers? Consumer surplus is $10.00
Your neighbor John has a barking dog. Which of the following statements is true?
It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders
Which of the following is an example of a good or service having the effects of a positive externality?
Medical research and Education.
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
Q5#7
Producer surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram to the right by area B
What is the most likely reason why tobacco taxes have been more politically popular than taxes on soda?
Second hand smoke is a more obvious negative externality than the social costs of obesity.
The parties involved in an externality have an incentive to reach an efficient solution because
both parties become better off when an efficient solution is reached.
Q5#2 Suppose that a frost in Florida reduces the size of the orange crop, which causes the supply curve to shift to the left (from Supply 1 to Supply 2). As a result, consumer surplus:
decreases by areas B, C, and D.
A producer or a consumer will internalize an externality because
they have an incentive to consider the external effects of their actions due to taxes that are imposed or subsidies that they receive.
Q5#19 Refer to the graph to the right. When 15,000 cups of tea are produced and consumed per month, which of the following is true?
1.The level of output is economically efficient. 2.The marginal benefit to buyers of the last cup of tea is equal to the marginal cost of producing the last cup of tea. 3.The sum of consumer and producer surplus is maximized.
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus decreases, and as the price of a good falls, consumer surplus increases
Q5#4
Consumer surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area A
What is the focus of a command-and-control approach to reducing pollution?
The government imposing quantitative limits on the amount of pollution firms are allowed to generate
When are we likely to see private solutions to the problem of externalities?
When the parties involved have information about the externality. When transaction costs are low. When the number of parties involved is small. all of the above.
If the mortality effect of obesity is smaller than the mortality effect of smoking, then obesity has a larger external cost because
obese people live longer than smokers and thus incur higher costs from their related illnesses.
The private cost of producing a good will differ from the social cost
when there is an externality, such as second-hand smoke generated by the consumption of cigarettes and when there is an externality, such as fewer diseases generated by the consumption of vaccines.
Why do most economists favor tradable emissions allowances to the command-and-control approach to pollution?
Tradable emissions allowances eliminate pollution at lower cost than the command-and-control approach.
1.Without property rights (or if property rights are difficult to enforce), externalities are _______ 2.For example, if you buy a house and the government protects your right to exclusive use of that house, then your private benefit from the house will likely _____ the social benefit of the house. 3. In another example, if you buy a college education and you have no property right that will enable you to prevent others from benefiting from your education, then your private benefit will likely _____ the social benefit.
-likely to result -equal -be less than
A price ceiling is a legally determined __________ price that sellers may charge. A price floor is a legally determined ______ price that sellers may receive.
1. Maximum 2. minimim
Examples of transaction costs include (check all that apply): 1.the difference between the private costs and social costs of production. 2.the time required to negotiate an agreement. 3.the cost of drafting a contract or agreement. 4.the cost of monitoring an agreement. 5.the cost of the externality.
2.the time required to negotiate an agreement. 3.the cost of drafting a contract or agreement. 4.the cost of monitoring an agreement.
Which of the folowing is an example of a good or service having the effects of a negative externality?
Cigarette smoking.
A country that imports a substantial amount of gasoline every year imposed a $1.2 per gallon excise tax on gasoline, to be paid by sellers. The equilibrium price of gasoline prior to the tax was $4 per gallon. Gasoline being a necessary good, its demand curve is steep and the consumers had to bear the bulk of the tax burden. The post-tax price of gasoline went up to $5 per gallon, causing the country's media to claim that it was unfair that people should have to pay so high a price for such an important consumption item. They further believed that such a high tax was inefficient and could not be justified. Which of the following, if true, could support the imposition of the tax even if it is inefficient?
The revenue generated from this tax is being used to develop alternative sources of energy.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
Economic efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
A Pigovian tax is
a tax to bring about an efficient level of output in the presence of externalities.
The Coase Theorem states that
if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
According to economists, an efficient tax is one that
imposes a small excess burden relative to the tax revenue it raises.
An individual producer or a consumer "internalizes an externality" when
in their own decisions they take into account the external effects of their actions.
Q5#2 Producer surplus
increases by area B and decreases by areas F and G.
Q5#3 Consider the graph at right. Comparing demand curves D1 and D2 , the consumer surplus is
larger with demand curve D1 because there is a larger area between the demand curve and the market equilibrium price.
Compared to a command and control government approach to reducing pollution, a market-based system of tradable pollution allowances is:
more efficient because polluters that can only reduce pollution at high cost do not and instead buy allowances.
Do producers tend to favor price floors or price ceilings? Why? Producers favor...
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
By paying college students a subsidy equal to the external benefit from a college education, the government will cause students to internalize the externality. That is, the external benefit from a college education will become a
private benefit received by college students, and the demand curve for college educations will shift up.
At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to
the cost of the externality.
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pay
How is free riding related to the tendency of a public good to create market failure? Free riding results in
the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.
How do externalities LOADING... affect markets? If a negative externality in production is present in a market, then
the private cost of production will be different than the social cost of production.
5#3 Comparing demand curves D1 and D2 , the producer surplus is
the same for both D1 and D2 because there is no difference in the area between the market equilibrium price and the supply curve.
Discussions of the economic results of rent control and of federal farm programs would be considered ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered ________ analysis.
1. positive 2.normative
The "mortality effect" Finklestein refers to means that people
don't die as quickly from obesity as they do from smoking.
