ECON 100B - Externalities and Public Goods

A village is located next to 1000 acres of prime grazing land. The village presently owns the land and allows all residents to graze cows freely. Some members of the village council have suggested that the land is being overgrazed. Is this likely to be​ true? This is likely to be true since individuals consider only their private cost and not the social cost of grazing. These same members have also suggested that the village should either require grazers to purchase an annual permit or sell off the land to the grazers. Would either of these be a good​ idea? A. An annual permit would raise the private​ cost, which should reduce grazing. And if the land were privately​ owned, then the owners would have an incentive not to overutilize the resource. B. Neither of the proposed solutions would work. The only effective way to correct a common resource problem is for the local government to set a per unit tax on grazing equal to the marginal cost of grazing. C. Neither of the proposed solutions would work. The only effective way to correct a common resource problem is for the local government to set strict restrictions on the amount of grazing that is permitted. D. An annual permit would raise the private​ cost, but would not reduce grazing.​ However, if the land were privately​ owned, then the owners would have an incentive not to overutilize the resource.

A. An annual permit would raise the private​ cost, which should reduce grazing. And if the land were privately​ owned, then the owners would have an incentive not to overutilize the resource.

As more people use a social networking site like​ Facebook, it becomes more attractive for other people to use that site also. This effect is called A. a positive network externality. B. an external demand. C. the snob effect. D. a fad.

A. a positive network externality.

Common property resources tend to be: A. overused. B. underused. C. not used at all. D. efficiently used.

A. overused.

When new technologies reduce the marginal cost of abatement​ (MCA), the price of transferable emissions permits A. will decrease. B. will increase. C. will remain unchanged. D. may​ increase, decrease or remain unchanged. More information about the shape of the MCA curve is required to determine how the price will change.

A. will decrease.

The marginal social cost of producing the last unit of a good is​ $1.10, while the​ consumers' willingness to pay for the last unit is​ $0.80. The deadweight loss from the production of the last unit of the good is​ ________. A. $1.10 B. $0.30 C. $1.90 D. $0.50

B. $0.30

Which of the following is a public good? A. Telephone service B. Broadcast TV C. A daily newspaper D. The Red Cross E. all of the above

B. Broadcast TV (Nonrival and Nonexclusive)

Which of the following is an example of a public​ good? A. High school education. B. Street lights. C. A national park. D. A toll road.

B. Street lights.

Why does free access to a common property resource generate an inefficient​ outcome? A. The marginal private cost is greater than the marginal social​ cost, which leads to the resource being overutilized. B. The marginal private cost is less than the marginal social​ cost, which leads to the resource being overutilized. C. The marginal private cost is less than the marginal social​ cost, which leads to the resource being underutilized. D. The marginal private cost is greater than the marginal social​ cost, which leads to the resource being underutilized.

B. The marginal private cost is less than the marginal social​ cost, which leads to the resource being overutilized.

Public television is funded in part by private​ donations, even though anyone with a television set can watch for free. Can you explain this phenomenon in light of the free rider​ problem? A. When a good is​ nonexcludable, consumers do not have an incentive to reveal their true willingness to pay. Many will donate much more than their true​ value, knowing that others will not pay.​ Thus, it can be argued that public television is overfunded. B. When a good is​ nonexcludable, consumers do not have an incentive to reveal their true willingness to pay. Many will not​ pay, expecting that others will.​ Thus, it can be argued that public television is underfunded. C. When a good is​ nonrival, consumers do not have an incentive to reveal their true willingness to pay. Many will donate much more than their true​ value, knowing that others will not pay.​ Thus, it can be argued that public television is overfunded. D. When a good is​ nonrival, consumers do not have an incentive to reveal their true willingness to pay. Many will not​ pay, expecting that others will.​ Thus, it can be argued that public television is underfunded.

B. When a good is​ nonexcludable, consumers do not have an incentive to reveal their true willingness to pay. Many will not​ pay, expecting that others will.​ Thus, it can be argued that public television is underfunded. Your answer is correct.

When emissions are measured on horizontal axis, the marginal cost of abating emissions is: A. downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. B. downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. C. upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. D. upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. horizontal because the technology to remove emissions is assumed constant.

B. downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.

A computer programmer lobbies against copyrighting​ software, arguing that everyone should benefit from innovative programs written for personal computers and that exposure to a wide variety of computer programs will inspire young programmers to create even more innovative programs. Considering the marginal social benefits possibly gained by this​ proposal, do you agree with this​ position? The computer​ programmer's argument that his proposal would inspire young programmers to create even more innovative programs A. is correct because software would become a public​ good, prompting the market to provide more software. B. is incorrect because software would become nonexclusive and its production would generate little private reward. C. is incorrect because software would become a common resource that is susceptible to free riding. D. is correct because software would no longer generate an​ externality, resulting in an inefficiently high level of output. E. is incorrect because software would become rival and susceptible to free riding.

