MicroEcon Exam 2

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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.


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