B. is incorrect because software would become nonexclusive and its production would generate little private reward.

If firms in a perfectly competitive industry pollute the air and there is no government regulation or intervention in the​ market, then compared to the socially optimal​ levels, A. the market price will be too high and industry output too low. B. the market price will be too low and industry output too high. C. the market price and industry output will be at the socially optimal levels. D. we do not have enough information to determine which of these is true.

B. the market price will be too low and industry output too high.

If a ton of newspaper costs​ $350 to produce and in the process causes​ $10 worth of pollution damage to the​ environment, then​ ________. A. the private cost is​ $360 per ton and the social cost is​ $340 per ton B. the social cost is​ $360 per ton and the private cost is​ $350 per ton C. the social cost is​ $10 per ton and the private cost is​ $350 per ton D. the private cost is​ $360 per ton

B. the social cost is​ $360 per ton and the private cost is​ $350 per ton

Which of the following is NOT a public good? A. Public fireworks display B. National defense C. Books in a public library D. Clean air

C. Books in a public library (Rival and Exclusive)

Which of the following describes an externality and which does​ not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to rise—an increase which in turn also causes the price of tea to rise. b. An advertising blimp distracts a motorist who then hits a telephone pole. A.Neither choice describes an externality. Choice​ (a) describes market effects and choice​ (b) describes nonmarket​ effects, neither of which creates an externality. B. Both choices describe an externality because both describe actions that affect a third party not directly involved in the initial transaction. C. Choice​ (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market​ effects, which are not externalities. D. Choice​ (a) describes an externality. The restriction on coffee exports has an external​ effect; it causes an increase in the price of tea. The blimp distracting the motorist is a nonmarket issue and therefore​ doesn't count as an economic externality.

C. Choice​ (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market​ effects, which are not externalities.

When there is a common property​ resource, why is the marginal social cost greater than the marginal private cost of using the​ resource? A. Each user considers only his own cost of using the resource but does not take into account the fact that his use increases the benefit other users receive from using the resource. B. The marginal social cost includes the cost of​ pollution, which is not included in the marginal private cost of using the resource. C. Each user considers only his own cost of using the resource but does not take into account the fact that his use reduces the benefit other users receive from using the resource. D. The marginal private cost includes the cost of pollution which is not included in the marginal social cost of using the resource.

C. Each user considers only his own cost of using the resource but does not take into account the fact that his use reduces the benefit other users receive from using the resource.

Which of the following is NOT a negative externality for​ Natasha? A. The new tall building that blocks the view from​ Natasha's mountain house. B. The late night noise made by people in the apartment right above​ Natasha's apartment that keeps her awake. C. The hurricane that washes away​ Natasha's beach house. D. Automobile exhaust from other​ people's cars makes it harder for Natasha to breathe.

C. The hurricane that washes away​ Natasha's beach house.

In the case of a good that no one can be excluded from consuming it and the marginal cost of providing it to an additional consumer is​ zero, private markets fail because A. profit is driven down to zero. B. this is a natural monopoly. C. of the free rider problem. D. the quantity produced will exceed the social optimum.

C. of the free rider problem.

How should the government initially allocate transferable emissions permits among firms if it wants the target level of emissions to be achieved at minimum​ cost? A. Give permits to firms in direct proportion to the amount of emissions each generates. B. Give each firm the same number of permits. C. Give more permits to firms that have lower marginal abatement costs. D. It​ doesn't matter how the permits are allocated as long as the firms can buy and sell them in a competitive market.

D. It​ doesn't matter how the permits are allocated as long as the firms can buy and sell them in a competitive market.

Which of the following is NOT true of public​ goods? A. They are one cause of market failure. B. They are nonrival and nonexclusive. C. Private firms will not provide them because of the free rider problem. D. They are the only type of good provided by the U.S. government.

D. They are the only type of good provided by the U.S. government.

A lighthouse is a public good: A. because it doesn't cost any more to light the way for 105 ships than it does to light the way for 104 ships, but for no other reason. B. because there is no way to prevent those who haven't contributed to the lighthouse from seeing better because of it, but for no other reason. C. because the government produces it, and for no other reason. D. for the reasons in A and B together. E. for the reasons in A, B, and C together.

D. for the reasons in A and B together. (A. is nonrival, B. is nonexclusive)

When there is a negative network externality for a​ good, the demand for that good A. will be more elastic than it would have been without the negative network externality. B. may have a degree of elasticity that is​ more, less or the same as it would have without the negative network externality. C. will be just as elastic as it would have been without the negative network externality. D. will be less elastic than it would have been without the negative network externality.

D. will be less elastic than it would have been without the negative network externality.